Most people would be surprised to know that only 32 percent of Americans have a will or other estate-planning document. According to Caring.com, this percentage has been steadily dropping over the past few years and is down 25 percent from 2017. It can be a morbid proposition to plan for one’s death, however, drafting a will is an essential part of estate planning and financial planning.
Proper wills are not just for the elderly, people with children, or even the wealthy. It can be human nature to think that things that happen to other people, such as untimely death, won’t happen to you. However, proper planning can provide peace of mind regarding such an event. By drafting a will, you can be sure that your wishes will be carried out, and you will have helped your loved ones through a stressful and difficult time.
Many people say they either don’t know how to go about drafting a will or have been meaning to create one but keep putting it off. This is understandable because there are several factors to think through. During the planning process, you need to determine how your current assets are titled including any property owned, bank accounts and who is listed as beneficiaries on any 401k, IRAs, or brokerage accounts. You might also have a life insurance policy to account for. However, leaving these assets without clear or consistent directives can create stress for your loved ones as they try to determine what you would have wanted.
At a minimum, we suggest our clients draft a will, power of attorney, and healthcare directive. While this does not completely ensure loved ones will avoid probate (creation of a trust does), it will speed up the inheritance process and allow for a more seamless distribution of your assets based on your wishes. In order to help you start planning, here are six components to think through and anticipate as you approach this process.
As previously mentioned, it is important to maintain an updated a list of beneficiaries. Keep in mind that this list must also be updated on retirement accounts, insurance policies, and other accounts with beneficiary designations. Getting a divorce, getting married, having children, etc. can affect who you want as your beneficiaries, and you should know that the designations made on these accounts supersede any designations made in a will. Also, if you would like nieces, nephews, grandchildren, friends, etc. to inherit assets, this would need to be drawn up and listed in detail, as the assets would typically be distributed to a spouse and/or to other siblings first.
If you decide to leave assets to a minor, the court will hold a guardianship or conservatorship and can appoint someone of their choosing to hold the funds until the child turns 18. A way to avoid this scenario is by leaving a UTMA or Uniform Transfers to Minors Act account. The custodian you designate would administer the funds until the child reached 21 when the funds would become fully available to the young adult. If you have a large sum of money to your name, it is prudent to create a testamentary trust that lays out how and when the funds should be distributed to your children. The trust could then specify that they are allowed to use the money for the purchase or a home, healthcare, or education. It could also provide for the maintenance of the account or designate that they receive various sums at certain ages rather than one large lump sum payment.
In order for a will to be enforceable, you need to void any previous wills and make sure you have your current will signed by two witnesses who are not beneficiaries. Also, you need to have a copy of an original will if an attorney has not helped draft the document, although we suggest always having an attorney draft one regardless of the complexity.
Joint tenancy allows another individual to write checks on a bank account or to become the owner of real estate upon the death of the original grantor. Unfortunately, this can cause some unintended consequences. For example, the person who added a joint tenant to their checking account may not have understood that the entire account will now pass to that joint tenant rather than to the estate. We usually suggest having some type of power of attorney if you want help with your assets or assign a Transfer on Death rather than establishing joint custody of the account.
The executor of an estate has a difficult job because fulfilling the wishes in a will can be a long, strenuous process. They will need to help pay taxes or creditors, distribute assets, and deal with the settling of the estate so you need to make sure that the person you name as executor is aware of and capable of the responsibility. Also, as with other designations, you need to have a contingent or alternate in place in case of the passing of the executor.
We also like the establishment of a power of attorney which designates another person to act on your behalf in the event of incapacitation. They can help with any financial assistance to make sure bills are paid. There are various ones that include general powers of attorney, durable powers of attorney, and specific powers of attorney. Also, a living will with a health care proxy helps your loved ones make health decisions should you not be able to.
As we mentioned, wills are an essential part of financial planning. It is important to ensure that your assets are distributed according to your wishes. Estate planning can take some time and cost a little bit of money up front, but the cost is worth it in the long run. Taking the time to set this up is crucial for making the most efficient use of your assets and for helping your loved ones. Speak to financial planner and estate planner on how to best go about this.
Matthews Barnett, CFP®, ChFC®, CLU®
Financial Planning Specialist