Take Action: Estate Planning
Blair Braden, CFP®
Watch the full Leaving a Legacy webinar here.
One of my favorite past times is moseying through old neighborhoods—for our Denver-based clients, think Wash Park—admiring the homes. Unlike many cookie-cutter suburban communities today, those houses were uniquely built. From the foundation and architectural inspiration to the type of brick used, no two houses are quite the same.
Similarly, estate planning is unique to the individual or family establishing the plan. Estate plans can range from quite simple to relatively complex. The purpose of this article is to offer all parties a starting point, which is an area in which we can help.
OUR ROLE IN THE PROCESS
Reverting to my introductory analogy, those older homes were built with a plan in mind. Homeowners didn’t merely grab some lumber and nails and start hammering away. Chances are, they sat with an architect and drafted a plan before passing that along to a contractor.
You can think of us as the architect in that example. Our role is to meet with you, discuss your generational objectives, explore various options, and draw up the plan. Once you’ve established the outline, you can confidently meet with an estate-planning attorney for the legal process.
DEFINE THE THREE W'S: WHO, WHAT, AND WHY
Click here to download the worksheet.
When getting started with estate planning, the first step is to define your purpose. Who do you want to benefit from your hard-earned estate? It may be your children or grandchildren, your favorite cause, or a loyal pet (yeah, it’s happened).
Once you determine the who, write out the what. What is it that you hope to accomplish by passing along your assets? A trust is a great vehicle to maintain control after death. Perhaps you want the assets to pay for your grandchildren’s college or new medical equipment for a local medical center. Maybe you simply wish to evenly distribute your estate among your heirs immediately, which may be accomplished with a will.
Finally, is the why (technically, it’s the how, but that didn’t fit into the three w’s). How are you going to protect your assets? Against what do you hope you safeguard?
TAKE ACTION: Fill out the Who, What, Why worksheet.
UNDERSTAND THE APPROPRIATE VEHICLE
There are three main topics to address when outlining your estate plan: operational law, wills, and trusts.
The term “operational law” refers to beneficiary designations. Regarding the distribution of your estate, operational law always supersedes wills and trusts. The beneficiaries listed on your various investment accounts will receive the assets despite what is written in your will or trust. Therefore, your beneficiaries must be accurate and updated as needed.
A common scenario in which this poses an issue is following a divorce. The deceased spouse forgot to update the beneficiary on an investment account, and, upon death, those assets go to the ex-spouse rather than the preferred recipient.
TAKE ACTION: Update your beneficiaries—it’s a simple task.
When it comes to wills, there are three common types to understand: the final will, living will, and pour-over will. We recommend that everyone have at least the latter two, all three if you do not have a trust established.
The final will is your run-of-the-mill will (say that five times fast). When you pass, the final will defines who gets what. Easy.
The living will outlines what should happen if you are in a vegetative state (i.e., how long do you want to remain on life support?). My wife and I just set ours up, a process that is no fun but one that’s important to complete while you have your full physical and mental capacities available.
The pour-over will is a catch-all. Perhaps there are specific assets that you left unincluded from your trust—a typical example is a car. Those assets fall into the safety net that is your pour-over will, which are distributed by your appointed beneficiary of said will.
The difference between a will and a trust comes down to control after death (an important phrase to remember). A trust gives you control after death.
Maybe you want your assets used for college tuition. Maybe you don’t want your heirs to receive the assets for some time. Maybe one child has issues with substance abuse, and you would like the assets to be inaccessible until the problem is overcome. You maintain control of your assets after death with a trust. The same is not valid regarding a will.
Another critical difference between a will and trust is probate. A trust goes around probate; a will goes through probate. Simply stated, probate sucks. It’s often a drawn-out, potentially costly (potentially very costly) legal process in which the court decides the allocation of your assets. Generally, the court will use the final will as a starting point, but it also opens an opportunity for public claims against your estate—something we discuss in the webinar.
Try to avoid probate. A trust can accomplish that.
Besides the benefit of probate avoidance, maintaining control, and potential tax advantages, another advantageous feature of a trust is the transfer of real estate. Unlike financial accounts, you cannot appoint a beneficiary to a piece of real estate. A trust, however, can facilitate the transfer of property upon death.
That is especially true if you own multiple units of real estate in various states. Probate is a state-specific process; therefore, if you own property in five different states, your heirs may need to settle with the court in each state individually.
Again, your heirs are mourning your loss—an extraordinarily emotional and stress-filled time. As a final parting gift, establish a trust so they can avoid the additional headache that is probate.
A final thought on trusts: there are two main types of trusts, revocable and irrevocable. Unlike most legal jargon, these terms are easy to differentiate.
A revocable trust can be changed; an irrevocable trust cannot be changed. There are potential tax benefits to an irrevocable trust, but the loss of control is something to consider carefully.
TAKE ACTION: Consider which estate vehicle is most appropriate for you. I said “consider” intentionally because this is an area where we can help.
There are numerous other considerations to make before landing on a specific vehicle. Our job is to explore those options and discuss which may be most appropriate for you, given your current assets and long-term objectives.
ESTABLISH A POWER OF ATTORNEY
Newsflash: you need a power of attorney (POA). Your POA is a person who you have designated to make decisions on your behalf in case you become incapacitated.
It is a nightmare of ours that a client becomes incapacitated without an established POA. They may have plenty of money to cover their medical expenses, but no one who can legally access the funds on their behalf.
In the case of a POA, forfeiting control to another person is a worry that many clients share. If that is a concern of yours, we recommend a “springing provision.” With this provision, the POA only becomes effective when, for example, two medical professionals have confirmed your inability to make decisions. Provisions can vary.
TAKE ACTION: Establish, or update your power of attorney. Again, this is an easy form to complete—just call our office, and we can send it over.
TAXES
Estate taxes are incredibly fluid. In the time that I have been a financial advisor, the federal exemption rate has gone from $1 million to $0, back to $1 million, to $5 million, and currently sits at $11.58 million. By 2025, that rate will return to $5 million.
What is the federal exemption rate? As mentioned, the current rate is $11.58 million. When you pass away, the IRS will tax your estate on anything above that amount. The taxation rate is a steep, graduating scale, but for all intents and purposes, it’s safe to assume you will pay about 40% in estate taxes on the overture.
This information is essential for two reasons. One, we have no idea what the federal exemption rate will be when you pass. Thus, number two, your estate plan must be a living document. The tax law regarding your estate may change as a whole, or there may be changes in your personal life. Either way, stay on top of your estate plan, and make updates as needed.
TAKE ACTION: Take a look at your estate plan. If you haven’t revisited those documents recently, call your advisor (hopefully, that’s us), and discuss. There may be changes in the tax code or changes in your financial situation to address.
THAT'S A WRAP
At this point in the webinar, we discuss specific types of trusts: A-B trusts, special needs trusts, charitable trusts, and qualified charitable distributions. For the sake of brevity and specificity, we recommend that you discuss each of these with your financial professional. Besides the A-B Trust, which is relatively common, the trusts listed above are specific to each individual’s situation and objectives, each bringing with it a series of potential alternative avenues.
Your estate plan is incredibly essential, yet many folks put it off. Don’t put it off any longer, and take action:
TAKE ACTION: Fill out the Who, What, Why worksheet. Another worksheet that we have provided is an inventory list. Document all of your assets, how each is titled, who the beneficiaries are, and the assets’ location.
TAKE ACTION: Update your beneficiaries—it’s a simple task. If you haven’t checked on your beneficiaries in a while, now is the time. At the very least, take a look. If you need to make updates, it’s an easy form.
TAKE ACTION: Consider which estate vehicle is most appropriate for you. I said “consider” intentionally because this is an area where we can help. There are numerous other considerations to make before landing on a specific vehicle. Our job is to explore those options and discuss which may be most appropriate for you, given your current assets and long-term objectives.
TAKE ACTION: Establish, or update your power of attorney. Again, this is an easy form to complete—just call our office, and we can send it over.
TAKE ACTION: Take a look at your estate plan. If you haven’t revisited those documents recently, call your advisor (hopefully, that’s us), and discuss. There may be changes in the tax code or changes in your financial situation to address.
Until you’ve established your estate plan, it is something to stress over. If, however, you have checked off the action items above, you are well on your way.
The next step is setting a meeting, which is no cost to you. One of our many services is acting as the expert design consultants on your estate plan. We are happy to outline your plan before you solidify the documents with an attorney.
To set an appointment, call our office at (303) 261-8015 or email thepartners@denverwealthmanagement.com.
Disclosures
The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.
All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.
This information is not intended to be a substitute for individualized tax or legal advice. We suggest that you discuss your specific situation with your tax or legal advisor.
All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
An A-B trust is a trust that divides into two upon death of the first spouse It is former with each spouse placing assets in the trust and naming as the final beneficiary any suitable person except the other spouse.
