Half of Americans with children and 41 percent of baby boomers don’t have a will according to a 2012 survey by Rocket Lawyer.
The lack of planning is an epidemic, says Melissa Richey, an executive vice president of sales and marketing at Fragasso Financial Advisors. People aren’t prepared for an untimely death, and they aren’t prepared for their timely death either.
“People need to understand that life is unpredictable. They should not put estate planning off,” she says. “People get caught up in the investment rate of returns and the stock market — none of that means anything if you lose half your money to the government because you died without a will or didn’t plan well and your family suffers.”
Smart Business spoke with Richey about the pieces of your individual estate plan, including looking beyond a will.
What are the basics that you need in your estate plan?
Three pieces to a solid estate plan are the simple will, power of attorney and living will. The power of attorney guides financial decisions and allows somebody to manage financial tasks if you’re incapacitated. A living will is a legal document that provides end of life directives like medical decisions. When emotions are running high, it can be hard for family members to make decisions. Clearly defined documents make it easier.
Why do you think people put planning off?
People often think they are too young. Others don’t think they have the time or money to spend. For some, it’s just not a priority. There are reasons to plan no matter who you are or what your situation is, but it usually takes a triggering event. People taking care of both their children and elderly parents may realize how much needs to be done with their parents’ affairs and they spring into action for their own.
What are the repercussions — financial or otherwise — to poor planning?
If you die intestate, meaning you don’t have a will or any way to transfer your property, the state comes in and says who gets what.
The federal estate tax can go as high as 45 percent if your estate is over $5 million or $10 million as a married couple. A business owner can easily have an estate, including the value of the business and life insurance, over that amount.
In Pennsylvania, there’s a state inheritance tax assessed no matter how large or small your estate is, which you can possibly protect against.
It’s also important to properly designate your accounts. If your will states that your husband gets everything, but your IRA, 401(k) and life insurance beneficiaries are different, that supersedes the will. If you’re going through a life change update all your beneficiaries. It’s easy to do; you just have to fill out the paperwork.
What are some other estate planning tools?
Gifting is something most high net worth people need to consider while they are still alive, because it removes funds from the estate. You can give to charities, your kids or educational accounts for your grandkids.
Trusts can get complicated, but a couple of key ones are charitable remainder trusts (CRUTs) and irrevocable trusts. A CRUT is typically funded with highly appreciated stock. You get a tax deduction for the contribution, the assets transfer to a charity at death where they are not taxed and you can get income for life from the trust.
An irrevocable trust typically is funded with life insurance. For example, you calculate your estate or inheritance tax at $500,000, buy a $500,000 life insurance policy and set up an irrevocable life insurance trust. It pays the tax of your estate, protecting the assets that pass on to heirs or charity. The caveat is that you must be healthy to get the life insurance.
Are trusts only for the wealthy?
Beyond wealth, there are lots of reasons to set up a trust, like family dynamics, special health considerations or multiple properties across state lines. Trusts are great for going into detail about distribution of wealth and property. They also can help you avoid probate, which is public.
How often do you need to update the plan?
Once a year is common, but whatever life throws at you — a divorce, birth of a child or a severe car accident — pause and think about the repercussions on your planning.
Insights Wealth Management is brought to you by Fragasso Financial Advisors