Most people spend decades building a retirement plan – saving, investing, adjusting their risk profile as they age. Then they stop short of the last step. Estate planning gets treated as a separate task, something to deal with “eventually.” The problem is that eventually often arrives without warning, and a gap in the plan at that point costs families far more than money.
It’s not just about what happens when you die
The biggest misconception about estate planning is that it’s something that only matters after you’ve passed away. A well-structured estate plan does a lot of good while you’re still living, but have lost the capacity to look after your own affairs. It could be a temporary situation, like you’re under anesthetic for a short-term medical procedure.
Unfortunately, it could also be a permanent state of being, possibly due to cognitive decline, an accident, or a serious illness.
Incapacity is a very real risk in retirement. If you don’t have the right legal structures in place, family members may have to go to court to prove you’re incapacitated before they can gain access. That’s a big problem because going to court is time-consuming, expensive, and very emotional.
One of the key documents for this stage is a power of attorney, which allows you to nominate someone to take care of your financial and legal matters in the event you can no longer do so. This can be coupled with an advanced healthcare directive in which you set your care and treatment preferences in advance. It’s the best way to ensure decisions about your life are made by you.
The accidental disinheritance problem
Here’s a common scenario that occurs more frequently than many realize: A person writes a will, carefully names their beneficiaries, and figures they’re all set. However, the retirement account they opened 20 years earlier still lists their ex-spouse as the beneficiary. Plus, the life insurance policy indicates a deceased brother who died five years ago as the recipient.
The beneficiary designations on the retirement account and life insurance plans are outside of the will. They are direct legal orders and override anything else. When it comes to these assets, the will doesn’t even matter. If they are out of date, the assets go somewhere the deceased never wanted – and, in most cases, there’s nothing the law can do about it.
That’s why estate planning isn’t a one-time thing. It needs to be checked every three to five years, as well as immediately following any significant life event, such as a divorce, a remarriage, the death of a named beneficiary, the birth of a grandchild, or a move to another state or country. The documents that worked just fine when the individual was 50 may well be undermining the wishes of the 65-year-old they’ve become.
Probate and the burden left behind
When someone passes away without a solid estate plan, or even with a partial one, their estate must usually go through probate. This is the legal procedure by which a will is verified and the estate is administered under court supervision. It can go on for months. In disputed cases, it can stretch over many, many years.
Probate can be a paperwork nightmare, but it’s also a waste of money. Legal fees, court costs, and administrative charges can eat up a hefty chunk of the estate’s value long before any heir gets their share. And don’t forget the inevitable drain on time and emotion when the surviving heirs are forced to simultaneously deal with both mourning the deceased and attending to a few lawyers. That is harder to put a price tag on but it is very real.
An all-embracing plan simply routes your assets to your heirs more cheaply and with less red tape. Trusts set up during your lifetime may step in for instance, to ensure that assets pass outside of probate. The same goes for well-documented beneficiary accounts. Even how you own your house – as in, joint proprietorship versus your will – can make a big difference.
Tax efficiency and asset protection aren’t optional
Estate planning equals tax planning. Essentially, how your estate is formulated determines how much of it is transferred to the next generation, and how much goes to taxes and administrative expenses in the process.
A testamentary trust can be established through a will, which provides tax advantages to beneficiaries and acts as a protection shield around the assets. It additionally determines guardianship in the case of families with young children or dependents – who will take care of them, and what financial circumstances will they be in?
In reality, only a relatively small portion of people actually have a will in place despite its importance. These statistics constitute a large number of estates that will be subjected to intestacy laws – the regulations that determine how assets are divided if a valid plan is not present. These laws don’t prioritise parties based on who needs help most, who was there during their deceased life and what items on the will are most valued.
An estate plan serves as an instruction manual for the transfer of your property, and most importantly, the desired care for your loved ones. A will (or a trust or even a survivorship plan) directs where and to whom your assets will go after you die.
Durable powers of attorney and health care directives can be as important for how you live as for what happens when you no longer can. Periodic meetings with your advisor (as well as your attorney, tax professional, and your family) guarantee that your strategy is up to date with the law and your life.
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