Estate planning rarely gets the attention it should get.
Saving for your children’s education, purchasing a second home, deciding when and how to retire — these are all topics that people talk about with their friends and their financial advisers. But deciding what happens to whatever is left of your money when you die is often passed over. It shouldn’t be, though, because it is crucial to a financial plan.
But not discussing something that is going to happen will not stop it from happening. And at some point, someone is going to have to sort out your estate — regardless of how big or small it is. Here are some of the key issues that should be addressed:
WILLS Everybody should have a will, and people who are married and/or have dependent children. There are significant issues that only a will can clarify. One of the biggest is who will take care of the people you love, and how? You may have told your best friend that he will be the guardian of your children if you and your spouse die in a plane crash, but unless you spelled out your wish in a will, there is no guarantee this will happen. If both parents die, it will be up to the state to decide, and they will chose based on family.
If you say this is what you wanted anyway, you’re missing the point. Which parents would you want to raise your children — yours or your spouse’s? Or if it is a sibling, do you care if your children go to the wealthy one in Seattle whom you always fought with or to the financially strapped but loving one in Memphis with two children of his own?
If you are wondering what will happen to your money if you die without a will, go to mystatewill.com. It shows what happens to your assets in each state if you die without a will. The picture it paints can be scary and may convince the holdouts that paying a fee online or spending $1,000 for an actual lawyer to draft a basic will is well worth it.
LIVING WILLS AND MEDICAL DIRECTIVES Once you have figured out wills, you need to think about what will happen if you are seriously injured or incapacitated. This is the territory of living wills, a legal device that waxes and wanes in popularity. Every few years, there seems to be a high-profile battle over whether to disconnect a loved one from life support. Think Terri Schiavo. And afterward, a bunch of people set up health care proxies and medical directives to express their wishes if they have to go on life support. The same sites for wills can help here, but this is an area where you really want to pay attention to the details. If you followed the Schiavo case and have a strong opinion about a specific treatment — continued life-support or removal of all artificial means of living — then you need to express that in a living will.
SPECIAL-NEEDS TRUSTS Most people with physically or mentally challenged children worry about how their deaths will affect their children. Special-needs trusts are a common and effective way for parents to make sure their children are cared for. By leaving money to a trust and not to their special-needs children, parents can supplement government benefits to their children.
Setting up such a trust is not difficult, but it requires advance thought. The issues involved range from how you will finance the trust — cash, securities, an insurance policy — to who you will designate as the trustee. That person will not only make decisions involving how the money will be spent, but, more crucially, the trustee will evaluate the care the special-needs child is receiving.
ESTATE TAX Most Americans will die without the estate tax affecting them. In 2009, a married couple can leave $5.25 million to their children tax free.
Those who are affected by the tax are some of the best planners. The problem here, though, is that they do not always make sure that what they wanted to do is laid out properly in their estate documents. Anyone can learn from their slip-ups.
The most common mistake is one of oversight. Anyone who has ever worked at a company that offers benefits has filled out a “beneficiary designation” form. In the stack of papers asking questions, ranging from which health insurance plan is right to how much should go into the company retirement plan each pay period, the beneficiary designation form is remarkably simple: If I die, who gets the corporate benefits package?
Fast forward 25 years, and the lowly assistant who signed that piece of paper is now a top executive. His benefits package has grown substantially over the years. Does he still want to leave it to his mother and brother — or former wife? These forms trump wills when it comes to distributing assets not held jointly. Check them often.
The same goes for people who have set up trusts. Regardless of what the trusts were for or when they were written, they should be reviewed occasionally — preferably by someone not involved with creating them. This isn’t to detect shenanigans, but to check for simple errors that could alter how an estate will be distributed.
As a side note, trusts are no longer the province of the very rich. They have morphed over the years into useful and straightforward vehicles to protect assets in life from creditors and lawsuits and to pass them to heirs on your own terms.
The lesson to be learned from all of this is simple: One day you will die, so while you’re alive, plan for it. If you don’t have a proper estate plan, the emotional pain of your passing could be compounded by financial chaos.