By Alan McCormick, CFP™
Having a will is one of the most important things you can do for your family. However, according to recent studies, 65% of adult Americans do not have a last will and testament. Of adults ages 30-49, 64% confess not having prepared a will and testament; 44% of adults ages 50-64 admit this same daunting fact. While these statistics seem surprising, I constantly run into people through my work who have not taken the time to prepare a will. Just a few weeks ago while talking with some friends, I was surprised to hear how many of them had nothing prepared regarding their estate planning and the ultimate disposition of their assets—even who would be the guardian for their children. Most of the reasons cited for not having addressed this issue seemed as far-fetched as the next, which got me thinking about some of the myths that people believe about estate planning.
Let me preface this discussion by saying this: I am not an attorney and our firm does not prepare legal documents for clients. However, we have conversations about this topic with our clients routinely and refer them to experts in this field to create the appropriate legal documents.
The Basics
From my perspective, estate planning is simply creating a strategy to make sure that your family is taken care of when someone passes away. Whether it’s determining how your assets are distributed or choosing who will be the guardian of your children, there are steps that can be taken to assure that these changes will be carried out as you see fit. Estate planning doesn’t have to be a complicated or expensive process; in most circumstances, some simple planning can do the trick. A good estate plan implemented now could save a family higher costs in the long run. The first step in arriving at an effective estate plan is dispelling with the false notions some of us may be entertaining. Here are some common misconceptions that people have regarding estate planning:
- “My parents will take care of my children.”
As a 37–year-old with a young family, I have this conversation frequently with my peers. You may want a parent or trusted sibling to be the guardian of your children. You might even tell this person that is your intention. Nonetheless, you cannot insure this will happen without proper planning. This means you need to create a will. In a properly executed last will and testament, you can specifically name the person(s) you desire to be the guardian of your children. An alternate can also be named should your first choice be unwilling or unable. This legally binding, written instrument is the best way for you to make plain your wishes for the care of your children and your possessions. Without a Last Will and Testament, the care of your children will be determined by the court system. Many different issues may arise during a court appointment process, including multiple family members wanting to serve as guardian. The court will then have the power and responsibility to decide who is the most appropriate guardian. If all family members do not get along well or have different beliefs as to rearing children than you might, conflicts may occur. - “I’ll name my parents or my sibling as beneficiary. They’ll use the money for my children.”
This sounds good. Your parents/brother/sister will love and take care of your children (assuming you named them as guardian – see myth #1). Most likely, they will be perfect stewards of those funds and use them to benefit your children as they grow. But what if they don’t make wise decisions? What if they have a financial setback and borrow those funds “temporarily?” This can and does happen. With proper planning in a will, you can establish guidelines on who is responsible for the management and oversight of the funds. This can be a different person than the guardian named in your will. You can also determine when funds can be distributed and for what purpose, and you can even establish distribution ages for when the child can be the outright owner of the funds. All of this can be arranged in a will by setting up a trust for the benefit of your children. - “My estate is pretty simple – I don’t need to put anything in place.”
You may have a simple estate: a house, a retirement plan, some bank accounts and maybe some life insurance. Without a will or beneficiary designations, however, the laws of the state may control who receives your assets. This can mean that minor children receive assets intended for a spouse. While you could accomplish your desires with beneficiary designations and proper titling, there are reasons to consider adding the protection of a will on top of proper titling of financial accounts. (Note: you cannot retitle a house without giving up some ownership.) In a real-world example, I had a client who did not have a will; the family did not want to probate the deceased client’s estate. Their thinking was that proper titling and beneficiary designations would accomplish the distribution of the estate. This client owned shares of a publicly traded company, but they were not held in any investment account. Due to the existence of this unknown asset (the stock certificates were found in a drawer), the estate had to be opened and admitted to probate, which cost the family time and money. With a proper will, this could have been avoided. There can also be a scenario where this is a change in life status: marriage, divorce, remarriage, death of family member, etc. If one of these life events occurs and beneficiaries are not updated or titling is not changed (i.e. a bank account could change from joint ownership to individual), the asset may not be distributed as desired. With a properly structured last will and testament, you can account for “unknown assets” as well as accounts that do not have a beneficiary named. And speaking of beneficiaries… - “I named beneficiaries at the account opening—I should be fine!”
As we all know, change happens. It can come by way of marriage, birth, death, divorce, or remarriage, just to name a few possibilities. In light of these life changes, maybe you’ve taken the step to put a last will and testament in place and because of this new, perfect document, you need to update a beneficiary on your financial accounts. If you are not intentional about updating your beneficiaries on your life insurance, 401(k), IRA, etc., these assets may not end up where you desired or planned for them to go. - “I put my estate plan in place years ago; there’s no need to review.”
When taking a trip, you have probably checked the map to make sure that you’re on the right path. However, if that map is outdated, there might be a better road to take or you might encounter a roadblock that will cause you to reroute. The same is true of life. Maybe the individual you chose for guardian is unable to serve in that role anymore, or maybe you need to adjust the language restrictions in the trust because your children have aged since your last revision. Depending on how your personal net worth has grown over time, your plan may call for more complex planning or new assets that need to be incorporated. It’s always good practice to review your estate planning every few years, but it is crucial to do so if a major life event occurs. Here’s the bottom line: meet with your attorney and review your plan. - “I can’t afford an attorney, so I’ll do it myself.”
In this age of technology and “I can do it myself” mantras, people think they can go online and accomplish this kind of estate planning. While there are certainly websites where this can be done that may be appropriate for you, if you’re not knowledgeable in estate planning, there may be key steps that are left out that might prevent your plans from working out as you intended. An attorney who understands the proper language to use and the trust laws, who can also provide good council based on knowledge and experience is worth the time, effort, and money to assure a sound plan.
The Takeaway
No matter how big or small, you have an estate—and you need to think about how you want it distributed in the wake of your passing. If you’re ahead of the game and already have a will, take the time to review your estate plan if you have not done so recently. Make sure your beneficiaries are in line with your estate plan. Most importantly, if you have not met with an attorney to have a will prepared, seek out a professional to get the process started. While we don’t like to think about it, death is inevitable, so we need to take care of our loved ones in the best way that we can while we are living.
If you would like more information about how to start organizing your estate, contact your financial advisor at 601.368.3500.