Estate Planning 101: The Basics

Estate planning can be an overwhelming process. It’s rife with deeply personal issues and designations that can be uncomfortable at best, and wildly divisive at worst. Planning your estate however, is an essential part of a comprehensive retirement plan and overlooking, or putting off addressing it will only make the situation more complicated.

You don’t want to leave your family with unanswered questions or chaos when it comes to your estate. Not having an estate plan leaves the division of your assets to the courts and to your state’s laws of intestacy. We want to remove the mystique of estate planning, answer some basic questions, and help you understand the untold benefits of estate planning. 

What is Estate Planning?

When we talk about your estate, we’re talking about everything that comprises your net worth - land you own, real estate, possessions, financial securities, cash, and any other assets you may own or have a controlling interest in. Additionally, it also delegates authority over any medical, financial and legal directives you may have if you become incapacitated. 

Estate planning refers to the management of your estate after you have passed away, and includes how and to whom your assets are distributed. One might believe that with all the movies and television shows built around inheritance, we might all understand how important it can be to have a plan for what happens to our material lives; however, one study reports only 42% of adults have even one estate planning document like a will or living trust. For those who have children under the age of 18, the number drops to 35%. If that’s you, what’s holding you back?

Maybe you think estate planning is only for the very wealthy – those with multiple properties and a jet, perhaps. Many of us don’t think our estates are large enough to warrant an estate plan, and we’re wrong. Just because you think a situation will work out fine – splitting your estate between your four children, for instance – doesn’t mean it will - especially if you’re not around to give direction. 

Aretha Franklin’s estate ran into this exact issue when she passed in 2018. The legendary soul singer had a multi-million dollar estate at the time of her death, but no will officially filed with her attorneys, the general assumption being she had planned to split the estate evenly between her four sons. However, a year after her death, two hand-written documents (one found in sofa cushions) seemingly invalidated that claim, and started an inter-family fight. Even as recently as March 2021, new evidence was presented introducing a potential third will that laid out an entirely different plan than the two others.

For those who do consider an estate plan, they may feel that the time to establish one is when they’re older, well into retirement – but that’s far from ideal.

Take former Zappos CEO Tony Hsieh. Hsieh was a Harvard grad, and tech guru who founded his first company just after graduating from college, and later sold it to Microsoft for some $265 million. He retired in 2020 at 46, after generating a net worth totaling around $840 million. Mere months after retiring however, Hsieh died due to complications of injuries sustained in a house fire. He died intestate, or, without a will. In the months after his death, his family stepped in to help sort through the issues, but in 2021, claims against the estate totaled some $93 million.

That may sound like an extreme scenario, but similar situations happen all the time. In one case, a man was preceded in death by his wife, but because he had not updated his will after her death, when he passed, his estate went to his beneficiary’s (still his deceased wife) next of kin including a woman living in another country and his wife’s estranged daughter, both strangers to him.

When should you start the Estate Planning Process? 

A recent study by Caring.com found that in 2021, 18 to 34 year-olds will be more likely to have a will than 35 to 54 year-olds, and middle- and older- aged adults are less likely to have a will now than they were just one year ago. The importance of this can not be overstated, this is the first time those demographics have been weighted toward youth, and some experts point to how seriously each demographic understood the Covid-19 pandemic. But the best time to plan your estate? Any time. 

Who is involved in Estate Planning?

When you’re ready to start planning your estate, who comes to the table and where do you go? If you’ve already created a financial plan, an estate plan is part of that overall process so a certified financial planner is critical in the process.

For some, it may make sense to turn to an Estate Attorney. These lawyers work in tandem with your financial planner, and are specifically dedicated to drafting living wills and mitigating any potential estate taxes (hopefully) long before your passing. Additionally, they can draft powers of attorney (POAs), avoid conservatorship, help appoint guardianship, sort through and manage complicated estates, and most importantly, make sure your plans for your estate will hold up in court.

You’ll want to appoint an executor, or the person who will administer your estate once you pass. Who you name as executor of your estate is, arguably, the most important person in the entire estate planning process. They can honor your wishes or destroy what you’ve built so, to choose wisely isn’t just sage advice, it’s everything. Sometimes this role is shared – it is common for parents to appoint one or several of their children as co-executors; it’s also common for estate attorneys to serve this role as well. Whomever you choose however, understand that this person will bear the burden of responsibility to execute your plan as you have laid out. 

What goes into creating an Estate Plan? 

It depends. If you’re creating a broad estate plan, it will require a fair amount of paperwork including all of your financials and tax documents. The more layered your estate is -- and that’s not necessarily a bad thing -- the more complicated an estate plan can be. Generally, there are four main parts, sometimes called “the big four”:

1. A Last Will and Testament 

This is the most common estate planning document, and lays out what you want to happen to your assets upon your death. We refer to this generally as a “document” but in the wake of Covid-19 pandemic (in which there was a significant uptick in those interested in preparing these documents) there has been a rise in video submissions. These documents lay out how and when beneficiaries will receive their inheritance, as well as establish who the executor(s) will be. 

2. A document granting an executor Power of Attorney

The executor of your estate will need your Power of Attorney to make decisions on your behalf. There are different kinds of POAs, so it’s important to be specific when you’re making this designation. An executor is entrusted with four major functions: to gather and keep safe all relevant assets until they’re given to their beneficiaries; pay all debts of the decedent including funeral expenses, and any estate administration fees; handle all tax matters including filing the decedent’s final tax returns; and distributing all other assets specifically named in the will. 

3. An advanced medical directive

Also known as a living will that will designate someone with your healthcare power of attorney or HCPA. This directive allows you to empower another person to make medical decisions on your behalf. If at any point in your life, you suffer a medical emergency and cannot communicate your wishes, this person will make those decisions for you, ideally, previously communicated by you. 

4. Revocable living trust

A living trust is so-called because it is created when the owner, or trustor, is still alive and revocable in that it can be changed (a will, in contrast, only goes into effect once the owner has passed away). It is sometimes considered an either/or -- either you have a will, or you have a trust. That’s not a hard and fast rule, and it’s possible to have both. They operate similarly, but whereas a will must go through probate (the legal process that gives recognition to the will and hears objections), a trust does not. It can help streamline the inheritance process, but you’ll also tend to pay more for the pleasure. 

How is an Estate Plan executed? 

An estate plan is generally executed by filing the will and testament with the probate court, which will review the will and swear-in the named executor, thus giving them the go-ahead to begin performing their functions. The executor will file a public notice, and begin paying any debts – this is where having a financial plan in place will make the process easier on your friends, family, and the executor if they are neither. After distributing the assets as laid out in the will, the executor will close the estate. 

How often should someone revisit an estate plan?

Like any part of your financial plan, you want to revisit your estate plan when you experience major life changes or invest or acquire real estate or anything else that might be considered an asset. This can include anything from marriage, divorce, birth of a child, when you buy or sell land and property, and if you or a beneficiary are diagnosed with a chronic illness. If you move out of state -- it’s especially important to revisit your estate plan because estates are governed by the laws in the particular state you’re in, or that it was filed in.

Generally, experts suggest revisiting your estate plan every 3-5 years.

Navigate the Challenges of Estate Planning with Professionals

At Fullerton Financial Planning, our goal is to help you enjoy your retirement with confidence, not worrying about whether or not you have enough money to enjoy it. Our certified fiduciaries and experienced investment advisors have decades of combined experience helping people find answers to difficult financial questions. Sit down with a Fullerton Financial Advisor today to discover if you are on the right track for your retirement goals. 

We understand how important your financial future is to you and your family; we also understand how difficult making these plans can be. Incorporating an estate plan into your overall retirement vision can be challenging to tackle on your own, especially with such personal and complicated subjects. When you schedule a call with Fullerton Financial Planning, we’ll help you develop an all-inclusive plan that checks all the boxes and lets you sleep better at night.

 Don’t leave your financial future to chance. Let us help you create a personalized plan so you can enjoy the retirement you’ve worked so long and hard for.