An estate planning primer

Here are the basics to get going: understanding key documents, life and long-term care insurance, tax efficiency and how to safekeep documents.

One of the most important steps in developing your estate plan is assessing what you have in place today. Creating an inventory of your current assets, liabilities, insurance policies and legal documents will better prepare you to perform regular reviews of your current net worth and estate plan.

A summary of your net worth often provides details regarding what assets you have (e.g., cash, retirement assets, corporate benefit plans and businesses), asset ownership and titling. Creating a summary of your net worth is important for analyzing and evaluating your current financial status so you can create a plan to ensure your estate will be managed in a manner consistent with your goals and objectives.

A revocable living trust (RLT) functions in much the same way as a will. You appoint an individual to administer your assets and outline how your assets are to be distributed. Unlike a will that must be administered by the probate court, however, an RLT may enable your estate to avoid the probate process altogether along with the associated time and fees. Since the probate court and any documents filed with it are open to the public, those wishing to maintain privacy may prefer an RLT. Also with an RLT, certain provisions become effective upon signing and may assist in planning should you become incapacitated.

A revocable trust must be “funded” to work effectively. This means you will need to retitle your assets from your individual name to your RLT. All too often, individuals will establish a revocable trust document only to fall short when it comes to retitling assets in the name of the trust. Assets that remain in your individual name will be subject to probate. As such it is important that you confirm with your advisors that your assets are titled appropriately after you establish your RLT.

A financial durable power of attorney (DPOA) is essential if you ever become incapacitated for a period of time. You will need to have someone authorized to make financial decisions on your behalf. A financial durable power of attorney lets you designate your attorney-in-fact to act on non-trust assets. You may wish to consider naming two individuals to act in this capacity, a primary agent as well as a successor agent.

Your agent’s powers under your financial DPOA may become effective as soon as it is signed, as is often the case with married couples that would like the convenience of standing authority, or it may take effect if you are declared incapacitated by a doctor (or upon some triggering event). Unlike a standard power of attorney, this document may be made “durable” so that it remains in force throughout incapacity until your death or until it is revoked. Your designated agent will be able to pay bills, authorize transactions and manage your overall financial affairs.

Life insurance is often considered alongside an estate plan for the purpose of providing for the needs of the surviving spouse and family members or used as a “wealth replacement” vehicle. Review your policies to determine whether the insurance amount and type of policy meet your current needs. Policies originally purchased as a means of income replacement for a surviving spouse or for the care of a minor child may no longer be necessary if you are retired or your children are fully grown. Reevaluate the purpose for the insurance you have in place to see if you still require it.

Review the ownership and beneficiary designations of your policies to ensure they are aligned with your overall estate plan. The death benefit of an insurance policy owned in your individual name will be included as part of your estate for purposes of calculating your estate tax. This is true regardless of who receives the insurance proceeds. However, if your insurance policy is owned by a properly structured irrevocable trust, it should not be included in your estate.

It’s important to consider incorporating long-term care into your estate planning because these expenses can quickly deplete your savings. Long-term care includes the services you may need, like nursing home care and home health care, especially if you have severe cognitive impairment. Almost no long-term care expenses are covered by health insurance.

Effective estate and gift tax planning often comes down to one straightforward and effective strategy: give away a significant portion of your wealth during your lifetime to family, trusts or their benefit, and/or charities. It’s one of the most effective ways to reduce estate tax liability at death.

Among other benefits, making significant gifts during one’s lifetime removes the gifted asset from the donor’s estate, along with any future appreciation attributable to those assets prior to death. That means when the IRS levies the estate tax, it’s a smaller bite.

The next step is to preserve the documents you’ve put in place and communicate your plan with your loved ones. The location of the original documents should be communicated to the appropriate individuals (e.g., attorney-in-fact, executor or trustee) to prevent future confusion. 

While the first instinct may be to keep the documents in a safe deposit box, be aware of how it is titled prior to housing your documents there. In certain states if the box is titled in your name alone and you pass away, your executor may need to obtain a court order to access its contents. So prior to depositing your documents there, explore alternative storage options.

With some forethought and planning, you can help protect the wealth you’ve worked so hard for and ensure that your last wishes are carried out. For the sake of your family—and your peace of mind—it’s never too early to start thinking about estate planning.