We’ve been revealing our financial planning process over the last few weeks.  Last week we talked about insurance and risk management. This week we are looking at estate planning.  Estate planning allows us to be proactive about deciding how our assets are inherited or given away at our death.  It also allows us to consider the needs of those who rely on us (such as children or others) if something happened to us.

First, it’s important to realize that not all of your property will pass through your will.  There are 3 ways that property can pass at one’s death:

  1. By law – If you have any joint accounts (JTWROS), then the account will automatically pass to the other joint account holder at your death.  The account is already legally owned by the two account holders, and will become the property of the survivor upon your death.  It is common for spouses to own joint property together, such as a home.
  2. By contract – Many of your financial accounts may be governed by the account agreement or contract.  Examples include your 401(k), IRA, Roth IRA, and any life insurance you own.  Essentially, think of any account with a beneficiary designation; such accounts will be inherited by whomever is listed as a beneficiary, and are not governed by your will.
  3. By probate – Everything else you own that doesn’t pass via either law or contract will be included in your probate estate.  This would include individual accounts, personal items, and any other property owned by just you (i.e. A car titled in only your name).  These assets are controlled by your will.

It’s important to understand these nuances as it can lead to unwanted outcomes.  For example, if you are in a 2nd marriage and have updated your will but not your IRA beneficiary form.  Your IRA would not pass via your will, but according to the beneficiary form.  If you haven’t updated your beneficiary info, you would disinherit your new spouse!

There are horror stories of heirs getting disinherited because the deceased did not have a correctly structured estate plan.  Proper planning can mitigate these concerns, and help address other questions like:

  • What if my children aren’t financially responsible?  I’m afraid they would blow their inheritance if they received a windfall.
  • How can I give some of my wealth away at death to the organizations that I care about?  What is the best way to do this?
  • I’m worried about estate taxes.  Will that impact me?
  • Does it make sense for me to setup a trust for my assets?

Wealth is hard to accumulate.  So, it makes sense to plan for the transfer of your wealth in a well-thought-out manner, so that is accomplishes your goals.  That’s what estate planning does.

You can start the estate planning process by thinking about what you want your assets to accomplish once your gone? Think about today, and 10, 20, and even 30 years into the future.  We recommend looking at these issues during the financial planning process.  If you conclude that your current estate planning documents (or lack thereof) will not accomplish your goals, we recommend meeting with an estate planning attorney to help you revise your documents.

Next week: Tax planning

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