Estate and incapacity planning is one of the hardest basic financial planning items to tackle. It makes sense: Who enjoys talking about their own or their loved ones’ eventual death? While death and incapacity will always be difficult situations, a well-crafted estate plan can help minimize logistical and financial stress for your family during a crisis, and is well worth the effort. While these five steps will help prepare you to start the estate planning process, the most important task is to just start. Don’t let the difficult emotions or complexities hold you back from getting this important piece of your financial plan in place.
We think one of the most valuable services we provide at Pinnacle Advisory Group is a substantial amount of education around basic estate planning. We offer an Estate Planning 101 meeting to our clients, to explain the core documents that make up the foundation all estate plans, and to guide our clients through the following five steps.
Step 1: Choose Your Fiduciaries
Your fiduciaries are the people you entrust to carry out your wishes, either in financial or healthcare matters. Think through what you would want to happen if you were to be incapacitated tomorrow. Who would you want to manage your finances? Who will pay your bills, file your taxes, manage your investments? Who should make health care decisions on your behalf? Who will discuss your care with your doctors? Select the right doctor or medical facility? Who do you trust to access your medical records so they can make good decisions for you?
And who do you trust to handle these tasks if your spouse is unable to help, due to their own death or incapacity? Could an adult family member, a friend, or a professional corporate trustee serve as an alternate? If there are minor children, who will raise them? Who will manage their inheritances to pay for their needs until adulthood?
We recommend at least two back-up fiduciaries for each role. These are positions of enormous trust and responsibility, and so you should give serious consideration to selecting your fiduciaries. One of the things we do to help our clients envision who may be able to serve in these roles is to sketch out a Family Tree, including important non-relatives and entities, so that we have a good understanding of all the important parties to your estate plan. Typically, this Family Tree should list everyone you want to have act for you as a fiduciary, any person or entity you’d like to leave an inheritance to at your passing, and close blood relatives (especially if there is anyone you want to intentionally disinherit). This becomes a wonderful tool for designing the appropriate structure and forces you to think generationally, as we can note right on the Family Tree important considerations, such as whether any grandchildren have special needs, or whether an adult child has substantial assets of their own (and who might face an estate tax problem down the line, should they receive a substantial inheritance).
Step 2: Think Through The Disposition Of Your Estate
Think through what you would want to happen to your assets if you were to pass away tomorrow. Are there loved ones who rely on your financial support? Are there young children who need to have funds managed on their behalf until they reach a responsible age? Is there someone who you’d like to take care of, but you’re concerned about their ability to preserve the assets over their lifetime? Are there charitable organizations that you want to support? Could your spouse run your business if you died suddenly? What legacy is important you leave behind?
You have tremendous leeway to structure inheritances after your passing. You can leave money outright to a beneficiary, or in further trust for their benefit. You can preserve a nest egg for a beneficiary by directing that only the income be distributed, or that they may only access the principal for certain purposes. You can leave funds in trust to your children so that their inheritances are not as accessible to creditors if they go through divorces or lawsuits. You can support your spouse from a second marriage during his or her lifetime, but leave any assets to the children of your first marriage when your spouse passes away.
There are pros and cons to any inheritance structure. We encourage our clients to think of the balance between control and ease of management when they think through the best way to structure an inheritance, so that it is most beneficial to those you leave behind.
Step 3: Understand What You Own
The types of assets you own and how they are titled is an essential part of your overall estate plan. Before your first meeting with your attorney, you should gather copies of deeds for real estate and copies of recent statements for financial assets. For that meeting, bring the details on how each asset is titled (that is, whether they are owned individually, in trust, jointly, etc.) and also the current beneficiary designations of any accounts. Don’t forget to note any tangible assets with substantial monetary value. Bring documentation on the death benefit, term (if applicable), cash value (if applicable), owner, insured and beneficiary for each life insurance policy (including group term policies through work).
At Pinnacle, we help clients create an Estate Planning Asset Spreadsheet, with each account or asset sorted by type (cash, business, investment, real estate, qualified, etc.), and showing the approximate current value and the current titling. When our clients bring this spreadsheet to their meeting with their attorney, the attorney can see at a glance whether there are estate tax considerations, whether there is sufficient liquidity to pay possible estate taxes, whether a Revocable Living trust may make sense because you own a vacation house in a different state than your state of residence, whether there are liability concerns and you need LLC structure to mitigate risk in multiple rental properties, etc. Many of our clients periodically update their Estate Planning Asset Spreadsheet, and keep a copy with their legal documents to help their fiduciaries locate all their assets in the event of a health crisis or death.
Step 4: Assemble The Right Team
A well-designed estate plan often requires coordination among your legal, tax and financial professionals. Each one of these advisors will look at your situation through a different lens, so make sure to keep your advisors informed as you design your estate plan. In selecting an attorney, the legal profession is like the medical profession in that it is highly specialized; we recommend our clients work with an attorney who focuses their practice on estates and trusts, particularly if you have a large estate or complicated family situation.
We highly recommend our clients interview several attorneys to understand their services, fees, and just get a sense of personal fit. You will be discussing sensitive information about your hopes and fears for yourself and your loved ones after your death, and it’s important to find someone you are comfortable with. Understanding the way they charge for their services is very important; typically, for the creation of a new estate plan, we see attorneys charge a flat fee retainer for a three meeting process (design, review of drafts, signing).
Make sure you understand how much help an attorney will provide in implementing your plan after the legal documents are created; at a minimum, they should advise you on how your assets should be titled and how your beneficiary designations should read, so that your asset titling is working together with your legal documents. Particularly with Revocable Living Trusts, re-titling assets in the name of the trust is critical to the proper functioning of your estate plan.
Step 5: Communicate And Educate
Before you sign your documents, call each of your chosen fiduciaries and confirm that they are willing to serve in the role you have selected for them. Occasionally we see clients go through all the work of putting together an estate plan, just to turn around and have to amend it because one of the people named in their documents is not able or willing to take on the responsibility.
Once your legal documents are in place, depending on your particular situation, you need to let your fiduciaries know where the original documents can be found, so they are able to access them quickly as needed.
While this is certainly not possible in all circumstances, we tend to recommend you be as open and communicative among your fiduciaries and heirs as is comfortable for you. Some of our clients ask that we host a Family Meeting, during which we go through the legal structure, and help their fiduciaries understand their roles and responsibilities in the estate plan. This can also be a great opportunity to educate adult children about basic estate planning, and to encourage them to put their own documents in place, or help an heir understand the structure of their inheritance, so that they don’t accidentally miss filing a trust tax return or unwind creditor protection put in place for their benefit.
Walking through these five steps with your legal, tax and financial planning professionals will help ensure that you have made things as easy as possible for your family when the inevitable occurs. Please reach out to your Pinnacle Wealth Manager if you need help getting started on your estate and incapacity plan.
Pinnacle Advisory Group, Inc. (“Pinnacle) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Pinnacle and its representatives are properly licensed or exempt from licensure.