Estate planning is much more than setting up a trust. The broadest description of estate planning is the process of preparing to dispose of your assets when you pass away. At least, that’s the textbook definition. Understandably, that gives many people the impression that estate planning is for the rich or those taking required minimum distributions or RMDs. The reality is that estate planning should begin as a young family and evolve over time as your lives change. However, there is much more to it.
A properly developed estate plan will help avoid the probate process (public settling of an estate through the court system). Most people don’t like the idea of their private financial lives being made public via the courts. Even worse, relying on the court system to determine who should take care of your minor children. Simply having a will isn’t enough to avoid the probate process.
I often see curious looks on my younger clients faces when I ask them if they have done any estate planning. There seems to be this reaction like, “why would we need that, we’re not rich.” When some folks hear the term estate planning, they seem to envision mansions and fancy cars and don’t consider that it’s something they need. There simply isn’t the awareness out there as to how critical estate planning can be.
When should you do estate planning?
Parents with young children:
Making sure the needs of the children are met if something happens to the parents while the children are minors is very important. Most estate plans provide for one or more trusts to take care of the minors’ finances and a nomination of a guardian to handle the minors’ personal affairs. These include issues like where the children will live and go to school and healthcare decisions. The appointment of the nominee as the guardian is ultimately up to a court to decide. However, the parents’ nominee is given preference over others. This can help give surviving family members some much-needed insight into the wishes of the parents.
Young, single adults who still rely on parents financial support:
Young adults who still rely on parents for their health insurance, tuition, rent, and spending money can benefit from an Advance Health Care Directive and Durable Power of Attorney Finances, which will enable Mom and Dad to coordinate their student’s health care and assist with banking activities.
Purchase of a home:
In California, if the gross value of your estate is more than $150,000, the estate will have to go through the probate process. This process is expensive and time consuming. These assets won’t pass to the next generation until the probate process is complete. Since essentially every home in California has a gross value over $150,000, establishing a revocable living trust is key. Funding the trust with a home and other appropriate assets will allow the estate to pass to the intended beneficiaries without the need for probate.
So whether you are a young college student, new parent, or first-time home buyer (or, of course, nearing retirement), it is a good idea to talk to an estate planning attorney about how a comprehensive estate plan can benefit you now.
Life insurance and retirement accounts
It is important to note that retirement accounts and life insurance will mostly pass to beneficiaries avoiding the probate process. As a result, it will be important to make sure your beneficiaries are properly designated. Be sure to review all of your retirement accounts and life insurance beneficiary designations. Each spouse should consider designating the other as 100% primary beneficiary.
As a fall back, consider adding the trust as a contingent beneficiary once a trust is established. Special care should be taken if naming minors as beneficiaries or contingent beneficiaries. Consulting an estate planning attorney is critical. Not all situations are the same. For more detail on beneficiary designations, I suggest the following article: IRA Beneficiary Designations – What You Need To Know.
What assets are included in a trust?
Assets you will title under the trust often include: Home and rental properties, non-retirement investment accounts, bank accounts. Estate planning attorneys will help file the appropriate documents for recording with your county.
The type of trust established is referred to the following names (they all refer to the same thing): Family Trust, Living Trust, Revocable Trust, Inter-Vivos Trust. Your trust will likely be referred to as The Doe Family Trust with John Doe and Jane Doe as Trustees.
What estate planning documents do I need?
In addition to establishing a trust, you will also be creating other legal documents to indicate when and how either of you take control of the others health and financial decisions. This includes specifying who should be the guardian of minor children if something were to happen to both of you.
The following taken together will often constitute estate planning:
1. Last Will and Testament
2. Revocable Living Trust
3. Financial Power of Attorney
4. Advance Health Care Directive
5. Life Insurance
6. Retirement Accounts
7. Trust Assets
8. Miscellaneous Personal Property
Most would agree that estate planning is a prudent task. Unfortunately, many people put this process on the back burner. It’s understandable. Estate planning is designed to address unfortunate events. Illness and death are not the most pleasant things to discuss. In addition, it’s another thing that we pay for, but can’t see or touch. This is similar to life insurance. It isn’t easy paying for something that may never be used. Having said all of that, estate planning is one of the most important financial responsibilities we have. Those who take the steps to be prepared will likely sleep a little better at night.
SPECIAL NOTE: None of the information contained in this post is considered legal advice. Before making any decisions related to your own legal affairs, be sure to consult an attorney.
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