Estate Planning

The one area of wealth management that people ignore the most is estate planning.  Per The American Association of Retired Persons (AARP), 60% of Americans lack an estate plan.  And 40% of those between 50-70 lack an estate plan.

We are here to let you know it is really an easy process which shouldn’t be procrastinated.  By clicking here you can find an easy simple checklist of the items you should consider when putting an estate plan together.   We also offer our Family Life Guide, this guide is a worksheet we designed to help you gather and organize all of your financial, legal, and medical affairs. It can be used as an estate planning tool to help your loved ones as well as a strategy to consolidate and simplify important information for your own everyday use.

Below I discuss strategies you can use to help your estate prior to death.  First let’s discuss the basics of estate planning.

The first rule of estate planning is the K.I.S.S. philosophy.  Keep it simple unless you consider the consequences of a complicated estate plan and then decide to move forward.    A complicated estate plan can become a nightmare for your loved ones after you pass away, as well as cost you significant money, not only upfront but on an ongoing basis due ongoing maintenance.

Before moving forward with an estate plan, knowing the laws of your state in regards to marital property is important.  There are three main types:

• Community Property Estate – Arizona, California, Idaho, New Mexico, Louisiana, Washington, Nevada, Texas, Wisconsin, and Alaska all are community property states. Under this system, property acquired by either spouse during the marriage is community property, meaning it is owned 50%-50% by both partners.  It doesn’t matter who earns the money, property bought with money made during the marriage is equally owned by both.
• Common Law Property – Most states fall under this system, in which property acquired in a marriage is owned by the person acquiring the asset unless the person agrees to make the assets jointly owned.
• Separate Property – Regardless of which system used in a state, separate property is considered property acquired before a marriage or property received as a gift or inherited and is owned by the recipient spouse. In a community property state, keeping separate property separate is important.  We suggest titling bank accounts or assets bought with gifts or inheritance as separate property.

You now know the marital property law of your state and want to move forward.  The next step is understanding the difference between a will or a trust.  There is one huge difference.  A will typically dies with you at your death while a trust lives on.  More specifically, in a will once you die and the money transfers to your beneficiary, you no longer have any control of what happens to that money.  With a trust you can dictate how that money is disbursed long after your death.

10 Mistakes You May Be Making

A Will

A will is the simplest and easiest way to plan your estate.  A will is either a document or video, which has been witnessed, in which you direct who receives your property after you die, as well as identifies who you assign control over your life if you can no longer make decisions while living.  There are 4 major parts of an estate plan in a will.

• The will itself – This is the document that directs what happens to your most valuable treasures after you die. I called it treasures because it isn’t necessarily just assets.  The will is also very important if you have an under-aged child.  The will itself should include:
  • Testator Information and execution – this is establishing the will, signing it in front of witness. Basically, establishing the will itself.
  • Identify the Executor – We can’t stress how important this part of the will is. It isn’t easy in many cases being an executor.  It can be a significant load of work.  You need to ensure the person you identified as the executor has the time, desire and financial knowledge to be the executor.
  • Guardianship – establishing the guardians for any under-aged or special needs children.
  • Distribution of Assets – This is where you list how your assets will be distributed.
• Financial Power of Attorney – Here is where you identify who you want to have access and control over your financial assets if you become unable to make decisions for yourself while you are still alive. The executor takes over after you pass.  This document is for your protection while you are still living.
• Medical Power of Attorney – The financial durable power of attorney is for finances only while the medical power of attorney is regarding your health. This is the person who will make the decisions for you if you are unable to mentally make decisions in the best interest of your health.  This could be a horrible disease like severe dementia or an accident that leaves you unable to make decisions.
• Living Will – this is your directive to either your medical power of attorney, or the hospital if you didn’t identify a power of attorney, that states the medical care you wish to receive if you are unable to make those decisions. For example, what happens if you are in an accident and end up in a coma?

The benefits of a will are the simplicity of the estate plan and the cost.  The negative is that they are not very efficient in complicated estate planning.

A Trust

It is important to note there are many different types of trusts.  We are going to discuss in more general terms.   If you want more information about specific types of trusts, please contact us to discuss.

A trust is a legal document which a third party, the trustee, is given the right to manage your assets as per your directives stated in the trust document.  You can be living or deceased when you assign this right to the trust.

Even though there are many types of trust, they fall into one of two categories:

• Irrevocable – The key word to remember here is permanent. Once you place assets in an irrevocable trust, you lose control of those assets.
• Revocable – Allows you to maintain control over the assets and make changes to the trust when you are alive. These are often referred to as a living trust.  Typically, they become irrevocable upon your death.

There are several benefits to a trust, including that irrevocable trusts typically protect your assets from creditors.  If a beneficiary is at risk of being pursued by creditors, a trust may be effective in protecting those assets.

Trusts also provide control to you in cases in which you worry about a beneficiary receiving too much money at once.  For example, a child that might have an addiction problem or very bad with money.  You can establish a trust so that they don’t receive all the money at once.

A trust is typically needed for special needs beneficiaries.  There are specific trusts for these situations.

Trusts are sometimes used to ensure money stays in the blood-line versus going to a son or daughter in law.  Keep in mind, as we discussed earlier, this also can be accomplished much cheaper using separate property accounts.  Ensuring your beneficiaries are educated on your wishes and their options might be a much cheaper way to proceed then a trust.

Trusts typically avoid probate.  This is my least favorite reason to set up a trust.  In many cases the trust will end up costing much more than the probate.  For example, in Texas the court cost is approximately $350.   You should be able to find an attorney, if an executor chooses not to probate the will themselves, for approximately $1,000.   If you manage your trust correctly and have it reviewed at least every 3 years, you will spend much more on the trust than probating a will.  This depends on the cost of probating in the state you reside in.  We recommend you understand that cost before establishing a trust for the sole purpose of passing probate.

Finally, a trust may reduce, or eliminate, your estate tax liability.  This benefit has been reduced significantly with the current estate tax exclusion.  However, the exclusion limits do change and have varied significantly – ranging between $1 million and $12 million just since the turn of the century. When estate planning, it is important to know what the limit is and how it will impact your situation.

We offer one warning, a trust is a commitment.  If one goes down this path, know it isn’t a one-time thing.  We can say the same about a will, which is true but an “I love you will,” which fits many Americans, is less of a commitment than a trust.  An “I love you will” is the typical will in which each spouse is the primary beneficiary of the estate and then after the second to die, the children receive the estate.

At Virtus Wealth Management, we believe it is our job to fully explain your options so you can make an educated decision on which is best for you.

As in most cases involving your estate plan, if something seems overly complicated, a second opinion is wise. Typically, estate planning does involve consulting with a few professionals including a lawyer and financial advisor, among others. While your financial advisor may not be trained in estate law, we have years of experience reviewing and implementing estate plans. Thus, we can provide you with guidance on when you might need to seek the opinion of a second lawyer or when you might need to simplify your plan in general. If you have questions regarding your estate plan or where specifically you should start, give our office a call to schedule a complimentary consultation with one of our advisors today.

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This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. Virtus Wealth Management and LPL Financial do not provide legal advice or services.