If you are like most people, wills, trusts, life insurance, disability income insurance, and advance directives are topics you would just as soon avoid. Yet, timely planning is necessary to preserve the assets you have worked so hard to accumulate and to protect your loved ones. Here are some important steps you can take now to help ease your family’s emotional and financial burden in the event of your death:
Prepare a will.
Your will specifies how you want your assets to be distributed after your death. If you die without a will (intestate), your estate will be distributed through the probate court according to the intestacy laws of your state. Intestacy laws essentially function as a “one-size-fits-all” will. Without a will, your assets may or may not be transferred to those you would have chosen. Generally, you must have a will if you wish to designate an executor for your estate, name guardians for minor children, or appoint other fiduciaries.
Consider a living trust.
Also called an inter vivos trust, a living trust is established during your lifetime. It provides a mechanism to protect, manage, and distribute your assets. These trusts are revocable, which means that you retain complete control of your assets and may alter the trust at any time. Most people establish living trusts to avoid probate, which may make sense for those who are concerned about privacy, since probated assets are a matter of public record. It may also benefit those who own property outside their state of domicile, since their estates might otherwise be subject to multiple probate proceedings. Once a trust is established, assets must be transferred into it, or they may be subject to probate.
Keep in mind that a trust’s usefulness depends on the type of property involved (e.g., real estate, life insurance, bank accounts, investments, business interests, and personal property), where it is located, and how it is currently titled. Generally, a living trust does not eliminate the need for a will.
Title property for ease of transfer.
A simple and inexpensive estate planning technique is to own property as joint tenants. Many couples own their personal residences this way. With jointly owned property, when one partner dies, the property automatically passes to the surviving partner without the need for probate. However, it is important to note that community property states have their own laws governing the disposition of assets.
Take advantage of Transfer on Death instructions.
Most banks and investment firms allow for the addition of beneficiaries on non-retirement investment, checking, savings, and money market accounts known as Transfer on Death (TOD) instructions. By adding these instructions during your lifetime, assets that would normally have to go through probate can be more quickly transferred to your heirs. Some states (such as Arizona) also allow for Transfer on Death instructions to be listed on your home property deed. This allows for the transfer ownership of your home to your heirs in the percentages you designate after you pass. Transfer on Death instructions do not impact your ownership of the accounts or property during your lifetime, simply provide instructions for how accounts/assets are to be divided once you pass.
Purchase life and disability income insurance.
Life insurance can help provide a source of replacement income for your family in the event of your death. The death benefit may also be used to help pay estate taxes or other immediate financial obligations. According to the Social Security Administration (SSA, 2012), a 20-year-old worker today has a 3-in-10 chance of experiencing a disability before reaching full retirement age. Disability income insurance can replace a portion of your income if you experience an accident or illness that prevents you from working.
Establish advance directives.
It is essential to have a living will, durable power of attorney, and health care proxy in place in case of physical or mental incapacity. A living will allows you to express your preferences regarding the giving or withholding of life-sustaining medical treatment. A durable power of attorney and health care proxy allow you to designate a trusted individual to handle your legal and financial affairs and make your medical decisions if you are unable to do so. Be sure to inform those closest to you of your arrangements and the location of all related documentation.
Ensure your beneficiary designations are updated.
Once you’ve determined how you would like to distribute your property via a Will or Trust, it’s an important step to update all accounts, insurance policies and deeds (if applicable) with the correct beneficiary designations. If an account has a beneficiary designation, such as an IRA or TOD, the account will pass according to those instructions NOT the Will or Trust. It’s a critical and often missed step to ensure your beneficiaries match the intentions outlined in your Will or Trust. It’s also important to keep them updated to reflect changes in name (i.e. via married), address, divorce or other changes in circumstances.
The key to successful estate preservation is planning. So, don’t put it off. Consider taking these important steps now.