There are many questions that need to be answered before estate planning documents can be drafted. I always advise having a big picture idea of what you are trying to accomplish with your legacy before you meet with your estate attorney. The answers will be both important and highly personal to you, and it’s easy to be overwhelmed by the process. To help you get started, here is a list of five things you should think about and discuss with your spouse.
It’s best to assume that there will be millions in your estate (even if you are a young professional, think life insurance) and that you are planning for the long-term, perhaps even for several generations. We recommend this because it’s better to over-plan when it comes to your estate. Too many people neglect to update their documents as their family and/or their estate expands, and the consequences can be catastrophic.
Some of the estate documents you will need are a durable power of attorney, to name the person who will take care of your finances if you are unable to, and a living will, to document your medical wishes and/or a durable healthcare power of attorney, to name the person who will make your medical decisions if you cannot, for example, by instructing your doctor to keep you on life support after an accident. A living will can be used as your first line of defense, with the provision that your healthcare power of attorney would take over if there is a situation that the living will does not address.
If you are married, your primary durable power of attorney and healthcare power of attorney will usually be your spouse. But who will you name as your contingent? It has to be someone who knows you well enough to have a good idea of what you would want if you could speak for yourself, and someone you can trust to act upon that knowledge (this does imply some shared values). Two things to keep in mind: the perfect durable power of attorney is not necessarily the perfect health power of attorney; and, even if these documents are part of your estate planning, they will only be in force while are still living. They lose power the minute you pass away, and the person you have named as your executor assumes control. (Many people choose the same individual to be both durable power of attorney and executor).
This is one of the toughest questions. Who will you name as guardians? Trustees? It is very difficult for any parent to imagine not being around to protect their family, and it is even harder to imagine your children losing both their parents. In fact, it’s so difficult that it is one of the main reasons that young parents do not get their estate documents in order. What’s the best case scenario here? You have a really hard conversation, perhaps even a dispute with your spouse, but you pick some names, and you never have to think about it again. What’s the worst case scenario? You do nothing, you’re involved in a car accident, and your kids are placed in foster care while your families fight over guardianship. The takeaway: buckle up, have the conversation, and protect your children. A few things to keep in mind:
♦ The court has the final word. While it may be rare for a court to overrule parents’ wishes, it can happen. If the court believes that a guardian is not fit, it can appoint someone else. Therefore, if the person you name is not an obvious choice, be sure to spell out the reasons for your choice in the document, along with the reasons why you don’t want other specific individuals to be guardians.
♦ It is better to name an individual as guardian rather than a couple (even if your hope is that that person will still be married to whomever it is they are married to when you named them).
♦ You need a contingent, sometimes more than one. Your 65-year old mother may be the perfect primary guardian, but fast forward 15 years. Will you still think that when she is 80? Remember, we are planning for the long-term, so having more than one contingent means that you won’t have to keep updating your guardians.
♦ You can have structures in place that will create some sort of a shared guardianship. For example, your brother is named guardian, but your husband’s sister will have the children for two months every summer.
♦ Guardians and trustees can, and often should be, different individuals. It creates a checks-and-balances strategy to have several people looking out for your kids’ best interest.
♦ Make sure your trustee doesn’t have to guess your intentions by employing carefully drafted trusts.
Trusts are not only for the very wealthy, and there are as many variations as you can imagine when it comes to trust distributions. It can be helpful to picture different structures to see how you feel about them. In our experience, it is easier to react to specifics than concepts.
♦ Middle ground example: your trust funds can be used for support and education right away, with the first distribution to beneficiaries at their age 25, a second at 35, and the final at age 45.
♦ Stricter: trust principal can be used at any time to purchase a house or for educational purposes, but no lump sum distributions will occur before a beneficiary reaches age 60. The thinking here is to ensure that beneficiaries have their own careers.
♦ Less strict: the trust will distribute income from the get go, 30% of principal to beneficiaries at age 21, and the balance when they reach 30.
If the answer is yes, then there are a lot of ways to go about it.
♦ Outright donations from your estate. (For this we advise spelling out the minimum amount that your kids will get before charitable gifting kicks in, especially if you have minor kids.)
♦ Donations through trusts that distribute income to your beneficiaries for a certain period of time before the remainder goes to charity, or the opposite.
♦ Charitable intent can also be used during your lifetime to help you transmit your values and prepare your kids to be the best version of themselves in regards to money. One of my favorite tools is the donor advised fund, which allows your children to learn how to budget and invest, how to work with professionals, and how to give back. All of this whiles saving you some money on taxes.
Your answers to these five questions are not the only ones your estate attorney will need to get your documents drafted, but they will put you ahead of the game. As you begin to compile your thoughts, remember that your financial advisor is certainly here to help you prepare and to discuss best options before you meet with your attorney. We highly recommend that you involve us in the process.
By Audrey Libois, CFP® / Financial Advisor
Audrey holds the CFP® designation and particularly enjoys creating custom strategies for important life transitions.
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