“Despite the benefits of estate planning, it is commonly the elephant in the room that everyone avoids talking about,” says Kenneth Dorsett, the executive vice president of FirstMerit Wealth Management Services.
“There are several reasons for this. Many people don’t want to face a subject that ultimately is about mortality. Others want to avoid stirring up family conflicts or are simply uncomfortable talking about money with their heirs. While the reasons for procrastination are many, the elephant doesn’t go away. Delay or avoidance can prove costly not only from a tax standpoint, but also in unnecessary conflicts, time and confusion among heirs.”
Smart Business spoke with Dorsett about the essentials that everyone should have in their estate plans.
Why is there a need for a well-thought-out estate plan?
With sound estate planning, you can ensure that your estate is distributed according to your wishes. A well-thought-out estate plan allows you to pass your property to whomever you want with as few legal obstacles as possible. Estate planning can maximize the value of your property by reducing or eliminating the impact of estate tax laws. Estate planning is also an opportunity to make arrangements for your children. Without a will, your spouse, children or other heirs could end up with less than you planned, the assets could be poorly managed, your children might not have the guardian you wished, or your estate could end up paying more in taxes and legal fees than necessary.
Can I write my own will?
Although there are many online sites to help you write a legally binding will, my recommendation is to work with your attorney. For one thing, a local attorney can make sure that the will conforms to your state’s laws. A professionally drafted will further ensures against legal challenges and the failure to include important details. Improperly drafted or last-minute, hand-written wills frequently are contested and invalidated in court. If you don’t know what you are doing, the outcome can be much different than you expect. Spending a few hundred dollars more on a professionally drafted will could end up saving your heirs from considerable distress and expense later on.
What should every estate plan have?
There are two powers of attorney you will need: one for financial affairs and one for health care, end-of-life issues and life support. The durable power of attorney allows you to designate a representative, such as your spouse or adult child, to perform certain actions for you should you become ill, incapacitated or otherwise unable to manage your affairs. The representative could pay bills, sell securities or make major financial decisions on your behalf, depending on how broad or narrow you limit the powers. Without a power of attorney, your spouse or other loved one would have to go through the delay and expense of seeking approval from the court to carry out needed financial transactions.
A medical durable power of attorney authorizes your representative to make medical decisions on your behalf, ideally to carry out what you’ve specified in your living will. But talk to that person before appointing them; be sure they understand and are comfortable with your wishes, and will be strong enough to carry them out even though some family members may object.
I also recommend a living will that states your wishes for end-of-life issues. By having these three building blocks in your plan, your heirs will avoid many emotional and financial challenges down the road. The next step is to address estate planning.
What does that involve?
As part of a sound estate planning strategy, many people choose to create trusts to not only reduce estate taxes, but also to help their heirs avoid the delays, expenses and lack of privacy associated with the probate process. Trusts can also be used to control the distribution of your assets after your death.
Another planning tool is the qualified terminal interest property (QTIP) trust. This tool works well in family situations where there is a second marriage and you have assets to protect for your children from a first marriage.
What mistakes do people tend to make in estate planning?
If you are working with an estate planning attorney, most likely the important areas are going to be properly addressed, including the impact of pending changes in estate taxes. However, I’ve found that many people overlook making arrangements for their personal effects, including jewelry, art work and collectibles. They simply assume that their loved ones will be able to agree on how to divide it all up. In my experience, these things are what people argue over the most.
Not long ago, there was a case involving two brothers who litigated for three years over the ‘stuff’ left in their mom’s house. They ended up spending over $50,000 on attorney’s fees fighting over items that were appraised for only $5,000. To avoid this happening in your family, draft a Memorandum of Understanding and attach it to your will. The Memorandum can be very simple, but it should also be very specific in detailing your wishes. Hold a family meeting to identify what your children want, and incorporate that into the memo.
As your circumstances change and evolve over the years, your plans need to be kept current. Don’t forget about external factors such as tax law changes and fluctuations in the value of real estate.
Few people sit down, annually, and take stock of their estates. But if you do, millions of dollars can be saved and much heartache can be avoided.
Kenneth Dorsett is the executive vice president of FirstMerit Wealth Management Services. He can be reached at (330) 252-8211 or [email protected]
The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice.