The global pandemic has required all of us to adapt to drastically changing circumstances—homeschooling children, worrying about isolated relatives, working from home, and more. It’s also provided a time to reflect on what’s important and most meaningful in our lives, as we shared in a recent “Truepoint Talks” webinar. And, as many of our clients have told us, they’re increasingly concerned about financial security, including how their financial plans are connected to their end-of-life wishes.
Estate planning is a critical part of Truepoint’s integrated approach, and while it is often a tough topic to broach, we find that building an estate plan, complete with all the essential legal documents, can provide peace of mind. In today’s challenging times, when we are facing not only economic trials, but also a major healthcare crisis, it’s important to ensure you have a well-structured plan, regardless of the amount of assets you have. In this piece, we’ll walk you through the foundational pieces of a solid plan.
Creating Advance Directives
A critical component of any estate plan is stipulating what happens when you can no longer make decisions for yourself. In most states, once you reach the age of 18, the only person who can legally make financial and healthcare decisions for you is you.
Advance directives allow you to appoint an agent to make important financial and healthcare decisions on your behalf. Without these directives, family members will need to obtain a court-ordered guardianship, which can be a time-consuming and expensive process—one you don’t want your family to endure at any time, let alone during an emergency. The following documents allow you to avoid such difficulties:
- Financial Power of Attorney (FPOA): Gives an agent the authority to oversee your financial affairs and to protect your property by acting on your behalf. The FPOA gives the agent the ability to pay bills, write checks, make deposits, sell or purchase assets, or sign any tax returns.
- Healthcare Power of Attorney (HCPOA): Gives an agent the authority to make healthcare decisions for you should you become incompetent or incapacitated.
- Living Will: Allows you to specify what end-of-life treatment you do or don’t want to receive in the event you are unable to communicate your wishes. Without a living will, the decision to remove life support is left in the hands of your healthcare agent or family members, which can be a very emotional decision. A living will allows you to outline your wishes and take that decision out of your family members’ hands.
Please note—this advice is equally as important for kids over the age of 18, as they need their own set of documents as well!
Establishing a Last Will and Testament
It’s also important to ensure your assets pass to your beneficiaries, such as a surviving spouse or children. A last will and testament allows you to achieve many objectives related to this, including:
- Direct distribution of your property at the time of your death. Without a will, there is no direction as to how to distribute your assets, and a default allocation statute will be applied. Such statutes are state-specific, may direct assets to relatives whom you don’t want to benefit, and don’t allow for bequests to charity.
- The appointment of an executor, who will oversee the distribution of your assets. Without a will, a court will decide who is the best person to oversee the administration.
- The appointment of a guardian to care for minor children. Without a will, a parent has no ability to recommend to the probate court who should be responsible for raising minor children. In the absence of such guidance, the probate court will appoint a guardian based on what is “in the best interests” of the children.
The bottom line? Without a will, you can lose control over specific areas of life that you have worked hard to maintain and care for.
When to Consider a Trust
Trusts are legal documents that can control the disposition of assets during and after your life. Trusts ensure complete privacy of your assets and allow you to fully control to whom, when, and how much assets are distributed. Whether you need a trust depends on many factors. Our team has years of experience helping clients assess whether a trust is right for them.
Trust Planning for Individuals with Minor Children
Generally, if you have minor children, it is recommended that you have a trust, even if your assets are minimal. If no trust exists, even if you have a will, the probate court will assume oversight of your assets until the child turns 18. As a result, a child’s guardian will often have to file annual accountings with the court to report how the inherited assets are being distributed. This can be expensive, as attorney’s fees and court costs are usually involved. It’s also worth noting that these accountings become public record. Because a trust is private and not under the oversight of the probate court, all of the above is avoided.
If you do not create a trust for your minor children, any guardianship created for them will terminate once they turn 18. At that time, whatever assets are left in the guardianship will be distributed directly to the child. As you might imagine, most 18-year olds are not in a position, both from a knowledge and maturity standpoint, to manage assets, and they could end up wasting or shortchanging their inheritance. With a trust, assets can be kept with a third-party trustee until the child reaches a more mature age. This helps ensure that the assets will be managed appropriately and that your children will have support through more of their life experiences, including college. Once the child reaches the more mature age identified in the trust, they can receive the remaining assets directly, or even better, they can become their own trustee and manage the trust assets themselves.
A trust is especially important for minor or adult children with special needs. In most cases, a beneficiary who has special needs will not qualify for government assistance if they inherit assets outside of a special trust. For this reason, you should use a specific trust structure that will enable your loved one to receive their inheritance and still qualify for government assistance.
A trust can also provide other important safeguards, effectively protecting assets from creditor claims or divorce settlements. In contrast, if a child receives assets directly, those are individually owned and will not receive the same protections.
Trust Planning for Individuals with Complex Estate Tax Issues
It’s important to note that not all states assess an estate tax, which is a tax on the transfer of property after death—Ohio is one of those states. For federal purposes, as of 2020, each person has an $11.58 million exemption against estate taxes. This amount increases each year based on inflation until January 1, 2026, when the estate tax exemption will be cut to $5 million, plus an inflation amount. A trust can help protect your assets from incurring these taxes. Additionally, certain trusts, such as a grantor retained annuity trust or an irrevocable trust, allow you to strategically pass assets to future generations to minimize their tax consequences.
Maintaining Beneficiary Designations
Many people mistakenly believe that if they have the right documents in place, then their loved ones will avoid probate. This is simply not true. To avoid probate, assets need to have beneficiaries, be jointly owned, or be owned by trusts. Because beneficiary designations are contractual agreements with financial institutions, the assets pass outside of your estate documents according to that contract (i.e., the beneficiary designation form). Additionally, by naming your beneficiaries, you help ensure that your assets will be passed on quickly and that your beneficiaries can avoid costs like attorneys’ and court fees. Here are some simple instructions on commonly owned assets:
- Checking/Savings Accounts: Add a “payable on death” beneficiary to these accounts. This can be done by going to the local branch of your bank and asking for a “payable on death” beneficiary form.
- Brokerage Accounts: Add a “transfer on death” beneficiary to these accounts. Most financial institutions will have specific forms for designating such beneficiary.
- Retirement Accounts (IRA, 401k, etc.): Add both primary and contingent beneficiary to these accounts. Most financial institutions allow designations via online portals or a specific form.
- Real Estate: In Ohio, an affidavit can be filed with the recorder to name a beneficiary to own real estate upon a death.
- Motor Vehicles/Boats: Some states allow you to name a “transfer on death” beneficiary to receive these items of property at the time of the owner’s death. If applicable, forms and process can be found on the state’s department of motor vehicles.
While this process requires a little work, once complete, assets will avoid probate and pass to beneficiaries in an expedited way.
It’s Okay to be Overwhelmed!
If you feel overwhelmed or even depressed when considering these issues, you’re not alone! Clients often tell us that they know they should have an estate plan, but they put it off because they fear it’s too difficult or time-consuming to create. Yet, it is typically much less painful than they envision, and our streamlined, step-by-step process makes crafting a plan even easier. What’s more, the peace of mind they feel once their plan is in place leaves them wondering why they didn’t do it sooner.
Consider this critical time as a bit of a wake-up call if you have delayed creating your own plan—or if it needs an update. You and your loved ones will feel more reassured knowing that, even with the current uncertainty, your wishes can be carried out without adding to their burdens.