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Time to Prepare Your Estate Plan? Consider These Estate Planning Tips

An estate plan helps to ensure that your wishes regarding your health and assets are clear and can be followed accordingly, before and after your death.

Articles by Nick Holeman, CFP®
By Nick Holeman, CFP® Head of Financial Planning, Betterment Published Oct. 19, 2016
Published Oct. 19, 2016
6 min read
  • Estate plans provide a roadmap for important decisions regarding your health and assets, and generally cover two phases: before and after your death.

  • Without an estate plan, state laws will determine the fate of your medical care and assets. What they dictate may not be in line with your wishes.

  • Estate planning includes setting up a financial power of attorney and health care directive, a will and/or trust, and assigning joint owners and beneficiaries to your assets.

  • Once you’ve created an estate plan, review it every two years to account for any major life changes among your family members and beneficiaries.

Did you know that you already have an estate plan? That’s right. Your state has general, default laws that kick into action in the event of your physical incapacitation or death.

Most times these laws won’t manage your estate how you’d want it to be managed—you’d essentially be letting a complete stranger call the shots regarding your health and your assets.

You don’t want this to happen, so it’s best to create a plan that manages your estate on your terms.

Consider this: If your estate plan is a house, then a will, health care directive, power of attorney, and trust make up that house’s foundation, walls, and roof.

We know that being sick or dying is something you’d prefer not to think about. You may also think that setting up an estate plan is prohibitively expensive, or that you’re too young to have one, or don’t have enough assets to make such a plan worthwhile.

But it is crucial for everyone to prepare an estate plan. By having one in place, you’ll remove any ambiguity around your wishes when it comes to protecting your family, loved ones, and assets, in case you’re unable to do so.

Here, we cover basic estate planning steps to help you get started.

Estate Planning 101

Let’s ignore all the legal jargon that you may already associate with estate planning.

Estate planning is the act of preparing for the transfer of your wealth and assets in case of illness or death. Items that are part of your estate include your financial assets, life insurance, pensions, real estate, cars, personal belongings, and debts.

At its core, an estate plan can be broken down into two phases of time:

1. Before Death

Examples of some of the important decisions to make at this stage include:

  • Instructions for medical procedures, such as certain operations, or whether or not you wish to be put and left on life support.
  • Instructions for how to manage your finances in case you’re unable to do so due to illness, injury, or old age, and whom you’d want in charge of carrying out these instructions.

2. After Death

Examples of some of the important decisions to make at this stage include:

  • Assigning guardianship over your non-adult children.
  • How your assets will be distributed across your beneficiaries.

These are major decisions that shouldn’t be left to uncertainty or the laws of the state where you live. This is why your estate plan will provide security in knowing that your wishes will be carried out exactly as planned.

Phase One: Before Death

This aspect of your estate plan is crucial because it affects both you and your beneficiaries.

You’ll decide what you want to happen in case you become physically incapacitated, and assign a person who can carry out your wishes. For this phase, you’ll need to prepare the following two documents:

  1. Durable Financial Power of Attorney (POA): This document allows you to designate someone (known as your “agent”) to handle your finances if you are unable to do so. Without a POA and a designated agent, it may be difficult for someone to do things on your behalf, such as pay bills, file taxes, or cash checks.
  2. Advanced Health Care Directive: Similar to a Financial POA, this document allows you to designate someone to make medical decisions on your behalf. Again, this person is called your “agent” and can make decisions such as choosing a doctor, accessing medical records, and putting and keeping you on life support.

If you’re thinking about naming multiple people to serve as your agents rather than a single person who has total authority, exercise care before doing so.

Ultimately each of your agents’ signatures will be required for every decision, so consider their schedules or locations before you assign them these roles.

After executing these documents, make sure your banks and doctors have copies of these documents on file; otherwise, they may deem them invalid.

Some entities may even require additional documentation or have specific procedures when dealing with agents. Make sure to double-check ahead of time to avoid putting your agents in a difficult position.

Phase Two: After Death

The second phase of your estate plan deals with what happens after you pass away.

Having an estate plan can help to prevent any chaos and messiness by clearly outlining the key roles and documents involved:

Joint Owners and Beneficiaries:

Joint Owner: If you’re married, this is the most common way to title your accounts. When you pass away, your spouse will become the sole owner of these accounts.

A joint owner can usually avoid probate, which is the state’s process of distributing your assets upon your death. Avoiding probate can save time and money, however be wary of adding others, such as your children or grandchildren, as joint owners of your property for the sole purpose of avoiding probate. Doing so can subject them to gift taxes and prevent them from getting a step-up in basis,1 and give them control of any assets in your estate even while you’re still alive.

Beneficiaries: Any asset with beneficiaries listed also avoids probate. More and more types of property are allowing beneficiaries, making estate planning even easier. These include:

  • Bank and Investment Accounts:
    You can easily add beneficiaries to bank and investment accounts. This usually only requires filling out a free request form at your bank or custodian.
  • Retirement Accounts:
    Similar to other investments accounts, retirement accounts allow you to add and update beneficiaries, usually with a simple form.
  • Life Insurance:
    Life insurance goes hand-in-hand with estate planning, so make sure you designate beneficiaries to any insurance you have as well.
  • Real Estate:
    More than half of the states in the United States now allow a Transfer on Death (TOD) Deed. This acts just like a beneficiary on a bank account, in that the real estate will bypass probate.

Key Documents of Your Estate Plan:

  • Last Will and Testament (Will): Your will is the document that determines who will inherit any assets if no joint ownership or beneficiaries are listed. If you did a good job at naming beneficiaries for most of your assets, this document will mostly be reserved for personal belongings. However, a will has other important features, such as naming a guardian to look after your underage or non-adult children, and naming an executor, the person who is charged with ensuring your wishes are carried out.
  • Trust: You as a trustor will assign a trustee (usually also yourself) the right to hold title to your property or assets for the benefit of your beneficiaries. A trustee is named to oversee your estate, allowing for increased flexibility, privacy, and control, even after you pass away. For this reason, trusts are more expensive than basic wills. If you have a large estate or more nuanced situations—such as prior divorces, children with special needs, or spendthrift heirs—a trust is worth considering. Keep in mind that there are many different types of trusts and an estate planning professional can help you decide which one is best for you.

As in the case of naming a POA, you should be cautious about naming multiple people to serve as your executor or trustee. Oftentimes, doing so can cause more problems than it solves.

You’ll want to inform who you’ve chosen to serve as your executors, trustees, or children’s guardians, and make sure they are up for the tasks.

These individuals must also have access to your important documents, or at least know where to find them. Finally, it is a good idea to put  these individuals in touch with, or have them meet your attorneys and financial advisors as well.

Taking the Next Steps

A rock solid estate plan is an important step to ensure that you and your assets are protected in the worst-case scenario. While you now have the basics, this is just the beginning. Because state laws can vary and every personal situation is different, we highly recommend speaking with a professional estate planning professional or an attorney to help you navigate this journey.

Also remember that an estate plan is not a static document that you can “set and forget.” We recommend reviewing your estate plan every two years, or when any major life event such as marriage, divorce, or death occurs among your beneficiaries.

Betterment customers can log in to their Betterment accounts today to make sure their beneficiaries are up-to-date. After logging in, navigate to “Settings,” and then select “Accounts” to view or update your beneficiaries.

Remember, talking about death and illness is never easy. But having a plan in place now will give you peace of mind when you and your loved ones most need it.

Your family and friends aren’t likely to be experts in estate planning law and dealing with your illness or death will already be stressful enough. Providing a clear set of instructions will help during a difficult time and also prevent any disputes that may arise.

1Step-up in basis: If you sell an asset that has increased in value, you must pay taxes on the difference increase. For example, if you bought a stock for $100 (your cost basis) and it is now worth $150, you will pay taxes on that $50 (capital gain). However, if you pass away and your heir inherits this stock from you, the cost basis is adjusted to the price on your date of death. This is called a “step-up in basis,” and means your heir can avoid taxes if he/she sells that stock.

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