Do You Really Need an Estate Plan?

As financial planners, one of the most difficult tasks we have is persuading people to do estate planning.  Many assume it is only for the elderly, but the advent of COVID-19, which has no regard for age and can cause sudden death, has certainly brought it to the forefront for many.  

For some though, the misconception that estate planning is no longer important still exists. This is likely because under current law (2020), the federal estate tax exemption for each person is $11.58 million. That means when you die, if your estate is worth less than that amount, you’ll owe no federal estate taxes. However, there are two caveats—currently 18 states and the District of Columbia impose state estate taxes on lower levels of assets. In addition, under current law the federal estate tax exemption is reduced to $5 million in 2025 (unless Congress changes it earlier).

The main purpose of having an estate plan is to make sure that the assets you have accumulated during your lifetime are distributed to your heirs as you would like them distributed. If you don’t have a will, the laws in the state where you live will dictate to whom your assets will go at your death. This may mean that if you’re single, your estate goes to your parents, or if they aren’t living, to your siblings in equal amounts. If you’re married, it may mean part goes to the surviving spouse and part to the children.

Estate planning isn’t that difficult

We think one reason people procrastinate when it comes to estate planning is because they think it will be too complicated. Rest assured it isn’t that complex. The first step is to make a list of the assets and liabilities currently held in your name. Exclude from this list your retirement accounts and insurance policies because these have a designated beneficiary (beneficiaries). Also, you can exclude jointly held property as it will go to the joint owner. You should, however, make a separate list of these excluded assets so that your beneficiaries are aware of their existence since they pass outside the will.

Choosing a Personal Representative

Once you’ve determined what your estate assets are, next you need to select your personal representative (PR) as well as who will serve as successors in this role if the person you selected is unable or unwilling to serve. A PR can be a person or an institution, such as a bank. Many select a family member, but make sure you ask that person’s permission before naming him/her — you don’t want it to be a surprise!

When considering a PR, it’s important to choose someone who can be trusted as well as someone who is competent. If you don’t have an appropriate family member or friend, you can delegate this duty to your lawyer or banker. A common mistake we see is someone naming all his/her children as personal representatives to prevent family discord. Actually, this can cause the opposite effect. If multiple decision-makers are involved, settling the estate can become needlessly complicated and often leads to family conflict. We recommend designating one person as the personal representative, preferably one who is geographically near.

If you have minor children, you need to designate a guardian. This is a difficult decision. You should have a frank conversation with the potential future guardian to make sure he/she is willing to accept this responsibility. You should discuss your wishes for the children’s futures and how those wishes will be funded. Sometimes it’s advisable to name two guardians — one who will take physical care of the children and another who handles the finances.

Work with a lawyer

Regardless of the size of your estate, it’s important you work with an estate planning lawyer. A lawyer can bring up issues you might not have previously considered and make sure your will meets your state’s laws.

The lawyer will prepare a draft of the will for you to review. The final document must be in writing and signed by the testator (you). The testator must declare that the will is his/her last will and testament. This must be done in the presence of at least two witnesses who also sign the document and aren’t related to you or are beneficiaries of the will. And don’t forget to date it!  Your will should be dated to show which is most recent.

Once you have a valid will, be sure to review it periodically or whenever you have major life events including inheritances, change of marital status or residence. If you become a resident of another state, all final legal documents should be reviewed by a lawyer to ensure they’re valid in your new state of residence. You can change your will as often as you want unless you become incompetent or are under undue influence of another person.

Please note this article isn’t intended as specific legal advice, as that should only come from qualified legal counsel.