Estate plans may be one of the most misunderstood areas of financial planning, yet they can be a critical component in protecting your finances, providing for your family, and leaving a lasting legacy. Before we get into how, let’s briefly recap what an estate plan is and debunk a few of the big misconceptions around estate planning.
What is an estate plan?
An estate plan can vary by person but in general it includes:
- A will;
- Durable power of attorney;
- A healthcare directive;
- Beneficiary designations; and
- Guardianship designations.
Estate plans contain multiple legal documents, so we recommend Bogart Wealth clients work with an attorney that specializes in estate planning. A focused attorney can help you build a plan that’s optimized for your state (since states govern probate laws) and your personal circumstances.
It’s important to note that an estate plan is different than the estate tax. The estate tax only applies to estates worth more than a certain amount (in 2023, the threshold is just under $13 million) while an estate plan is just that—a financial and medical plan for yourself before and after death. These plans are incredibly important if and when you cannot communicate your wishes.
The components of an estate plan
The will is probably the most well-known component of an estate plan. It designates who receives your assets—both physical and financial—when you die. Most wills document named beneficiaries (recipients) as well as an executor to carry out the instructions contained in the will.
If you have minor children, your will should include guardianship designations, or who you want to take care of your kids if something happens to you. Consider outlining a plan for any pets you have as well.
When you die, your will may go through probate, which is a public process involving a judge. Depending on where you live, this can be incredibly simple–or complex and pricey. Beyond the process itself, though, some people may have concerns about their assets and financial information becoming part of the public record.
Trusts do not go through the probate process, so many people use trusts as part of estate planning to help them efficiently pass assets on to beneficiaries. There are a number of types of trusts (revocable and irrevocable) for different purposes (legacy, charitable giving, etc.), so we won’t spend too much time here. Just remember that trusts can be a helpful tool both when you’re alive and in terms of planning your estate.
A power of attorney gives someone (the agent) the right to act on your behalf. A durable power of attorney lasts after you’re incapacitated. Essentially, if you are hit by a car and unconscious, the person with your durable power of attorney would make decisions on your behalf.
There are different types of powers of attorney. Medical powers of attorney are often granted as part of a broader healthcare directive (sometimes called an advanced directive), which details your wishes if you’re unable to make medical decisions. You can tell your agent what you’d like them to do. The rules and forms for these directives vary by state.
You’ll also want to make sure you update the beneficiary designations on any insurance policies and retirement plans on a regular basis.
Making an estate plan
Once you compile an estate plan, it’s important to follow through on the details. Establishing a trust, for instance, is only the first step. Once the trust is created, you need to retitle your assets to put them in the trust’s name.
You should also write a letter of instruction. This letter helps supplement your will by clarifying your wishes. A good letter of instruction includes a date, a list of your assets and where to find them, credentials (such as passwords to online and financial accounts), and instructions to the executor of your will. The more detail you include, the more likely it is your wishes will be carried out the way you want.
While estate planning isn’t fun—it requires you to think about a lot of worst-case scenarios—it can help protect your family if those worst-case scenarios occur. To help you simplify the many moving parts involved in the process, we created an estate planning checklist to help you get started.
If you’re interested in support beyond the checklist and the information in this article, including help managing a trust or questions about how an estate plan fits into your broader financial plan, contact us today.