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The Importance of Estate Planning

by | Jun 6, 2018 | Estate Planning

Estate planning is one of the most overlooked concepts of personal finance. There are any number of reasons for this, but I think for most people, the reasons boil down to one of two things: A) people don’t like to talk about what happens when they die, or B) the perception is that estate planning is mainly for wealthy people. For many years I was in Camp B, thinking we didn’t have enough wealth to bother with setting up an estate plan. For whatever reason, any time the topic of estate planning came up I immediately thought of the late 70’s TV show Dallas, with the big houses and big cars, thinking to myself, “Those are the kind of people who need estate planning…Not me!”

I want to help you see what estate planning is and what it is intended to do, and why having a plan is a good idea for most everyone regardless of your wealth. In short, estate planning is all about peace of mind. Thinking about what happens to your family if you get hit by the proverbial bus can be emotionally difficult for many people. I’m here to tell you that the sense of peace you gain from having an estate plan in place massively out-weighs the emotional cost of setting it up.

Before diving in, let me say that I am not an estate planning attorney. I don’t set up trusts or estate plans for people. You need a lawyer to do that. They will make sure that your estate plan is set up in accordance with state laws (which vary) and captures any unique situations you may have. My role as financial advisor is to help you identify areas where you may be at risk and then help you find the right estate planning attorney if need be. It’s like your family doctor referring you to a foot specialist if you’ve twisted your ankle.

Non-financial Goals of Estate Planning

The traditional definition of “estate” refers to all the money and property we own. I think this is one of the main reasons why many people think they don’t need estate planning. “If I don’t have a large estate (i.e. millions of dollars), then what do I need to plan for?” Yet as we will see, estate planning goes well beyond just our money and jewelry.
Let’s touch on some of the non-financial goals of estate planning. I like to call these the intangible benefits to estate planning.

1) Avoid the probate court system (time & cost). Probate courts are state courts that help settle people’s affairs after they pass away. If you’ve ever had to deal with a deceased relative’s “estate” in probate court, you know that it can be an expensive, time-consuming process. In Illinois, for example, probate court costs can amount to almost 8% of the value of the estate and take up to two years to fully settle out. That is a lot of time and money! When you set up an estate plan, you are essentially making important decisions today so that the probate courts don’t have to make them for you after you pass away. The fewer ‘decisions’ the court has to make, the less costly and time consuming settling your estate will be. This not only leaves more money to your heirs but helps them avoid a long, protracted estate settlement process, which can be an emotional burden for them.

2) Surviving spouse can continue to take care of the family’s needs in the aftermath of a spouse’s death. It’s not uncommon these days for a married couple to have separate banking accounts in their own names. Even in the cases where the couple shares a single account, it may still technically be in the name of one spouse. What can happen if a spouse dies with banking accounts in their name only is that the money is “frozen” by the probate courts until the deceased’s estate is settled. Practically speaking, this means that the surviving spouse cannot access funds in these accounts to pay for groceries, the mortgage, and other living expenses. As mentioned above, it can take several months or even years for an estate to work its way through the probate court system, leaving the surviving spouse with the additional pressure of having to scrounge up cash to pay bills, let alone dealing with the grief of losing their loved one. A proper estate plan will make sure your accounts are accessible to surviving spouses.

3) You know exactly where your minor children (under 18 years old) are going to end up if you and your spouse pass away. The #1 motivation for my wife and I to get an estate plan in order was this issue right here. We enjoy spending time together as a couple doing quick weekend getaways without the kids. One day we were talking about what would happen with our youngest kids if we were both in some sort of accident while away from home. We didn’t know. Courts are generally pragmatic and will have children live with grandparents or other relatives. But family dynamics can be very different from family-to-family. Put together a list of 3-4 people you’d like to have “in line” to take care of your minor children in the event of your passing. A Last Will & Testament as part of your estate plan is your opportunity to specify exactly who those people would be. That’s PEACE OF MIND!

4) Allows a spouse or other loved one to pay your bills and make financial decisions if you’re incapacitated. In the unfortunate event you end up incapacitated, like a coma or Alzheimer’s, you need someone that can pay your bills and “keep the lights on,” so to speak. A Power of Attorney for Property will help you do that. You designate a person who would be able to take care of your financial affairs in the event you were not able to. Normally these Powers of Attorney will only become active in the event you are indeed incapacitated, meaning they are only active when needed.

5) Allows a spouse or loved one to make health care decisions for you if you’re incapacitated. If you have ever dealt with a major health issue before – either for yourself or someone else – you know there are a myriad of treatment options that doctors will give you. But what happens if you are not able to make these decisions for yourself? Who is going to “make the call”? A Power of Attorney for Health Care is a document where you specify exactly who is able to make those medical decisions for you. Normally this is a spouse but it’s always a good idea to have a list of 3-4 people ready to make these decisions just in case your spouse isn’t able to.

Financial Goals of Estate Planning

As you can see, estate planning isn’t just about money and possessions. But let’s be honest, passing prized possessions, heirlooms, and money to heirs is important. Let’s look at some of the financial benefits that come from setting up what’s called a Trust. There are many kinds of trusts out there depending on how much wealth you have, what your charitable ambitions are, or your income needs. I’m not going to go through all the different flavors of trusts but instead, focus on some of the high-level benefits a married couple can achieve from setting up a joint revocable living trust.

1) Avoid the probate court system. I touched on the time and cost of an estate going through the probate court system above but wanted to highlight it again here. Remember that probate courts cost money, up to ~8% of an estate’s value in the State of Illinois. When you have a trust set up, any bank accounts and assets you put into the trust avoid having to go through the probate court system when you pass away. The fewer dollars and assets you have go through the probate courts, the cheaper and faster it will be to settle your estate, leaving more money for your heirs and less time hassling with the court system when you’re gone.

2) Help avoid estate taxes. Depending on your wealth, having trusts can help you avoid estate taxes, particularly in states that impose their own estate tax on top of federal estate taxes. Illinois happens to be one of those states (surprise, surprise!), where the state’s estate tax kicks in for anyone with more than $4 million of assets. Even if you don’t have that much money, a trust is a good idea for the other reasons outlined here.

3) Distribute money to your heirs on your schedule. This is particularly attractive for parents with younger children. Suppose you and your spouse passed away suddenly. Would you want your kids to get lump sums of your assets immediately? Some might say yes, but I’m sure there are some of you that wouldn’t like the idea of an 18-year-old son getting his hands on that kind of money until he has matured a bit. When you set up a trust, you can design it so that the trust pays money out to your heirs on a schedule. For instance, you could say they get 10% of the assets at the age of 20, another 30% when they turn 25, and then the rest of the assets when they turn 30. It’s totally up to you how this would be set up. The idea is to avoid giving huge sums of money to children that might not be ready for it.

4) Prevent family arguments. Sadly, there are many examples where family members fight over the inheritance of a deceased relative. Money does funny things to people. With proper planning, you can set up your trust to include something called a No-contest Clause. How it works is like this: if a beneficiary is unhappy with what you’ve left them they can try to challenge it. This can cost a lot of time, money, and above all, family hardship to settle out. A no-contest clause says that if one of the beneficiaries decides to challenge and loses, they will end up with ZERO. A no-contest clause acts as a big deterrent to an unhappy relative, saving lots of time, money and anguish.

5) Creditor and Litigation protection. Suppose you have a child who is having financial issues with creditors. Now suppose they receive a $100,000 inheritance. Guess what? Creditors will immediately go after that money and likely get it, leaving your heir with much less than you wanted them to have. Having a trust in place to “receive” their inheritance helps avoid this from happening, as creditors normally cannot get at inheritances that reside in a trust. It also protects your estate from any unnecessary litigation after you pass away.

Conclusion: Estate Planning is Important!

I hope you’re able to see why proper estate planning is important regardless of your financial situation. The cost to set all of this up will vary depending on where you live but can range up to a few thousand dollars. Yes, it’s a big investment, but unlike your annual life insurance premiums, getting an estate plan in place is normally a one-time investment. I strongly advocate making the investment in a good estate plan so that you have the peace of mind knowing your family is taken care of in the event you’re no longer able to do so.

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