Estate Planning 101


The Basics 

Estate planning is the most overlooked area in people’s financial lives. It often gets ignored or put off for a variety of reasons, whether it’s too expensive, too complicated or because people don’t think they have enough assets to need it. Estate planning is important for everyone.  We created a guide to help you understand what it is, why you need it, and how you can implement a basic estate plan.  

What is an Estate Plan?

Your estate is everything you own. It ranges from your house to your baseball card collection. Even if you don’t own a lot, you still need a plan for where those things will go when you die and who will make decisions on your behalf if you become incapacitated. 

Estate plans can address more than just your assets. It is a blueprint for your loved ones.   Your estate plan can include direction on things like who will take care of your children or pets if something happens to you.  It will also provide instruction for what to do if you become incapacitated, and who should take care of you and handle your affairs during your life if you are unable to do so yourself.

Documents Included in An Estate Plan

While everyone’s plan is different, there are a few specific documents that are common. These are the basic documents that everyone should have in place. 

A Last Will and Testament ‐ The core purpose of a Will is to direct the disposition of your probate assets after you die. If you have young children, your Will also appoints a guardian who will have physical custody of them should something happen to you. You will also appoint an Executor in your Will who will be responsible for ensuring the provisions of the Will are carried out. 

A Living Will‐ This is often referred to as an Advanced Medical Directive. The AMD designates a health care representative who is authorized to make medical decisions on your behalf in the event you are unable to communicate with your doctors. The AMD can also include specific instructions regarding DNR and other life‐supporting measures. 

Durable Power of Attorney ‐ Power of Attorney is a legal document that empowers your agent to act for you for non‐medical decisions. A Durable Power of Attorney remains in effect even if you become ill or disabled and cannot make your own decisions. Your designated POA has the legal authority to do things like transfer assets, access your funds to pay your bills, buy and sell securities, and even sign documents and contracts for you. You and your Power of Attorney become one and the same when it comes to financial decisions.  

A Living Trust‐ Not everyone needs a revocable trust as part of their estate documents, but trusts can offer some advantages over a Will. Trusts are dynamic vehicles that can be utilized in various ways, including holding your assets while you are still alive and controlling your children’s inheritance upon  your death. A common use of a trust is that the assets held in trust are not subject to probate court and are kept private. You can find more details on trusts later in this guide. 

What happens to your estate after you die? 

Everything that you own at the time of your death is part of your gross estate. Solely owned assets that have no beneficiary designation are known as probate assets and are subject to the probate. Probate is the process of administering a person’s estate after their death and involves the submission of various items to the probate court. If you do not have a Will, your assets are still subject to probate and pass in accordance with state intestacy laws. Under intestacy laws, someone may inherit your assets that you did not intend. If not adequately prepared for, the probate process can be both costly and time consuming. However, with proper estate planning, you can position your estate to be administered smoothly and minimize the likelihood of any contest, or you can avoid probate altogether. 

Titling of Assets 

Asset titling refers to the way in which you own an asset‐ such as your individual name, jointly with someone else, or in a trust or entity. The way that assets are titled determines who controls the assets while you are alive and who will receive the assets when you pass away. It is important to understand the various titling options and make sure they are consistent with your goals 

Individual Name‐ This is anything that is held in your sole name. You control the assets. These assets and probate assets and will pass under your Will and are subject to probate. 

Transfer on Death‐ These assets work just like an individual named account during your lifetime. The difference is when you die, the assets will go directly to the named beneficiary. TOD assets do not pass under your Will and are not subject to probate. 

Joint Ownership‐ When two or more people own an asset. There are various types of Joint ownership each with their own differences           

  • Joint Tenants with Rights of Survivorship‐ Each owner has complete control during their lifetime. When a joint owner dies, the surviving owner automatically becomes the sole owner of the account and the account is not subject to probate. 
  • Joint Tenants in Common‐ Each owner is treated as owning a specific portion of the asset, most commonly one‐half. When one owner dies, their interest in the asset passes under their Will and is subject to probate. These assets are subject to claims of the owner’s creditors. A new co‐owner (or co‐owners) is put on the account during or after the estate is administered. 
  • Joint Tenants by the Entirety‐ This option is available in some states, for assets owned by spouses. This account acts like Joint Tenants with Rights of Survivorship, however this account may provide special creditor protections for the surviving spouse. 

Retirement assets are titled in individual names but should always have named beneficiaries to avoid adverse tax consequences. Retirement accounts, when properly titled, avoid probate and pass directly to beneficiaries. 

Who Handles Your Estate?

When you create a Will, you name someone to act as your Executor. This person is a fiduciary who administers your estate and appears before the probate court. They will handle unpaid bills, taxes and all other matters that relate to your estate. The Executor also is responsible for making distributions of assets to the beneficiaries. Typically, a spouse, child or sibling will act as an executor. Being an executor is not an easy job, and it is important to pick someone you trust. If you do not have a Will, or have not named an executor before your death, there can be a dispute regarding who will be appointed as the fiduciary of the estate which may increase the time and costs of probate. Another reason why having an update will is crucial for your estate plan.  

Estate Taxes

With the current federal estate tax exemption currently at $12.06 million per person, very few people are impacted. With that said, these estate tax rules are always a topic come election time, so it is important to keep track of current laws. 

The $12.06 million exemption is a federal exemption, while you may not need to worry about any federal tax, there are 12 states that have a state estate tax with much lower exemption amounts. Currently, the 12 states with state estate taxes are: 

Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington

If you currently live or are planning to live in any of these states, it is important to be aware of their estate tax laws and rates, and plan accordingly.

Your executor is the one who will help handle all the estate tax bills that will be owed. They will use money from the estate to pay any tax and liquidate your assets if necessary. 

Do I Need a Trust? 

A few common reasons to establish a revocable trust are: (1) to control assets after your death without court supervision; (2) to shelter assets from future family creditors (e.g. in the event of a child’s divorce), (3) for tax planning purposes if you live in a state that imposes a state level estate tax, (3) and to avoid probate. Trusts can be costly to set up, but give people planning options and flexibility that may not be available via utilization of a Will. 

How Do I Get Started on Estate Planning? 

Now that you know the importance of having estate planning documents in place and the basics of estate planning, let’s look at the steps to take to get the process started.   

  1. Make a list of all your assets, and keep the list in a place that your loved ones know about
  2. Review all of you beneficiaries at least annually 
  3. Consider updating any individual accounts to have “Transfer on Death” 
  4. Think through where you want everything to go should something happen to you tomorrow
  • Think of a person that you would want to handle your affairs
  • Work with an online company or lawyer to get legal documents in place 
  • Review the plan and update as life changes 

Options to Get Your Estate Plan Done

While we can help you build out the framework of an estate plan and review all the different elements of planning, we cannot write legal documents because we are not lawyers. To execute your documents, you will need to hire a lawyer. There are two options for this.

  1. Hire an Estate Planning Attorney‐ If your situation is more complex, or you would prefer to have a face to face meeting, you will need to hire a lawyer. At Compass, we can help you find a lawyer that is a good fit. We will meet with you beforehand to help go through scenarios and questions the lawyers may have so that your meeting can be as efficient as possible. We help your through the process from start to finish.  
  • Online services‐ Using a company through the internet is a great way to get your estate planning documents done quickly and at a fraction of the cost of a lawyer. We recommend this for most couples who have a simple financial picture who just want to get it done. Most sites will walk you through simple questions to guide you in the right direction to get the documents completed. If you need an attorney, most online services will offer one as part of their cost.   

Having an estate plan is a crucial element to financial planning. Your estate plan needs to reflect your overall wishes to ensure that your loved ones are taken care of at your death. There are a lot of pieces to the puzzle, and too often people think” I’ll get to it later” …. If you become unable to make decisions on your own, and you haven’t put a plan into place, all that burden and stress will fall on your loved ones as they try to make decisions for you, hoping they get it right. Creating an Estate Plan is a true gift to your family and friends.

Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.

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