The late George Steinbrenner, former owner of the New York Yankees, is joked about as having had one of the most fortunate estate planning situations in recent history (although perhaps not for the reason you might expect). When he passed away in 2010, his estate, estimated to be worth $1.1 billion, transferred to his family without his heirs owing any estate tax. Why? The federal estate tax was repealed in 2010, which allowed him to pass assets to his beneficiaries tax-free. Had Steinbrenner passed way in 2009 or 2011 (the year the estate tax was reinstated), his family could have been responsible for paying taxes of up to $500 million.
With the current federal estate tax exemption of $11.4 million, most people won’t have to worry about paying federal estate taxes, regardless of when they pass. However, estate planning is about much more than just taxes. An estate plan outlines important things such as how your assets are divided, who cares for your dependent children, and even who makes important financial and healthcare decisions for you if you become incapacitated. For these reasons, everyone should have some type of an estate plan, whether your net worth is $1,000 or $10 million. When thinking about developing a new estate plan, or improving an existing plan, there are three basic areas to understand:
- Key documents in an estate plan
- Your current estate plan
- When to review your estate plan
There are four foundational documents that form the basis of most estate plans:
Will: This document provides instructions for how your property will be distributed after you die. It also appoints a guardian for your minor children. While a will allows you to dictate how your assets will be divided, it requires your heirs to go through a legal process, called probate, to ensure the assets are divided properly. Probate is a public, often time-consuming, process.
Revocable Living Trust: Like a will, this document provides instructions for how your assets will be split up after your death. However, if your assets are titled under a revocable living trust, you can bypass the probate process and simply rely on the instructions laid out in the trust. Avoiding probate is why it’s often beneficial to title assets in a revocable living trust rather than a will. The tradeoff for this convenience is cost, since a will is cheap to set up while a revocable living trust typically costs a couple thousand dollars.
Financial Power of Attorney: A power of attorney allows another person to act on your behalf. If you become incapacitated, a financial power of attorney provides instructions for who can make financial decisions for you (pay bills, withdraw cash from your accounts, etc.).
Healthcare Power of Attorney: Following the same concept as the financial power of attorney, a healthcare power of attorney allows you to designate who can make healthcare decisions on your behalf, should you become incapacitated.
Your Current Estate Plan:
By default, everyone has some type of an estate plan, regardless of whether they have any of the foundational estate planning documents just discussed. The distinction is that if you don’t create an estate plan based on your wishes, your estate plan will be decided by the government and your assets will be divided according to the government’s rules.
If you want to create an intentional estate plan, the first step is to get the four foundational documents (will, revocable living trust, and financial/healthcare powers of attorney) in place. After you have these documents, the next step is to ensure your assets are titled properly and your beneficiaries are designated correctly.
1) Asset Titling – After setting up a revocable living trust, you must take the next step of titling your assets (home, investment assets, etc.) in your revocable living trust, or as otherwise advised by your attorney.
2) Beneficiaries – In addition to titling assets, you must name beneficiaries for insurance policies and certain investment accounts (IRAs, 401ks, etc.). Beneficiaries are the people who will inherit these investment accounts, or receive payment from your insurance policies, after your death (beneficiary designations take precedence over instructions provided in wills or trusts).
Reviewing Your Estate Plan:
As was the case with George Steinbrenner, a lot can change with your estate plan from year to year. That’s why estate planning isn’t just a “set it and forget it” process. There are common life events, including the birth of children, marriage or divorce, material changes in wealth, death of a loved one, or a change in estate tax laws, that require you to revisit and update your estate plan. This includes having your key documents reviewed as well as confirming your beneficiaries and asset titling. You don’t necessarily need to update your documents with every single life change, but you should constantly be aware of, and comfortable with, what will happen to your assets under your current estate plan.
Estate planning isn’t just for the wealthy, and taking a few simple steps can ensure you have a plan that reflects your wishes, not those of the government. At its core, estate planning is about taking care of your loved ones and preserving family unity, and intentional estate planning can go a long way toward avoiding future arguments and headaches for your heirs. Once you have the key documents in place, you’ll have the confidence that everything is lined up the way you would like it to be. You might not make out as well as George Steinbrenner did, but at least you never had to root for the Yankees.
About MD Wealth Management: We are a fee-only financial planner that specializes in providing financial planning for physicians and dentists. As CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors, we are legally obligated to put our clients’ interests first at all times. We are located near Ann Arbor, MI, and we enjoy working with clients both locally and remotely.