Weekend Read: Estate Planning Basics
Estate planning might seem like an overwhelming task, but it's crucial to ensure that your hard-earned assets are distributed according to your wishes and in the most tax-efficient way possible. Let's break down the key components of estate planning, including beneficiaries, transfer-on-death (TOD) designations, wills, trusts, powers of attorney (POAs), and the tax efficiency of various account types.
Beneficiaries: Your First Line of Defense
One of the simplest yet most effective steps in estate planning is ensuring that your beneficiary designations are up-to-date and in line with your wishes. This applies to your retirement accounts, life insurance policies, and any other financial accounts that allow for beneficiary designations. When you pass, these designations determine who or what receives your assets, whether it's your spouse, children, sibling, charity, or trust. These designations override your will, so keeping them current is essential to ensure your assets go to the right people.
Per Stirpes
When you designate your beneficiaries "per stirpes," each branch of your family receives an equal share of your estate. If a primary beneficiary predeceases you, their share is divided equally among their descendants1. For example, if you have three children and one of them passes away before you, their share would be evenly distributed among their children (your grandchildren), rather than being split among your surviving children. This approach ensures that your assets are distributed equitably across generations.
Transfer-on-Death (TOD) Designations
Transfer-on-Death (TOD) designations allow you to name beneficiaries for your brokerage accounts, ensuring they transfer directly to the named individuals upon your passing, bypassing probate. This can be a quick and easy way to ensure your investments go directly to your heirs without unnecessary delays or legal hurdles2.
Wills: The Foundation of Your Estate Plan
A will outlines how you want your assets distributed, names guardians for minor children, and can even specify your wishes for funeral arrangements. However, it’s important to note that the assets which pass through a will must go through probate, a legal process that can be time-consuming and costly. Also, beneficiary designations on retirement accounts and TOD on brokerage and bank accounts would bypass your will. It’s not uncommon for someone who has done some thorough estate planning to have very little in assets that will speaks to.
Trusts: Versatile Tools for Estate Planning
Trusts can offer more control over how your assets are distributed. There are several types of trusts, but two of the most common are revocable living trusts and irrevocable trusts. A revocable living trust allows you to retain control of your assets during your lifetime and make changes as needed. In contrast, an irrevocable trust typically cannot be altered but offers benefits such as asset protection and potential tax advantages3.
One reason I see often for creating a trust is if your heirs are young or financially immature. When you pass, you may not want your 20-year-old children having unfettered access to a few million dollars. In this case, you could direct your assets to trusts in their names. Inside those trusts you’d elect a trustee to ensure your instructions are followed and would dictate the terms under which the beneficiaries have access to the funds, such as age restrictions, specific purposes, or limiting the amount they can withdraw each year. Another benefit of a trust is that it can protect your assets from future marital uncertainty, providing a potential safeguard in case of divorce4.
Powers of Attorney (POAs): Protecting Your Interests
A Power of Attorney (POA) allows you to designate someone to make financial decisions on your behalf should you become unable. This is an important document to have on hand because, without appropriate authorization, your spouse, heirs, or anyone else helping you will meet resistance from your financial institutions if something unexpected occurs and you’re unable to manage your finances. It's also a very powerful document that you should consider carefully before appointing someone.
There are two types of POAs: General and Springing. A General Power of Attorney grants your designated agent broad authority to act on your behalf in various matters, including financial transactions, legal decisions, and other personal affairs. This type of POA is effective immediately upon signing and remains in effect until you revoke it or become incapacitated. A Springing Power of Attorney, on the other hand, becomes effective only under specific circumstances, typically when you become incapacitated and are unable to make decisions for yourself. This type of POA "springs" into action upon the occurrence of a predetermined event, such as a doctor certifying that you are incapacitated5.
Deciding between a General and a Springing POA depends on your personal circumstances and preferences. A General POA is useful if you need someone to help manage your affairs immediately or on an ongoing basis. In contrast, a Springing POA is ideal if you prefer to maintain full control until you are no longer able to do so.
Tax Efficiency: Leaving More to Your Heirs
The tax efficiency of the accounts you leave to your heirs can significantly impact the value they receive. While living, it’s important to review your assets and see if the state they will be left to your heirs is what you want. Various account types are taxed differently as your heirs attempt to access them. I recently wrote a more in-depth article on this which you can find here.
Final Thoughts
Estate planning is about more than just distributing your assets. By taking the time to designate beneficiaries, set up TOD accounts, draft a will, consider trusts, and establish POAs, you can ensure that your wishes are honored and your heirs are taken care of in the most tax-efficient manner possible.
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1https://www.investopedia.com/terms/p/perstirpes.asp#:~:text=Per%20stirpes%20determines%20that%20in,the%20grandchildren%20of%20the%20testator.
2https://www.investopedia.com/terms/t/transferondeath.asp
3https://www.investopedia.com/ask/answers/062215/what-difference-between-revocable-and-irrevocable-intervivos-trusts.asp
4https://www.investopedia.com/terms/t/trust-fund.asp
5https://www.investopedia.com/terms/p/powerofattorney.asp
Steward Partners Investment Solutions, LLC (“Steward Partners”), its affiliates and Steward Partners Wealth Managers do not provide tax or legal advice. You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.
Securities are offered through Steward Partners Investment Solutions, LLC (“SPIS”), registered broker/dealer, member FINRA/SIPC. Investment advisory services are offered through Steward Partners Investment Advisory, LLC (“SPIA”), an SEC-registered investment adviser. SPIS, SPIA, and Steward Partners Global Advisory, LLC are affiliates and collectively referred to as Steward Partners.
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