Demystifying The Estate Plan
What is an estate plan? Many people know it is something they need, but they aren’t quite sure what it actually is. If you are unclear about what your estate plan entails, don’t beat yourself up over it. There are plenty of things most of us do not know – I’d put nuclear science and car repair at the top of my list.
I often get asked, “do I need a lawyer, a financial planner, an insurance person, or an accountant to create an estate plan?” The truth is they need all of these advisors, and just by knowing all those components they already have significant insight into what goes into developing an estate plan.
In simple terms, an estate plan is the process of preparing for the transition of control and distribution of your assets in the event you can no longer manage them yourself, and ultimately in the event of your death. There are many different components that your estate plan should address.
Who will make health care and financial decisions for you if you are incapacitated? Those decisions are addressed through your power of attorney and health care proxy.
You may also want to name a trustee to watch over the assets for your benefit in case an incapacitating event occurs. Drafting any of these documents (a power of attorney, health care proxy or trust) is done by your lawyer often with input from your other advisors.
Upon your death, you will need to plan for the transition of your assets. For assets in your name alone, you need a will. Again, your lawyer will draft your will. If you have assets that name a beneficiary, such as life insurance or retirement accounts, your insurance advisor and financial planner can assist with updating those beneficiary designations in consultation with your lawyer.
If you want to create trusts for minor children or a surviving spouse, your lawyer will draft that document for you. You also need to determine who will manage the assets for the beneficiaries after your death. For that, you should consult with your financial advisor. If you want to fund the trust with life insurance, that is where your insurance advisor comes in.
You need to name individuals to fill important roles after your death such as an executor and trustee. These individuals are named in your will and trust. Since they are legal documents, they will be drafted by your lawyer
If there are income tax issues associated with your estate, such as who will pay income taxes on retirement accounts after your death or how trust income taxes are to be paid, your accountant should be consulted.
Typically, your lawyer’s office files your estate tax return which is a one-time tax due on your estate if the value of your assets reaches certain filing thresholds. If an estate tax will be due on your estate, you need to discuss how that will be paid with your advisors. If insurance is to be used to pay the tax liability, your insurance advisor will need to be brought into that conversation.
Ultimately, you do not want to get financial planning advice from your lawyer or legal advice from your insurance person, but you want all of your advisors speaking to one another and actively engaging with you. That will ensure that your estate plan addresses all the necessary components and has been properly reviewed by your team of advisors.