Estate Planning 101: The Basics

Much like when talking about life insurance, no client likes to consider their own demise. However, doing so is crucial to ensuring your assets are distributed to the people and causes that you care about in the proper and most efficient manner. Planning your estate goes beyond just assets though; it is a way to reflect your personal values, consider your family's dynamics, and cement your legacy after your death.

In this article, I'm going to first discuss the basics of estate planning that everyone may want to consider. Look out for my next article, Estate Planning 102: Beyond the Bare, which will detail additional considerations for those with high net-worth, particular family dynamics, and the tools used in the planning process to reach your goals.

Estate Planning 101: The Basics

The first step of estate planning, like with any kind of planning, is to articulate your intentions: take the time to identify what your goals and objectives are so that they may serve as the foundation of the process.

Last Will & Testament: Nearly everyone has heard of a will, but not nearly as many actually have one. So why is it important? This legal document outlines the distribution of your assets upon your death, allows you to name a trusted executor to enact your wishes post-mortem, and appoint guardians for your minor children. Without one, state law will dictate the distribution of your property which may not align with your preferences. Two commons pitfalls we often see are:

1. Young people don't need a will yet because they consider themselves far from death. As soon as you have a family or have begun to accumulate assets, having a will wouldn't hurt. You can't predict the future and it's always better to be prepared.

2. The will is a 'set-and-forget' document. The will, somewhat ironically, should be thought of as a living and breathing document. Just as our opinions and situations change as time goes on, our last will & testament should be updated to reflect that. Imagine the following situation for a moment: a marriage goes sour after many years and the couple gets divorced. With so much on their minds, updating their wills was not on the top of the list of priorities. Nine months later, one passes away in an accident and their assets are now at risk of going to their ex-spouse, perhaps much to the dismay of the deceased. Though a grim depiction, it is not an uncommon situation. Your will should be reviewed annually and certainly after any major life changes such as an inheritance, divorce or marriage, and birth of a child.

Beneficiary and TOD Designations: Beneficiary and transfer-on-death assignments designate who will receive the assets of a retirement account/annuity or non-retirement account, respectively. These are just as important to update regularly because these assignments almost always override what you have dictated in your will. Meaning that in the above divorce scenario, even if you had remembered to update your will but had forgotten to change the beneficiary on your IRA, your ex-spouse could receive the entirety of those assets. Both of these assignments cause the assets they dictate to avoid probate unless your estate is listed as the beneficiary. Likewise, if you forget to update your beneficiary on a life insurance policy after a major life event or falling-out, someone could be receiving a substantial windfall after your passing that you may have found less than ideal.

Power of Attorney: Power of attorney, or POA, allows you to designate someone to make decisions about your legal and financial matters if you become incapacitated. If you didn't have a POA in place, your loved ones may have to have a conservator appointed by the probate court in order to manage your affairs. Much like your last will & testament, it is important to review and update this designation as needed. Life happens, and the person you trusted most last year may not be the same as today. You are also able to dictate what powers your POA grants. Imagine the following scenario for a moment: at the last sit-down with your estate attorney, you decide to grant a generic and all-encompassing POA to your cousin with whom you've been close to for many years. This cousin, let's call him Ralph, is close with all his cousins, in fact. After you unexpectedly fall into a coma, Ralph starts gifting assets from your investment accounts to a few other cousins who are in tough financial situations out of sympathy. After all, your POA lacked any specific language on gift-giving and Ralph feels it won't affect your estate all that much. The validity of these gifts may be argued in probate court, but it could become a time-consuming nightmare for you and your family.

Health Care Proxy: A health care proxy is a person you designate to have the ability to make medical decisions on your behalf when you are unable to do so for yourself. Not having a proxy appointed can cost you quite a bit of money as one would need to be sought after in probate court. Plus, they could appoint someone who you might not prefer. Let's imagine the above coma scenario but you didn't have a heath care proxy in place; Ralph gets appointed your proxy as he already has your POA and it makes sense to the court. Not only did this appointment cost you money due to your lack of having a proxy in place, but you may have questions about Ralph's judgement were you not incapacitated based on his gifting of your assets. Is this someone you would have wanted making important decisions about your medical treatment?

Declaration of Homestead: A declaration of homestead is a document filed with the registry of deeds in your county. It provides extra protection for the equity you've built in your home from some lawsuits and creditors. For Massachusetts specific laws regarding homestead, check out the link below.

Estate Planning can be a complex journey. If you're ready to take the next step in securing the future for your legacy and loved ones that's tailored to your individual goals, feel free to contact me. I enjoy going on this journey with my clients and giving them confidence in their affairs. At Dowd Wealth Management, we aim to aggressively ensure fair and ethical treatment of our clients’ interests in each and every circumstance, without exception.

Please Note: The contents of this article are for educational purposes only and should not be considered legal, tax, or financial advice. Everyone's situation is unique to them and you should always consult with your respective professionals before taking action.