I always find it helpful to first look at some of the origins and developments of a subject. Estate planning is one of those areas that have changed quite a bit. It used to serve only the ultra wealthy ($100 of millions), who used to be a very small percent of the population. Looking back a few centuries, in England and America, there were not many very wealthy people. Small cottage industry styles of business and agriculture employed most people. There were a few large industry magnates, large land owners, and people from or connected to royalty. Wealth and power was controlled by the few wealthy people, governments, and politicians. During those eras, most people had few assets to worry about after they died.
With industrialization and the growth of democracy, capitalism, entrepreneurism, and higher education, an unprecedented amount of wealth was generated in the hands of private citizens–everyday common people. We have really seen quite a bit of acceleration in this trend for individuals to become wealthy through hard work, free enterprise, and investing. This has been especially true since WWII, and it has accelerated with technology, as evidenced by Internet, leisure and sports industries. The demographics of our country have changed along with this. Today there are more millionaires than ever before as a result of favorable stock market returns, real estate appreciation, accumulations in IRAs and 401(k)s, and larger family incomes. In addition, the largest transfer of wealth ever seen—estimated to be in the tens of trillions of dollars—is due to occur over the next 30 years. Other than wills, more involved estate planning used to be only for the very rich, who could afford and justify paying a lawyer. Now moderately successful people can easily amass wealth of more than several million dollars. When you add up the value of homes, stock portfolios and retirement funds, it is easy to see how it is possible.
Not only has the distribution of wealth changed, but so has the practice of estate planning. For many people, the focus on estate planning used to be to minimize estate tax. For example, within the last 20 years, the Federal Estate Tax started levying taxes on estates as small as $500,000 to $1,000,000 at rates of around 35%, increasing the taxes to more than 50% for the largest estates. Today’s exclusion amount (not subject to estate transfer tax) is more than $5 million. This doubles for married couples; therefore, unless someone’s net worth is currently over $10 million, or it will be at life expectancy, the prime goal of estate planning isn’t any longer estate tax minimization or avoidance.
If estate tax avoidance isn’t the main goal, then what is? Estate planning will always deal with taking care of family and dependents, and dealing with the complexities of transferring business, real estate, privacy and creditor protection, probate cost avoidance, and charitable planning. However, wealthy people are taking a more active role in their estate plans, wanting to be stewards over their wealth, making sure family members don’t just inherit large amounts of money, but that they inherit in a fashion that rewards maturity. In addition, with many people with large charitable interests, charitable plans are playing a much bigger role in the overall estate plan. People leaving money don’t want to be remembered as the old rich guy or gal, but as successful people that contributed to others’ success and health, and to society’s overall benefit long after they die. The want good stewardship while they are alive, and they want to have some control from the grave. Thus the term Legacy Planning communicates the new paradigm versus estate planning.
Legacy Planning Today: What is a legacy? A legacy is what you want to be known for today and after you are gone, and what continues to live on. Someone might say: “This again is a negative, planning for when I am dead!” This could not be farther from the truth. You create your legacy by how you manage your financial affairs and how you live your life now. How do you create a positive living legacy? You probably already do it; you create it by demonstrating your beliefs and values:
- By how you give
- With your family and friends
- In the leadership roles where you serve
- Through your current or future career pursuits
- In the positive contributions you make to the world
- In how you transfer your positive values and beliefs to others
- In how you live every aspect of your life
- In how you give gift money to family and charity, both today and after you are deceased
Creating a legacy plan is so much more than estate planning. It involves creating plans centered on the things you value most, the beliefs you hold, and the people you love; in addition, it focuses on passing many of your beliefs and values to successive generations. It is a journey of rediscovery that many people go through when they hit mid-life, perhaps an exciting new chapter in your life. It is focused on your goals, needs and concerns instead of the consequences of not planning. Legacy planning is not focused on all of the intricacies and complexities of estate planning. That is why, for the purpose of this article, the finer details of estate taxes, features and benefits of specific trusts, methods of transferring businesses, and techniques to minimize taxes have not been discussed. Legacy planning starts with what you want, and not with the legal pieces. High net worth people today want a plan that will do many things:
- Teach and transfer values to the next generation
- Continue to give them control today
- Be flexible to change
- Address personal passions
- Help satisfy philanthropic concerns
- Provide for financial, emotional, professional, and legal needs of surviving spouses and children
- Maximize and control wealth for a long life span
- Gift to family members while they are alive, so that wealth can be can transferred in a way that helps rather than hinders them
- Transfer business (possibly to a family member) in a tax- and cost-effective way
- Assure privacy, creditor protection, and ongoing professional management
The Cost of Not Planning. There are some very practical reasons why people should plan too. If you don’t plan, you must be aware that you or your family will face many consequences of your failure to plan:
- You or your estate will over-pay taxes, both income and estate, as well as ongoing legal costs
- Assets will not pass equitably or as you intended
- Your business transfers may be very messy
- You will miss out on taking advantage of money- and tax-savings devices, because they will be lost if not done within a certain time period
- Your kids may fight over money
- Attorney fees will be much higher than necessary
- Your favorite charities will not receive what you intended them to get
- Children may inherit money in a way that might spoil them
Summary: Legacy planning is a process to put into action with your financial and legal advisers. Many legal, accounting and financial firms go the extra step by providing coaching, self exploration, and even individual and family workshops. The planning process is an opportunity to dream new dreams. The planning profession is privileged to witness and assist clients through this process of transforming the completion of previous successes into exciting new and satisfying ventures.
Most people don’t have a will or trust, or if they do, it may be out of date. Make it a goal this autumn to get your affairs in order. This article will help you prepare for meeting with your attorney for estate planning. When you meet they will ask you all sorts of questions, and will ask for a lot of information. The longer you take of their time, the more costly the process will be. Therefore, the more prepared you are, the higher level of service and care you will receive. This is because you won’t have to spend a ton of time talking about the basics. You will have gotten some of that out of the way by studying this, and by gathering some information.
Here are the various steps to build an estate plan for you and your family:
Step 1: Create a Written Financial Plan
Acquire a financial plan. Having a plan gives you the road map to help you figure out your present and future financial condition. People don’t plan to fail—they fail to plan. The process of creating a financial plan enables you to understand and establish your goals for you and your family. Your financial plan will also serve as a compass, giving you proper direction for commencing the estate-planning process.
Step 2: Understand Basic Estate Planning Concepts
The following is a partial list and brief explanations of the concepts you may need to understand as you prepare to plan your estate.
- A will provides for distribution of property you owned at the time of your death in any manner you choose, subject to state limitations, and assets that didn’t have a beneficiary (which means the estate is the beneficiary) and the will and probate process will sort that out.
- A guardian is someone you name in your will to care for your children in case something happens to both parents.
- Trusts are created to hold, own, and control property. They can also help your survivors avoid some parts and expenses of probate court. They can also provide creditor protection and privacy.
- A Living Will and Health Care Power of Attorney help if you become unable to make medical decisions for yourself.
- A Durable Power of Attorney grants legal authority to a trusted person to handle your finances and property if you become incapacitated and unable to handle your own affairs.
- Asset Transfers to Children require special handling—your estate plan should name a guardian if the children are minors or it should provide for a trust to manage money your children may inherit from you.
- Estate Taxes and Income Taxes may be deducted from your estate if it’s large. Talk to your attorney about charitable planning, gifting, trusts, and irrevocable life insurance trusts.
- Funeral Expenses are best paid by cash and not funeral prepayment plans; pre-arrangement is okay though.
- A Letter of Instruction is a document that you create to explain your wishes; be sure to include your plans for your organs and your burial or cremation.
- Business and Farm plans are important; if you own them; your estate plan should address the complexities specific to these situations
- Document Organization and Storage is important for locating important documents when they are needed. Locate all important documents and review them.
- Life Insurance instantly provides significant amounts of cash to help provide for your dependents, pay off debt, and pay estate taxes. Your financial plans should include a life insurance review.
Step 3: Make a Checklist of Concerns
Check any of the following that may apply to your situation. If you are unsure about a particular item, check it anyway so your attorney may address it.
- Charitable wishes
- Distributing assets to your heirs or disinheriting
- Medicaid impoverishment issues (tread carefully in this area)
- Protection for: Minimizing estate and income taxes, heirs losing inheritance, avoiding probate process and expense, heirs spendthrift tendencies, creditor protection, greed of heirs, children, business or Farm plans
- Common issues: Guardians of minors, keeping plans private (out of public record), children of previous marriage and current marriage, minimizing costly estate expenses, designate recipients of specific assets, grandchildren inheriting, avoid family quarrels over the estate, special needs child, property in other states or countries and disability planning
Step 4: Outline Your Wishes
Outline your wishes prior to the meeting with the attorney. It is important that your estate planning documents clearly reflect your intentions. This will prevent misunderstandings.
- Think through scenarios of how your property will pass if: You predecease your spouse or your spouse predeceases you. Children predecease you or you and your spouse die at the same time. Determine who you want to be the guardian of your minor children and what age you would prefer property to be available to your children with and without restrictions.
- Designate your preferred recipients for any specific assets.
- List charitable organizations you want to include in your estate plan and the amount you wish to give or the asset(s) you wish to donate.
- Ask your attorney to explain all of your options and the issues that may apply to your situation.
Step 5: Assemble Information for the Attorney pdf link
Step 6: Change Ownership and Beneficiary Arrangements: Ownership and Beneficiaries should be reviewed as the final step of estate planning to coordinate with your plan. This may be the most neglected part of the estate planning process. Make necessary changes to property ownership (e.g., homes, life insurance, investments) and beneficiaries (e.g., life insurance, annuities, pensions, IRAs and transfer-on-death accounts) to coordinate with estate plans.
Summary - Estate and Legacy planning is a process. Engage trusted legal, financial, and tax advisers to help you complete the process from the initial design, document drafting and implementation to reviewing your plans from time to time, You, your loved ones, and your business and charitable concerns will be glad that you did.
The Dave Ramsey Financial Peace University multi-week class has an entire lesson on insurance, or risk management. Wisdom with insurance is key to financial planning to protect the things we own or our family from risk, using as few dollars as possible. To underline a few items from this lesson, and a few things I have a little different opinion…
- Evaluate your life insurance and type: if you have minor children and a mortgage a good rule of thumb is 10 times income (an insurance expert or financial planner can help you calculate your amount). You can subtract from that number your group life amount and other insurance, savings and investments. If your spouse doesn’t work outside of the home, she probably needs it too. Consider term insurance since it is pretty inexpensive, and buy as long a term as you can afford usually, such as 10 – 25 year level term
- If you haven’t shopped your auto and homeowners insurance in a while, call some independent and captive agents for quotes for various deductibles, you may be able to save a goodly amount. Be sure to have your policy’s declaration page or description of coverage handy to refer to.
- Talk to your agent about ‘personal catastrophe’ or ‘umbrella’ insurance to protect you from excess liability. A few million dollars of coverage costs less than $200 usually.
- Ask your agent about your homeowner’s ‘replacement cost’ coverage for dwelling and contents.
- For long-term-care insurance, if you are in your 50′s it is not better to wait until 60 as Dave says, since the rates go up with age, and sometimes our health changes more as we age.
- Review your short-term and long-term disability coverage at work, even if you have it, it may be a good idea to consider supplemental since group DI is taxable.
- Dave recommends dropping all permanent life insurance (whole life, universal, variable), but if you’ve owned a policy for a long time or your health has changed you probably should consider keeping it. It is always good to get an enforce computer ledger to evaluate and compare before making this drastic change, and don’t ever drop coverage until the new policy is in force. Also, some people have some permanent needs, so again it is wise to consult a financial advisor first.
- Lastly, Dave recommends good estate planning. Be sure to contact an attorney about having a will, power of attorney written for you. If you believe in end-of-life planning, ask about living wills and health care power of attorney. Trust planning makes good sense for asset protection, and to take care of minor children, not including privacy and tax and probate cost minimization.
Many people are counting on receiving an inheritance, therefore they don’t adequately make good financial plans. It isn’t unusual for some to not fund their retirement plans, because they think their parents are well off and will leave them enough money to live on. Parents though may not have as much money as we think they have, but they might just be really good at personal finances. On the other hand a lot of money might be consumed by health care in older age, or the parent might leave the money to a new spouse, skip you and transfer to your children, or might just not make good plans and the money is lost through mismanagement.
The Wall Street Journal had a pretty good article, if you want to read more about this topic, but suffice to say most experts agree that your financial plans should probably not take inheritances into consideration.
A marriage counselor friend of mine recently said that only 25% of households in some areas are made up of single people and traditional nuclear families of once married couples with their own children. The other 75% of households make up the rest of unmarried couples or remarried couples following separation, divorce or death, with children from more than that relationship coming from prior marriages or other relationships.
Estate planning for these step or blended families becomes vital to make sure that ownership of assets and designation of beneficiaries, as well as wills and trusts are arranged so that assets flow in the direction the person wants them to. In the absence of proper planning, assets will flow to the wrong people, and conflicts will ensue, including costly legal battles. In the wake will be harmed relationships and perhaps money not available to care for people that may have needed it.
I have seen this happen many times, especially to elderly people who remarried later in life. For example, let’s say Bill and Dorothy Welloff have been married 50 years, have accumulated several hundred thousand dollars in retirement savings and other investments, and own a very nice home. They could easily have a net worth of $1,000,000. For the purpose of this example, let’s say they are in their upper 70’s and Bill dies. The normal I-love-you will and estate planning leaves everything to Dorothy Welloff, as it probably should. And when Dorothy dies, whatever is left is distributed to Bill and Dorothy’s children, Joanne and Kevin Welloff.
Let’s say Dorothy remarries Bob Broke and Bob has no money but has 2 children from his prior marriage, Linda and Chris Broke. Without thinking or planning too much they change their wills and beneficiaries, and don’t use trusts, and they set everything up to take care of each other should either of them die. What ends up happening most of time, it seems, is that Dorothy Welloff dies first, and all assets flow to Bob Broke; and even though Dorothy’s wishes were to have the assets left to Joanne and Kevin Welloff after Bob Broke dies, they all end up in the hands of Linda and Chris Broke. This tragedy seems to happen more often than it should, and it could be avoided by proper ownership of the home, and proper directions for the flow of assets through a trust to provide some assets for Joanne and Kevin Welloff right away, income to maintain Bob Broke in a decent lifestyle, and the remaining assets at Bob’s death for Joanne and Kevin Welloff.
If you have a blended family, your situation is more complex. Take time now to make good plans. If your parents have remarried and the example above may apply to them, try to talk to them. This can be a very delicate situation. Perhaps show them this to break the ice. A note to Mom or Dad: your children are not doing this because of greed, but because they want you to be aware of what may happen if proper planning doesn’t take place. As good stewards and managers of money you have worked a lifetime to earn and accumulate, you should make the time and spend a little money to make good plans with your attorney; then follow the wise and thoughtful interests and needs of Dorothy, Bill, and Bob so that assets are ultimately distributed fairly, according to what Dorothy and Bill would have originally wanted. However, you should be mindful of Bob’s needs as well.
The following are the most common and basic estate planning documents. If you don’t have them, plan now to get them. If you do have them but it has been several years since they were updated, update them now. If you don’t have properly drawn-up documents, your family members will have great difficulty in planning the disposition of your property in an orderly, lower-cost manner in case you become incapacitated or die.
A Will provides for distribution of property you own at the time of your death in any manner you choose, subject to state limitations. A Guardian is someone you name in your will to care for your children in case something happens to both parents. Trusts are created to hold, own, control and allocate property now, or as most people do after they die. Trusts can be particularly helpful if distributing assets to several people and over a period of time, with conditions. They can also help your survivors avoid some parts and expenses of probate court. They can also provide creditor protection and privacy. A Living Will and Health Care Power of Attorney help if you become unable to make medical decisions for yourself. A Durable Power of Attorney grants legal authority to a trusted person to handle your finances and property if you become incapacitated and unable to handle your own affairs. This is just a brief list of the documents and concepts; talk about these and more with your attorney, including letters of instruction and the organization and storage of important papers.
Legacy planning is the new phrase that is used synonymously with estate planning these days, and is the general process of arranging your financial affairs in a way that reflects your main priorities and values. People often think about wills and trusts, and this type of planning will always incorporate that, but the documents are not the tail that wags the dog. Legacy planning has evolved today into holistic approach to incorporate people’s overall financial planning goals and concerns:
- Providing for many aspects of the financial, emotional, professional, and legal needs of surviving spouses and children
- Maximizing and controlling their wealth for themselves for long life spans
- Gifting to family members while they are alive, so that they can transfer wealth in a way that helps rather than hinders the individual
- Transferring their business (possibly to a family member) in a cost-effective way, taking into account all possible tax concerns
- Charitable concerns for which they have a passion
- Transferring their important values and beliefs to the next generation
- Providing enough assets for their minor children and surviving spouse if they die, but also arranging it in such a way that maintains privacy, protects assets from creditors, and provides ongoing professional management
- Transferring wealth to spouses and adult children, that cares for the surviving spouse, and transfers remainder amounts to the intended children, which is especially important if there are blended families, or the spouse becomes remarried
When people have discussed their concerns about these items and many others with their attorney and trusted financial advisor, then it is the attorney’s job to draft up the wills and trusts that work to address these concerns.
The next issue that many people neglect is to change the beneficiary arrangements to work hand-in-hand with the legacy plan. A beneficiary is someone you designate in writing in an appropriate form (beneficiary form) directing the holder (bank, insurance company, investment firm) of an asset, where to send your money when you die. When doing estate planning be sure that your beneficiary arrangements are consistent with your overall plans. Check your beneficiary arrangements for life insurance, IRAs, annuities, and retirement plans. In addition, investment and savings accounts can have beneficiary arrangements too, called Transfer on Death arrangements. Be sure that you have them and they are up-to-date!