The Basics of Estate Planning
I know, I know. There’s no need to plan for your death because it’s so far in the future. There are more important things to do right now. You don’t have time to write a will. You don’t have much of an estate or net worth yet, so why bother with a will? Sound familiar? I’ve heard all the excuses in the book (I’ve even muttered a few of them myself). But the bottom line is you NEED to have a will and estate plan. Without them, you are setting your family up for failure. Planning things out removes all the stress and emotional drain on your family. They’re already hurting enough because of your passing. Then they have the additional burden of trying to figure out funeral arrangements, insurance settlements, closing bank accounts, etc. They don’t need more stress piled on top of all this just because you didn’t want to take the time to prepare things for them.
So, how do you get started? I thought you’d never ask. First, you have to have a will. Sounds silly, but way too many of us are just coasting through life without one. Either we keep pushing it off for “more important things” or we think it’s not necessary. Let me make this very clear: It’s extremely rude to your family and loved ones to die without a will. When you die and your family doesn’t know what you want, they have to guess and offer their own opinion of what they think you wanted. And we all know how common different opinions are. I’ve seen many families’ relationships change overnight and result in bitterness, anger and even rage because they couldn’t agree on funeral arrangements or how to distribute the wealth of a loved one’s estate. Do you think your family will be different? Why wait to find out? Eliminate the opportunity by planning ahead. It may be easier than you think. I know a will can sound intimidating but don’t think you need to pay a lawyer tons of money to set one up. My wife and I saved a lot of money by downloading a template from US Legal Forms and had it notarized for free at a local bank. If your financial situation is fairly straightforward, you might want to use them or a similar legal form provider.
Choosing the Executor
Next, you must carefully choose an executor. Here are some things to consider when deciding who will carry out your will:
- This should be someone you trust with your life while you are alive, because they are essentially managing your life after you die; in a sense you’re trusting them with your legacy.
- You need someone who will respect your wishes, even if they don’t totally agree with them.
- You need someone who shares your financial philosophies. If you have young children, this is a person who will handle your money until the kids are old enough to manage the money on their own. You want someone who will make good decisions with the money and handle it as good or better than you did. This person will also teach your kids about money when you are gone, so choose wisely.
- Choose someone you are comfortable discussing life and death decisions with. You can’t afford to choose an executor who beats around the bush in their conversations. You need open and honest communication that’s to the point. This person needs to be comfortable voicing their opinion with you, even if it hurts your feelings.
- Choose someone who shares your spiritual and religious beliefs. This is an area where a lot of people differ from each other, and it often becomes visible in their financial behaviors. If you are trusting them with your estate you need to be sure their values are aligned with yours
Set Them up For Success
Once you choose the executor, you need to set them up for success by planning very thoroughly and detailing the plan in writing. Here are some additional things you’ll want to consider during your estate planning process:- Make sure the executor of your will has a copy of the will.
– Make sure the executor understands the intent of your wishes. Wills are full of legal jargon and lengthy wording that may be confusing or subject to different interpretations than you intended. Spend time talking with the executor(s) so they understand how to execute your will according to your intentions.
– Have an appropriate amount of life insurance in place. At a minimum you need enough to cover burial costs. This is typically somewhere around 10 to 15 thousand dollars. I recommend 8 to 10 times your annual income in a good level term policy until the total value of all your assets (your net worth) are equal to that amount. Once your net worth is that high your assets can be sold or drawn upon to provide the same amount of income as your insurance policy. This means you are self-insured.
– In addition to a will, you’ll want a Living Will and/or Power of Attorney for Health Care. Make sure your executor understands your wishes regarding life support if you are in a vegetative state, organ donor status, etc.
– Lay out your burial plans. Do you want to be cremated? What should be done with your ashes? Where do you want to be buried? Any special burial requests?
– Take an inventory of all major items you own. List the item, the value, and the location. The values may need to be updated upon your death but it’s so much easier for your family to update values than to start from scratch and guess about everything you own. Include an inventory of all your financial assets. This is perhaps the most important item. You need to let your family know what accounts you own, what institution they’re with, and how to access them. Include bank accounts, investment accounts, real estate deeds, car & boat titles, insurance policies, stock or bond certificates, etc. Once again, it’s rude to leave your family with no clue how to access the assets they need to settle your estate.
– DON’T put your heirs on your bank accounts and real estate deeds as joint owners. When you do this, their tax basis becomes the same as yours. So if or when they sell the property or draw from the investment (or whatever the case is), they pay taxes on what YOU bought it for. For instance, say your grandma bought her house in 1951 for $30,000 and today it is worth $150,000. If Grandma puts your name on the house as owner, you get the house when she passes on. Now, Grandma’s house is nice but it doesn’t make sense for you to sell your house and move into grandma’s place so you put it up for sale. When you sell the house for $150,000 you now owe taxes on the gain in value while Grandma owned the house. So because grandma wanted to avoid probate she just gave you a gift of $120,000 in additional taxable income for that year. Had grandma simply willed the home to you, you would have inherited it with much less impact to your taxable income.
So what are you waiting for? Don’t tell me it’s important if you’re just going to keep putting this off. If it’s truly important to you, you’ll find time to take care of this. Look your family in the eyes and let them know they are important to you by finishing your plan and communicating it with them. Trust me, it’s important to them and it’s important for you. Just do it.