We have discussed legacy planning in the past, and in that discussion touched on the difference between legacy planning and estate planning. However, today we will provide a full overview into what exactly estate planning is. We’ll do into how it differs from legacy planning, why it’s important, and how to go about it. Estate planning is extremely important for most people with any sort of estate, and especially important for high net worth individuals.
What is Estate Planning?
The reasons for undergoing the estate planning process can be quite similar to the reasons for undergoing the legacy planning process. You have an estate, and you want to ensure that it is distributed and valued after you pass (or can no longer control it).
There is, however, one important difference – legacy planning focuses not only on how you want your estate and assets distributed after you’re gone, but also on how you want them defined. It enables you to give your wealth a sense of purpose, so to speak.
Estate planning, on the other hand, simply involves creating (and probably revising at least several times) a plan to distribute your assets when you are no longer able. It enables those appointed by you to protect, maintain, and manage your wealth and estate for your family.
Why Should You Begin the Estate Planning Process?
Before getting into the nuts and bolts of estate planning, let’s take a moment to review why it is a worthwhile endeavor. Estate planning is a powerful way to ensure that your estate is in the right hands when you are no longer controlling it.
This can mean very different things to different people, which is the beauty of estate planning. There are no rules or formulas you have to adhere to when portioning out your estate and assets. However, if you fail to plan for the distribution of your estate, that duty will default to your state government’s formulaic distribution formula. And in doing so, this likely will not include the beneficiary designations that you would have chosen.
Perhaps not everyone with an estate needs, wants, or chooses to go through the legacy planning process (although we’d recommend it). Yet estate planning is an essential process for all high net worth individuals to undertake. Planning your estate will have several long term benefits. But it will also grant you ease during your lifetime to know that you have satisfactorily planned for the distribution of your assets.
Are you interested in beginning the estate planning process (and have not already)? We highly recommend you employ professionals to help guide you through it. For today, what follows are some steps of the estate planning process to familiarize you with what it looks like.
Basic Steps of the Estate Planning Process
1. Gather data on all assets
First, it is important to make sure that you have an accurate inventory of any and all possessions that you may want to include in your estate plan. This means any tangible and intangible assets.
You would include:
- real estate properties
- stocks and bonds
- collectible items
- life insurance
- retirement accounts
- anything in this vein that you may want to pass down
Once you have a clear idea of what you’ll want to include in your estate plan, it’s time to verify how much these items are worth. Of course you may have an idea – or maybe even exact numbers.
But if it’s been more than a few years since you had your home appraised it might be time to get a new number. Collecting all relevant financial statements is also an important part of this step. In addition, you want to ensure that you are not the only individual who has access to the location of these documents. This is because if something unexpected were to happen to you, a family member and/or attorney would need to be able to locate them.
This includes a will
You likely already have a will, but if you don’t, now is the time to make one. Too often high net worth individuals put off creating a will year after year, and we understand why: it requires a lot of thought and it’s a bit morbid.
But these reasons do not outweigh the importance of having a plan for the unexpected. For the sake of your loved ones and the preservation of your estate and assets, anyone who has not made a will yet should do so immediately. And anyone who has a will, but has not revised it recently (or at all), should also do so immediately. Your will is a critical component of your estate plan; make sure it accurately reflects your wishes.
2. Get professional guidance
Once you have an inventory and financial estimation of your assets and an up to date will, it is time to consider bringing in a professional. Working with both an attorney familiar with estate planning and a tax advisor familiar with estate laws is advisable.
Estate tax laws can be tricky – and they vary state by state. Hence, you want to ensure that you are getting the most out of what you leave behind. This way, as little as possible of your estate is being lost to court fees, taxes, and the like. A tax advisor will be able to help you with this process.
Your tax advisor and attorney will also be able to help you consider what type of trust to set up with your estate plan.
There are two types of trusts that you will likely consider setting up – revocable and irrevocable trusts.
Revocable, or living, trusts still leave the designator in control of their assets, so that they can change anything at any time. And – this is the critical part – they allow you to bypass probate. This means, of course, that you – not the court system of the IRS – retain control of the distribution of your assets.
Irrevocable trusts, on the other hand, can result in reducing the taxable estate of the grantor. The assets included in an irrevocable trust will be taxed either at income tax rates or at the beneficiaries’ tax rates. They cannot, however, be amended (or if they can be it is a very long and arduous process).
Having estate planning experts on hand for the process of setting up a trust is highly recommended. It is the goal of anyone planning their estate to set up a successful, effective trust that avoids probate. As with many financial things in life, the process is not always straightforward.
In terms of healthcare and finances
Another aspect, and not necessarily the most glamorous one, of estate planning is setting up health care directives. Although many of us prefer not to think about the potential of declining health, it is critical to address this possibility when estate planning.
Essentially, you just want to develop a set of clear directives, so that your family members will know exactly what your health care wishes are if you can no longer communicate. You also may want to set up a power of attorney designation for dealing with any potential health care issues.
Pronouncing a power of attorney is a very important decision. This individual – they don’t have to be an actual attorney – will be in charge of handling your finances while you are living. Although it is advised that they have some experience or aptitude with finances and estate planning, the most important thing is ensuring that they are someone you trust. Your power of attorney could be a family member, close friend, or even your actual attorney.
Choosing your executor is also important to consider. The executor, like the power of attorney, controls your finances, but the executor is in charge after you pass. It can potentially be a very long term commitment to be an executor, so take that into consideration when choosing. Again, this person should be financially savvy, but does not have to have any legal background. Oftentimes a family member, or someone who will retain ties with your beneficiaries and is familiar with your estate, is a good decision for the executor role.
It’s a Great Time to Begin Estate Planning
Clearly, there is a lot to think about when undergoing the estate planning process. And you certainly need to be intimately involved with the future distribution of your own estate and assets. But it can be a tremendous undertaking without any outside help.
Employing a professional estate planner, attorney, and/or tax advisor to walk you through the details of the whole process can be immensely beneficial. And it’s especially true for high net worth individuals with complex and valuable estates.
This post is not an exhaustive list of every aspect of the estate planning process, but rather includes some facets of the process worth considering ahead of time. If you have questions about estate planning, or would like our advice, we are happy to help. Planning for the distribution of your estate and assets is extremely important both for your legacy and for the well-being of your family and future generations.
We Can Help
There are few things that affect as many areas of your life as your wealth. Treat it with the attention it deserves and it will repay the favor. Whether you’re thinking about retirement, estate, or financial planning or want to use your wealth to provide for younger generations, proper wealth management is what will make it happen.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Make sure your wealth is in the right hands and ready to grow in 2020. Schedule a meeting here, and we’ll discuss your best options.