FIVE ESSENTIAL STEPS IN ESTATE PLANNING

I’m really lucky to have wonderful parents who I love dearly. My clients and I tend to be similar in that regard. So, I’ve been unable to ignore the uptick in questions I’ve been receiving from clients asking about their parents. These are complex, situation-specific questions that I’ll try my best to boil down appropriately. As always, please reach out if you have more specific questions.

  1. HAVE A PLAN!

This may seem like a given, but I can’t tell you how many people have no plan at all. I think most people know they need to do something, but never get around to it. I think some people have difficulty facing their own mortality. I think others don’t understand how difficult a lack of a plan can make things for their survivors. And, unfortunately, I think there are some people who don’t really care what happens.

Unless you don’t care what happens, it’s certainly worth having a conversation with a professional. Things might be simple or they may not, but the only way to know for sure is to have a conversation and learn. No one’s ever benefitted by ignoring the inevitable. 

2. DON’T PUT YOUR KIDS ON YOUR DEED

This is one of those things that people have actually bragged to me about having done. The idea, which isn’t totally insane unless you understand the tax consequences, is that retirees can help avoid probate for their adult children by putting their kids names on the deed. 

In theory, this is a great idea! When property is owned jointly, if one owner dies the other owns it outright by operation of law (plus some paperwork).  So, rather than having to go through the time and expense of probating that asset, they can get it done more quickly and inexpensively.

The problem here is that they’re most likely subjecting their kids to unnecessary taxes. When someone passes their assets at death, the beneficiary receives a step up in cost basis. What does that mean, you’re almost surely asking yourself? Well, the cost basis is basically the amount of money paid for something, or more exactly the amount of value in something that has already been subjected to taxes. So if you buy a house for $10,000 and it appreciates to $100,000, the cost basis is $10,000.  A step up in cost basis means that, when the owner dies and they leave it to their kids in a will or revocable trust, their kids inherit it with a cost basis of $100,000, therefore paying no tax if they sell for that price. Pretty sweet deal, right?

Well, if you instead inherit as a joint owner, you don’t get the stepped up cost basis. That’s potentially a very costly mistake! Before doing this please check with your accountant or attorney!

3. UPDATE YOUR BENEFICIARIES

I have another article where I talk about coordinating your beneficiaries with your will or trust, but this is different. You have to make sure your beneficiaries actually reflect who you want to get your stuff. I’ve seen situations where former spouses inherit 401ks and others where children from second marriages are disinherited from life insurance benefits. 

Please - do yourself a favor and double-check who your beneficiaries are. Things to look at include life insurance, 401ks, IRAs, brokerage accounts, savings accounts, and any other account you have which might name a beneficiary.

4. HAVE A DURABLE POWER OF ATTORNEY, HEALTH CARE PROXY AND LIVING WILL

These documents are a vital companion to your will or trust. Essentially, a durable power of attorney gives financial decision-making authority to someone you trust, should you become mentally incapacitated. This is important so you can ensure that bills are paid, checks can be deposited, and other similar financial obligations remain intact.

A healthcare proxy and living will are two sides of the same coin. The healthcare proxy gives someone you trust healthcare decision-making authority in the event you are incapacitated. This enables certain medical procedures which require your authorization to be approved by your proxy. 

The living will is a document in which you state with some specificity what you would like to happen under certain specific circumstances. This is most commonly invoked in the event of a horrible injury or illness where someone may be in a persistent vegetative state, or otherwise has no reasonable likelihood of regaining a meaningful recovery.

Each of these are very personal and can be very painful for some people to consider. Nevertheless, it’s essential that you plan for these possibilities, both for your own benefit and to spare your loved ones the burden of facing these scenarios without these documents in place.

5. TALK WITH YOUR FAMILY

As important as it is to get the right documents in place, it’s nearly as important to talk things through with your family. A document can only say so much. you can have to most carefully crafted will, beautifully worded and well thought-out, but you can never say it all. You can name guardians for your children, but a will won’t tell someone your feelings about parenthood.  You may establish a trust on your kids behalf, carefully consider at which ages and in what sums they’ll receive their inheritance, but that document won’t tell the trustee how you feel about financial responsibility. 

Having these kinds of difficult conversations is the key step in the planning process. By having this discussion, you not only can feel confident and comfortable with your decisions, by giving context to the words in your will or trust you’ll make those you’ve entrusted to fulfill those roles the confidence to act on your behalf.