MoneyMerc

Death.  Not a topic many people like to think or talk about.  But deciding to have a couple key conversations can make your life much easier.  Plus it might be a good investment decision at the same time.  If death bothers you, take a deep breath, grit your teeth and read on – doing so is one of the those little things that can have a huge impact on your life.

What’s an estate plan?

When someone dies, their affairs and worldly possessions and debts are handled in something called an estate, and through a process called probate.  An estate plan sets out what happens to you and your possessions should you become incapacitated or die.  Included in this plan are documents you may have heard of, like a Last Will and Testament (a “will”), a power of attorney, a “living will”, trusts, and beneficiary forms (remember when you signed up for that 401k?).

Do I need an estate plan?

Yes.  Everyone needs an estate plan.  The complexity of the plan depends on your situation.  If you are unmarried, your situation is simple, and you probably don’t need much (your state has a will made out for you if you don’t have one – but in reality you probably don’t have much to resolve or distribute).  Once you are married, you will need 3 documents at the minimum:

1. a will (dictates who handles your estate affairs, how your possessions are distributed, who is guardian of your kids, etc),
2. a power-of-attorney (POA, gives someone else the ability to act legally on your behalf if you are incapacitated), and
3. a living will (or advanced medical directive (AMD), allows you to indicate how you are treated medically in certain situations if you are unable to make decisions yourself).

Once you have kids, and/or have a lot of money, or are in special situations like divorce, it becomes even more complicated, and I recommend visiting a qualified estate attorney.  Explaining the intricacies of all situations is not possible in a single post (or even a book) and it’s not the point of this post either…

The parental estate plan

The problem with death is many people don’t like to think or talk about it, so they neglect the topic whenever possible.  Chances are likely that your parents have done exactly this.  It’s the worst thing they can do.  And guess who this lack of decision-making affects the most… you!

Without these documents, your parents wishes are not officially written down.  If something happens to them, this can cause issues in even the happiest of families.  Times of sickness and death are stressful on all people involved.  Old feelings or never-discussed topics of disagreement can come back to haunt you quickly.  This can cause sibling battles over money and possessions (“but 15 years ago mom said she wanted me to have that diamond”), anguish like bringing an incapacitated parent into court to ‘prove’ they can’t make decisions, or deciding if ‘pulling the plug’ is the right thing to do.  Just dealing with grief is hard enough – you don’t need these other nasty situations.

Aside from these family and emotional issues is the issue of taxation.  You may not realize that the federal estate tax in this country is 45% on estates over $2 million (includes the house, investments, cars, insurance policies, everything – $2mm isn’t that much!)  So if your parent’s estate is worth $3 million and they’ve done no estate planning and die together, guess who gets about $500,000 of it (hint:  it’s not you or your family!).  Your parents can make sure their estate benefits the people they want to the greatest extent possible (i.e. with lesser or no tax) executing some simple, legal and cheap estate planning (in this case, using a bypass trust).  Asking your parents about their estate plan could be the biggest investment decision of your life.

4 Steps to an easier and richer life

1. Ask your parents if they have those 3 essential documents:  a will, a POA, and an AMD.  If they don’t, discuss with them why you think it’s important that they do, and have them see an estate attorney.  Usually this conversation is best had in person.  If they already have all 3 documents, congratulate them, and ask where these documents are stored.
2. If your parents don’t have these documents, follow-up with them periodically to make sure they are getting them.  It’s one of those things they will never seem to get around to.  Make sure they know that having these documents will save the ones they love a lot of pain and suffering in the future.
3. Ask your parents if they have updated the beneficiaries on all of their accounts (IRAs, 401(k)s, life insurance, bank accounts, etc).  They might not remember that 40 years ago when they started teaching and investing in a 403(b), that they but put Uncle Asshole as the beneficiary (when he was still Nice, and didn’t gamble and drink) and never changed it.  Even if the will says to leave the account to Little Joey, the beneficiary form takes precedence.  In fact, any accounts or contracts with beneficiary designations (like trusts, life insurance, IRAs, 401(k)s, POD/TODs) do NOT go through the will.  These accounts leave the estate before the will even gets read by the judge.
4. If you are married, and/or have kids, see an estate attorney yourself.  The consultation is typically free, and it can let you know if you need to do any planning.  Or you can start by asking your financial planner – in general CFP’s will know the basics about this stuff, and you can ask them about your specific situation.

A couple useful estate planning tips

More to come in future posts, but here’s some additional items to consider:

• “Free” or “Cheap” wills (especially those available online) fall into the category of “you get what you pay for”.  Not all wills are effective, so don’t go budget on this item.
• Don’t let your parents add you to their accounts or home as joint owner – this is an estate planning disaster, and will likely result in tricky situations and unexpected taxes.  See an attorney for more information, or leave a comment and I will try to answer your questions.
• If your family is well off, advanced estate planning can be expensive (thousands of dollars).  In this case, stinginess does not pay – $10k for a good estate plan that saves you $1million later is well worth it.
• Life insurance is not the end-all-be-all estate planning tool that some insurance agents make it out to be.  If your “financial planner” is really just an insurance agent, start shopping for a real planner, or at least do your own research.  Here’s some questions to ask when choosing a planner.