Certified Financial Planner and Author
5 Aspects to Consider When Creating An Estate Plan

5 Aspects to Consider When Creating An Estate Plan

Estate plans can vary considerably based on people’s financial situation and overall goals. Even though estate plans can look radically different from one another, they all have the same basic components. A solid estate plan is essential to ensure that your assets are passed along in the way you intended without court action or unnecessary taxes. The following are some points to consider when it comes to creating an estate plan:

1. Regularly update your estate plan.

Parts of an estate plan will often become obsolete as changes occur in a person’s life. Whenever a major event happens, such as a marriage, divorce, birth, or death, it’s a good idea to revisit the plan and ensure that it accurately represents one’s current situation. People should also feel free to update their plan if their net worth shifts, the composition of their estate changes, or their overall goals change. Some of the most critical areas that people should keep updated include powers of attorney and beneficiary designations. Individuals should have at least two powers of attorney named and ensure they are an accurate reflection of whom they want to make financial and medical decisions on their behalf. Beneficiaries may also change with life events, so it is critical to keep them updated so that assets do not go to unintended recipients.

2. Be proactive about your plan.

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Often, individuals can become quite passive in the presence of an estate planner and rely on this individual to get everything handled properly. While estate planners can certainly handle the majority of the work, their clients also need to play an active role in creating and executing the plan. A survey of estate planning attorneys revealed that many plans never become fully implemented because the clients who sign them do not fully understand them and the steps that they need to take after they sign. Clients should understand the plan, including how to implement and maintain it. While it’s certainly not necessary for people to know all of the legalese behind the agreements, they should know exactly what their signature is authorizing, as well as their responsibilities moving forward. People who feel confused should have a conversation with their planner.

3. Name retirement plan beneficiaries.

People often designate trusts as the beneficiaries of a retirement plan. Indeed, naming a trust as the beneficiary of an IRA or a 401(k) has a number of benefits, but some problems could arise if this is not undertaken correctly. IRS regulations about this are very specific, and naming the wrong kind of trust as a retirement account beneficiary could result in unnecessary taxation. Retaining the tax deferral of a retirement account requires that the trust designated as a beneficiary have language establishing it as a see-through trust. Remember that all trusts named as beneficiaries have the appropriate qualifications and serve your personal goals. If this is not possible, then it may be better to name individuals as beneficiaries.

4. Fund a living trust.

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A living trust, otherwise known as a revocable trust, enables assets to avoid probate and helps with disability planning, among other issues. For this reason, these accounts are generally included as part of an estate plan. Importantly, the accounts are not designed to help you save on your taxes. As a result, the accounts sometimes end up forgotten and unfunded. The trust is created after a trust agreement is signed, but the account still needs to be funded. In other words, individuals need to transfer the legal title of assets to the trust. While personal effects can be easily transferred, other accounts require more work, such as changing the deed on a property or automobile registration. To put financial accounts in the trust, the name of record with the custodian needs to be changed, which can require creating a whole new account. While these steps are not particularly complicated or expensive, they must be taken in order to ensure that the assets that are owned by the trusts can avoid probate.

5. Focus on contingency planning.

Part of the value of an estate plan is preparing for the unexpected. Individuals need to take full advantage of these plans to create contingency plans for the future. At the most basic level, every plan should have a financial power of attorney and a healthcare power of attorney to make decisions in the event of incapacitation. However, individuals should also include details about the level of care they would expect in certain situations so that there is guidance in making decisions. Without this information, the courts may end up appointing a guardian. Ideally, individuals should appoint alternates for both of these positions, as well as an executor or trustee, so that the courts never get the power to make decisions about the estate. Sometimes, people ignore these issues because they do not want to think about death or incapacitation, although this could lead to significant problems down the line.