Estate planning

The Beginner’s Guide to Estate Planning

Kay Dee Cole

April 13, 2023

If we have one mantra we repeat with our clients regarding estate planning, it’s this: If you don’t make a plan for your estate, someone else will – and you probably won’t like it. 

That “someone else” could be loved ones in the process of grieving, or even government entities. Take, for instance, Pablo Picasso. He created thousands of paintings and sculptures, owned five homes and had millions of dollars in cash and gold. The total assets were worth hundreds of millions, possibly landing somewhere in the billions in today’s money. Yet, he never had a will. 

Forbes reports that Picasso’s estate “took years and tens of millions of dollars” to settle – all of which could have been avoided through a simple will. Even today, many are arguing over the legality of using Picasso’s likeness, wondering what he would have wanted.

Picasso’s career is one to admire, certainly, but his estate planning was lacking. Luckily, it’s fairly easy to develop an estate plan and save your loved ones from navigating Picasso-esque dilemmas after you’re gone. 

In today’s blog, we’ll walk through the basics of estate planning, as well as tips to help you begin your long-term asset management journey.

What is Estate Planning?

Estate planning is the process of organizing and creating a plan for all your belongings in the case that you pass away or become otherwise incapacitated. Your estate plan could involve:

  • Legal documents
  • Accounts
  • Insurances
  • Pensions
  • Physical assets (like valuable artwork)
  • Real estate and more 

Building out your estate plan usually involves both estate planning attorneys and financial advisors. Although both professionals can work together to create your unique plan, they actually have very different roles and responsibilities.

Financial advisors cannot physically create many of the documents involved in estate plans – that responsibility falls primarily on your estate planning attorney. The advisor serves more as a quarterback of the process, providing big picture guidance on what all needs to be done and how it all fits together. It’s just another reason it’s important to have a full financial team. 

Digital assets: A 21st-century addition to estate plans

Estate plans used to be limited to the physical realm, but in today’s world, many of your assets may exist online. Travel points, online accounts, social media profiles, NFT investments – the list goes on and on.

Related: Making Sense of Digital Assets

By including your digital assets in your estate plan, you can make it easier for loved ones to access and organize your online information. Your family may also wish to archive social media accounts and collect all those photos you have saved on your desktop. Simply canceling payments for your Netflix subscription can be incredibly difficult if no one knows your login information.

If you have any questions about digital estate planning or need some tips to get started, your estate planning attorney and/or financial advisor should be able to point you in the right direction. 

Why is Estate Planning Important?

There are five main reasons why we encourage our clients to invest in estate planning:

  1. Grief is a very stressful time – Organizing your estate now makes it easier for your loved ones to know what to do and who can help them.
  2. An estate plan gives clear direction to organize and process your physical and digital belongings after you pass.
  3. Loved ones can contact the right people to help close accounts/automated billing more easily.
  4. It makes it easier on those left behind to ensure your belongings are given to who you want to have them.
  5. It helps prevent arguments over which assets belong to each party. To really make it easier, consider including a letter to each beneficiary of your estate explaining why you made the choices you made.

How Often Should You Update Your Estate Plan?

Many people think that estate planning is a “one and done” sort of thing – but in reality, you may need to update your estate plan multiple times in your life. 

Why do clients love Clarity? Read these three real quotes from real clients to find out!

Imagine that you want your assets divided equally among your two grandchildren, so you set up your estate plan to reflect that plan. But a few years later, your family has grown to include another grandchild and even a step-grandchild. Now, your estate plan needs to be updated to reflect your new family members. 

In general, we recommend that you revisit your estate plan after any big life events, including:

  • Births
  • Deaths
  • Marriage
  • Divorce
  • Buying a new home – and there are plenty more!

Check with your financial advisor to see if now would be a good time to update your estate plan.

Can You DIY Estate Planning?

Technically, yes. But we wouldn’t recommend it. Although DIY estate planning can save you money, it also leaves room for errors. Attorneys spend years studying estate planning laws and are generally well-versed on the legal ramifications of the documents they create. In the end, DIY may end up being more costly if you have to redo the documents several times. 

One estate planning aspect we definitely recommend you hire a professional for is a trust. Trusts come in many versions, and if you accidentally create a trust with errors, it could leave a large legal mess for your loved ones. In general, if you’re going to invest in estate planning, it’s probably best to go the professional route so you can feel confident that your estate plan will be carried out as you want. 

Estate planning can feel overwhelming (and easy to push off to a later date), but with a financial planning team on your side, you can be sure that your estate plan is prepared in case of an emergency. Contact your financial advisor today to explore how you could benefit from estate planning preparation.

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Just Found Out You’re the Beneficiary of a Trust? Here Are 14 Questions & Answers You Need to Know

Just Found Out You’re the Beneficiary of a Trust? Here Are 14 Questions & Answers You Need to Know

If you have been named as a beneficiary of a trust, you probably have many questions about what comes next. Trusts can take many forms and may be governed by unique provisions established by the creator of the trust or “grantor.” As a trust beneficiary, you have certain rights. But to ensure that your financial and other interests are fully protected, you need some basic information about different trust structures and their management.

Trust Basics

At their most basic, trusts can be grouped into two broad categories – living trusts and testamentary trusts. A living trust is created by an individual during his or her lifetime. The grantor transfers property to a trust that is managed for the trust beneficiaries by a trustee. The grantor may act as trustee, or he or she may appoint another family member or family advisor, such as an attorney or accountant to be the trustee. A testamentary trust is established by will upon the death of the person whose assets it represents. Testamentary trusts can be used for many purposes; chief among them to provide for current and future beneficiaries.

In either case, it is the trustee who is charged with administering the trust in strict accordance with its terms. If this so-called fiduciary duty of the trustee is breached in some way, beneficiaries have the right to protect their interests by taking legal action against the trustee.

Role of the Trustee

Following is a brief overview of the trustee’s role and responsibilities.

• Asset collection and protection – Two of the trustee’s key responsibilities are collecting assets earmarked for the trust and ensuring the protection of those assets. For instance, if real estate is included as a trust asset, the trustee is responsible for the maintenance and upkeep of the property and maintaining appropriate insurance on the property. In the case of financial assets, such as cash or securities, the trustee must maintain one or more separate accounts on behalf of trust beneficiaries.

• Investment oversight – The trustee ensures there is a plan in place to address the needs and interests of current and future beneficiaries. Typically, trust investments are expected to generate income for beneficiaries while also retaining and reinvesting principal. In some cases, the trustee may have the authority to make distributions of principal to beneficiaries.

• Taxes – The trustee reports all income generated by trust assets and pays tax on any undistributed income as well as capital gains realized by the trust. In addition, the trustee informs beneficiaries of the amounts that they must report on their personal income tax returns as a result of trust distributions.

• Recordkeeping – The trustee is responsible for documenting every transaction that takes place in the trust accounts. Prior to final settlement, the trustee must demonstrate to the beneficiaries that all assets and income have been properly administered and distributed.

Beneficiary Right to Action

In addition to regular accounting of trust assets, beneficiaries have a right to request a special accounting from the trustee if there is reason to suspect a problem with the trustee’s performance of his or her fiduciary role. If it is found that the trustee is in violation of his or her responsibilities or fails to provide proper documentation of trust activity, then the beneficiary has the right to take legal action, including removing the trustee and requesting a replacement. Such action is normally handled by filing a petition with the local probate court.

Revocable vs. Irrevocable Trusts

Living trusts may be revocable or irrevocable. As its name implies, property held in a revocable trust may be “revoked” at any time; the terms of the trust may be changed and assets returned to the grantor. He or she can establish detailed instructions as to the handling of trust assets during his or her life and ensure continuity of management upon incapacity or death. Revocable trusts need not be filed in probate court after death, thus maintaining family privacy. However, the grantor will be subject to income and estate tax as if the property were owned outright.

In contrast, assets placed in an irrevocable trust are permanently removed from the grantor’s estate, and any income and/or capital gains taxes owed on assets in the trust are paid by the trust. Upon the grantor’s death, the assets in the trust are not considered part of his or her estate and are therefore not subject to estate taxes.

Irrevocable Trusts Offer Lifetime Giving to Beneficiaries

While requiring some loss of grantor control, a properly drafted irrevocable living trust allows individuals of substantial wealth to begin transferring assets to beneficiaries during their lifetime without incurring gift or estate tax. (Please note that a three-year survival period may be required in certan situations).

For example, the normal annual limit on tax-free gifts is $14,000 per beneficiary in 2015, an amount that may be indexed for inflation in future years. Under some circumstances, a taxpayer may include amounts above that in his or her unified estate and gift tax exclusion amount ($5.43 milliion in 2015 for an individual, twice that for a married couple, and subject to indexing for inflation in subsequent years). In addition, upon the grantor’s death, appreciation on the remaining trust assets is not subject to estate tax (assuming any three-year survival requirements are met).

Being named as a beneficiary of a trust is indeed a welcome event, but not without its complications and, if handled improperly, unfortunate consequences. For help understanding your rights and protecting your inheritance, it may be wise to engage the services of an experienced trust attorney.

Financial Planning Association
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