Estate planning is a crucial aspect of financial and personal security, yet many individuals are unsure if they need estate planning documents. In this article, we will delve into the common topics for basic estate planning and highlight the essential forms that everyone should consider having. Whether you have a sizable estate or modest assets, estate planning documents are necessary to ensure that your wishes are carried out after your passing. By understanding the significance of these items, you can make informed decisions about your estate and protect the interests of your loved ones.

How do I know if I need estate planning documents?

First, let’s define your estate. Your estate is everything you own: home, vehicle, bank accounts, investment accounts, businesses, life insurance, personal belongings, real estate, etc. Estate planning involves determining how you would like these assets to flow to your intended beneficiaries during your life or upon your passing. Assets can pass one of three ways upon a person’s passing:

1. Operation of Law
   1. A joint account will be passed to the surviving person.
2. Contract or Beneficiary
   1. A specific person is named on the asset or account as the beneficiary upon your passing.
   2. It is commonly used on retirement accounts and life insurance but can be added to many other account types.
   3. If a trust is in place, it can name the successor owners and provide specific language for the distribution of assets.
3. Probate
   1. This is the court process of following a person’s will if they have one.
   2. If someone doesn’t have a will, then probate is the process of following the specific state intestacy laws (meaning dying without a will). Each state has rules for people who die without a will (see Nebraska Intestate laws).

Next, an important step is understanding your personal situation. Are you single, married, or divorced? Do you have children? Are they minors? Do you intend to pass assets to other family members, charities, or anyone else?

A phrase often referenced in our office is to think of five-year increments when working on estate planning. Thinking about setting up a document that will last forever can be overwhelming and cause indecision or procrastination. However, doing nothing also has consequences and very likely isn’t how you would have structured the flow of your estate (as seen in the Intestate Laws). Remember, these documents can be updated as life changes, kids age, and your balance sheet grows.

Common Topics for Basic Estate Planning

Will

A will is a legal document that provides instructions for your wishes upon your passing. It can direct the flow of assets and appoint guardians for minor children. It also names the executor (or personal representative) who becomes in charge of helping administer your estate.

Durable Powers of Attorney (POA)

These additional legal documents are put into place to give someone the authority to act on your behalf. Specifically for durable POAs, these remain in force if you become unable to act on your own behalf due to incapacitation.

• Durable Financial Power of Attorney has the power to make financial decisions on your behalf in the event of incapacitation.
• Durable Medical Power of Attorney has the power to make medical decisions on your behalf in the event of incapacitation, allowing the medical POA to access HIPAA-protected information.
• Living Will can state your wishes on medical treatment in the event of terminal illness.

Testamentary Trust

A testamentary trust is a trust that is created as part of your last will and testament. The details of the trust are outlined in your will, and it springs open upon your passing. Your will includes instructions for the executor on how assets must be managed by the trustee and distributed to your beneficiaries.

Revocable Trust (also known as a Living Trust)

A revocable trust is a legal structure created during your lifetime that you can name as the owner of certain assets. As the name states, these can be “revoked” or amended during your lifetime as your life changes. As with testamentary trusts, these include language in the trust document stating your desired flow of assets, management by the trustee, and distribution to beneficiaries. Revocable trusts are generally created to help the individual avoid probate but require that all property be correctly titled in the trust or with the trust as beneficiary to avoid probate.

Minor Children

Generally, the top priority for parents of minor children is determining who will be their legal guardian in the worst-case scenario where both parents pass. Once decided, we recommend having that conversation with the person who you wish to have listed as guardian.

The next step is determining the proper structure of leaving assets to minor children. Even if your financial situation isn’t complex enough to warrant a revocable trust, your will can have a testamentary trust. Who will be the financial trustee of these assets, and what age should your minor children reach before having more control of and access to these funds?

Financial Trustee

The trustee will be responsible for managing the assets in the trust over time. While it is possible to designate the same person as both the guardian and trustee, we recommend keeping these roles separate. This approach can benefit your children and the guardian by avoiding any conflicts of interest in deciding how to use the funds. Additionally, it will enable the guardian to avoid being put in the difficult position of having to deny your children's requests as minors (such as wanting an expensive car at 16), which may not be in their best interest.

The trustee can be a third-party institutional trust company if that is the best fit, but it would come with additional costs. Also, the trust should have language determining the length of time a trustee will act and directions to the trustee.

Disposition of Assets to Your Children

Using a trust, you can set ages that you deem the kids ready to access a portion or all the assets left in your estate. There is no exact science behind this, but some aspects to consider are the number of assets that will likely be left for children and the potential growth of these assets by the time they reach the intended distribution ages.

For estates that will not likely make each of your kids independently wealthy, we commonly see these assets distributed outright at specific ages. To illustrate, assume assets are split into equal shares for your children. At age 30, each receives 50% of their trust share assets outright, and at age 35, each receives the remaining trust balance outright.

For estates that could potentially leave your children millions of dollars by their age of distribution, it is becoming more common for assets to remain in trust for longer, potentially even for your child’s lifetime. Keeping these assets in a trust adds a few extra safeguards for your children, like protection from creditors and potential future divorce.

For example, let’s say assets are split into equal shares for your children. At age 35, each child becomes their own trustee of the trust assets and can pull funds for specified expenses (commonly health, education, maintenance, and support).

Neither of these strategies has to be only for minor children. This could even be for children who are young adults, knowing that a large inheritance would meaningfully change their lives and could impact the decisions they make.

Lastly, it was mentioned briefly above, but we feel it is worth expanding on – the growth of assets that could be inherited. For some, it is apparent that assets will be significant and additional planning is needed, but for others, it might not be as clear.

For example, let’s assume that a couple has one young child (we’ll use age three for this illustration). The couple might be early in their careers and not have significant liquid balance sheets. However, let’s assume each has a two-million-dollar term life insurance policy. If this couple were in a fatal car accident, there would be four million dollars in their estate left to their only child. If they didn’t have proper planning documents in place, their child would inherit these assets at age 19 in Nebraska. These assets could be close to $10 million at the age of 19, using a conservative growth rate of 6%.

We know that estate planning isn’t fun when it involves thinking of some of these potential worst-case scenarios. Still, we feel it is crucial to be proactive, given the magnitude of the outcomes for anyone not planning ahead.

Marital Status

Whether you are single, married, divorced, widowed, or remarried can impact how you view your estate and how you would like your assets to flow. There are legal structures that can accomplish your specific intentions.

Family/marital trusts can give your surviving spouse limited access to your assets upon your passing while still protecting your children or intended beneficiaries. Trusts can also be put in place for specific assets – a common use is for a primary home. Again, one of the key factors here is being proactive and putting the proper documentation in place, knowing you can alter documents as your life and intentions change.

Even for a single individual who doesn’t have children, having an estate plan can still help you accomplish your specific intentions. You may have charitable causes you are passionate about that you want formally written into your estate plan. Or potentially other family members that you wish to receive your assets upon your passing. A will is still essential to ensure your assets reach your desired beneficiaries. Additionally, powers of attorney (POAs) carry significant importance for single individuals.

Coordinating Asset Titling and Estate Planning Documents

One of the last critical components of estate planning is the coordination of estate planning documents with your asset and beneficiary titling. You can have the greatest estate plan in place, but if assets are titled incorrectly, they can unintentionally direct the flow of assets away from your intended heirs.

For example, you just updated your will to state that all assets should flow equally to your two children. Since this is the most recent document you have completed, you think you’ve done your part in ensuring the proper flow of assets.

However, if you have an old retirement account you haven’t checked in years, and your sister is listed as the primary beneficiary, that beneficiary designation will supersede your will.

Or, if you have a sizeable joint checking account titled joint with rights of survivorship with one child because they were helping you pay bills. Upon your passing, they become the owner of all those funds – potentially inadvertently disinheriting your other child.

A beneficiary of a retirement plan has substantially different rules for spouse vs. non-spouse.

• Spouses can claim the retirement assets as their own, which is more tax-favorable.
• Non-spouses must take distribution within ten years, which is less tax-favorable.

Some exceptions apply.

Key Points to Remember

1. Plan Ahead: We hope these documents aren’t needed for a long time, but having them in place helps ensure your intentions are followed.
2. Review Periodically: As life changes, so can your documents.
3. Coordination is Key: Make sure all your assets are properly titled with correct beneficiary designations and are updated as your estate plan changes.

If you have any questions about estate planning or would like to talk to a member of our Lutz Financial team, please contact us.

IMPORTANT DISCLOSURE INFORMATION