Chad Waddoups is the Vice President of Wealth Management at Mountain America Investment Services.
Many years ago, my wife and I were sitting in the airport waiting to depart on our first kid-free vacation. Suddenly, I was overcome not by excitement or joy, but by dread and regret. I realized that if something happened to us while we were gone, we didn’t have a long-term plan in place for our kids. Who would raise them, pay for their education and take care of their overall well-being? As soon as we got home, I began putting together a trust and our wills.
The needs addressed with trusts and wills will vary according to life stage. When children are young, a will helps establish custodianship, and a trust is the best way to specify asset distribution and care for future needs. If you have minor dependents, they may be your biggest motivator to check estate planning off your to-do list.
When you are older and your children are adults, setting up a trust and will is a selfless act that will help your surviving children manage your estate as they grieve your loss. Think of it as a love letter to your descendants, letting them know you cared enough to provide a clear plan for what happens next.
Don’t Delay
It may be tempting to think you can get around to this later. However, a colleague once worked with a client who was financially stable, debt-free and had healthy assets, but she did not have an estate plan. My colleague recommended she make one multiple times, recognizing that her sons would have to go through litigation—known as probate—if she didn’t.
One day, she called from the hospital, having just received a bad prognosis, and she finally wanted to get her plan in place. We made arrangements for a local estate planner to visit her the following afternoon. When my colleague called her sons the next day to confirm when the attorney would drop by, she had already passed away.
Two years later, her house is still in probate. Her son, the executor, lives in a different state, but he travels every two weeks to keep the utilities functioning in a house that isn’t in his name yet.
Basic How-Tos
Don’t overthink getting started. Start by making a complete inventory of your major assets and valuable or precious belongings. Create a list of who gets what.
Next, make sure designated beneficiaries line up with what is listed on your life insurance policies and investment accounts, since these designations will override what is stated in your will.
Trusts Vs. Wills
Making the best decision about your estate planning documents requires understanding the difference between trusts and wills. Both are important documents that serve different needs.
A will is a legal document that gives direction for how custodianship of your children is designated and provides instructions for how your assets should be managed after your death. A will can be relatively easy to set up—you can even create one online based on a simple template.
A trust, on the other hand, is a legal entity that you can add as a beneficiary on life insurance, retirement accounts or property. A trust can manage the timing of when and how assets are distributed to your heirs. Trusts enable more specific distribution instructions than you might leave in a will.
Another benefit of a trust is that it can also manage property while you are living. For example, you can put a car or other property in a trust. A will, on the other hand, only supplies instructions for after your death.
Using A Professional
Considering that wills can be set up relatively easily, even without the help of a lawyer, some wonder if using a professional is worth the cost. If you decide to set up a trust, you will need the help of a professional, but one of the biggest reasons to rely on a lawyer or financial advisor is to better understand the tax implications of your decisions.
No matter how you decide to distribute your money, taxes will usually apply. Recently, tax laws have changed, and the IRS has adjusted rules about how inheritances are taxed. A lawyer or a financial advisor will be up to date on these rules.
Another reason to consider a professional is that you’ll receive more guidance on your options. Attorneys can help you get creative with the specifics of your distributions versus the general template you might get online.
When you create your plan, remember that it can be updated if you change your mind, gain a new asset or have a change in life circumstances, such as a new baby or pet. Periodic updates to your estate plans will also help your beneficiaries avoid unfavorable tax situations that didn’t apply when you first set up your plan.
A good rule of thumb is to review estate plans every five years to ensure they reflect your current needs and desires. When making an update, be very clear about the dates so the most recent will is identifiable, and be sure to destroy the old one. An attorney will also ensure these steps are taken.
Takeaways
If you don’t have a plan, the state will decide for you. Each state has laws on how to handle a person’s estate if they die or become incapacitated without a plan in place. It’s likely that your heirs will be required to go through probate if they dispute how the state would settle your estate. If you don’t want to lose the opportunity to make your wishes known, don’t put this essential task off any longer.
The examples provided are hypothetical situations based on real-life examples. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Consult your advisor prior to investing.
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