(Originally published May 15, 2019)
This article is not meant to be legal advice. It is for general information purposes only. Always consult an attorney licensed in your state for specific information since laws may vary from state to state.
Contrary to popular belief, you do not need to be wealthy in order to plan to leave an honorable legacy for your family. Legacy or estate planning is the act of creating a financial strategy for gifting your assets (no matter how much or how little) to a family member, friend, trust or charity of your choice when you pass away. It is an intentional act that requires some proactive steps to make your wishes known. If you do not take the time to do some legacy planning, your respective state will make those important decisions on your behalf via the probate process and intestate succession laws. Intestate succession laws vary from state to state, but they are essentially a plan based on the statutes of that state for where a deceased person’s assets go when that person has not laid out a plan of their own.
When planning your legacy, here are some key essentials to think about:
- Titling of your assets. You can strategically title your bank, brokerage, and other assets to designate a beneficiary directly on the account. A bank account can be titled Payable on Death (POD), and a brokerage account can be titled Transfer on Death (TOD). These designations will ensure that assets pass directly to your beneficiary without going through the probate process. There are other titling strategies as well such as Joint Tenants with Rights of Survivorship (JTWROS) where two or more people are owners on an account and the account automatically passes to the surviving owner(s) when one of the joint tenants dies. This is yet another way that assets can pass without going through the probate process.
- Designating beneficiaries on life insurance and retirement plans. It is important to keep the beneficiaries up-to-date on your life insurance policies and retirement plans. It is so easy to forget this important step when a life event happens. Not updating a beneficiary can cause a lot of trouble if there was a divorce, additional child born, a named beneficiary predeceases you, or a myriad of other life events happen (as they tend to do). Review your beneficiaries often and make sure it still aligns with your current wishes.
- Your healthcare decisions in the event of incapacitation. Setting up a Healthcare Proxy or Healthcare Power of Attorney gives the person of your choice the authority to make healthcare decisions on your behalf in the event that you are unable to speak for yourself. Additionally, setting up a Living Will outlines your wishes in the event that you are placed on life support or there is a particular life-saving treatment that you do or do not wish to receive.
- Your financial decisions in the event of incapacitation. Setting up a Durable Power of Attorney gives the person of your choice the authority to make financial decisions on your behalf in the event that you are unable to speak for yourself. Choose this person wisely because this essentially gives them the power to act in a financial capacity as if they are actually you. They can pay bills, open or close accounts, deposit and withdraw funds- all of the things you could do if you were able.
- Your last will and testament. This legal document outlines your wishes on how you would like your assets to be distributed upon your death. It can also outline your wishes for the care of minor children, pets, or other things that are important to you. Additionally, it should outline instructions on how you would like your remains handled (buried, cremated, etc). A will is activated upon the death of the Testator (person who created the will) and it must go through the probate process. The probating of a will is a public procedure and the will becomes a part of the public records. Even if you do no other legacy planning, writing out a will is an important legacy must. Otherwise your loved ones and assets are left to the statutory scheme of your state for distribution that may not be aligned with your wishes.
- Whether it makes sense to use a living trust to hold your assets. A trust is a legal arrangement between the Grantor (person creating the trust), Trustee (person managing the trust, many times it is the Grantor), and the Beneficiaries (the person or people for whom the trust is designed to benefit). It is basically your way of giving specific instructions on how you would like your assets managed and distributed during your life and after your death. It is important to point out that a living trust must be funded prior to your death in order for it to be effective. Setting up a trust is just one step in the process. You then need to retitle the assets that you want the trust to manage into the name of the trust. Trusts can be revocable (able to make changes) or irrevocable (very difficult or impossible to change). Trusts are highly complex and not everyone needs them. Unlike a will, which is pubic and has to go through the probate process, a trust is private and does not need to be probated.
- Consider your tax situation. For some people it makes sense to hire a tax professional to sort through the maze of tax planning. This is especially important for people with businesses, a higher net worth, and any other special considerations. A tax professional can help you plan how and when to pay your taxes as well as which deductions make the most sense for your unique situation.
These are just a few things to consider when thinking through your legacy plan. There are also other considerations if you have minor children, a special needs family member or an elderly person in your care. Building and leaving a legacy is a highly personal process that takes a lot of maturity and patience to complete. Many people put this important step off since no one really wants to think about the day when they will no longer be here. Take action and set up your legacy plan today with the key essentials above in mind.
Reach out if you need help establishing your legacy, firstname.lastname@example.org