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Estate Planning

Estate Planning

March 10, 2020

Did you know that nearly every adult has an estate? To understand estate planning you first need to know what “estate” means. Your estate is made up of everything you own. Your estate includes your car, home, checking and savings accounts, investments, insurance, furniture, and personal possessions. No matter the size and value of the assets that make up your estate all estates have one thing in common - you can’t take them with you when you pass on from this life.

A lot of people have the misperception that estate planning is only for the wealthy. They think the only thing necessary is a will. Your will is apart of your estate plan, but an estate plan does much more than a will.

An estate plan does a lot of things, but perhaps most importantly it gives you peace of mind. It ensures that your wishes will be fulfilled after death, and those you care about will be protected.

What Estate Planning Means?

Estate planning is essentially an economic process that involves leaving behind a list of instructions for your family, advisors, and network. It spells out what you want after your death. But an estate plan is not just an ordinary list of instructions. It’s more like a list that is structured in a specific way and considered to be legal documents.

Even more, your estate plan is a plan for your family’s future. If you’re just starting out and have young children perhaps you want to make sure that your kids can continue to live and grow in the house you purchased. Many things can end life early. Your estate plan keeps money allocated toward the home’s debt so your family can continue living there.

Maybe you want to ensure your kids have enough money to go to college. If that’s an objective you’ll need to include some sort of financial resources that will pay their tuition.

Estate planning means not only having your wishes carried out after death but having plans in place to ensure your financial resources and goals are in alignment to make it happen.

How Much Does it Cost to do Estate Planning?

As every lawyer once said, “It depends.”

This is true, it does depend, but there is a general range. For example, in California estate planning that includes your will, power of attorney documents, and a living trust can range anywhere from $2,000 to $4,000.

Estate planning can certainly get much more expensive depending on the complexity and size of your estate. The cost of your estate plan will vary depending on the documents you need and the complexity of each document.

Another factor that determines the cost is what you want the estate plan to do once it’s created. If it doesn’t have a lot of moving parts that need continual adjustments and updates then it will cost less.

  1. Young Couple Estate Planning Example A young couple with average wealth and small children will need an estate plan that focuses on guardianship and maximizing financial security. A plan like this requires straightforward documents like a will, appointment of guardianship, and basic living trust.
  2. Wealthy Individual Estate Planning Example To contrast with the above example, a wealthy individual with children from multiple relationships will need a plan that focuses on wealth management and legacy planning. It will also pay careful attention to family dynamics. An estate plan like this requires more skill in strategic planning and document drafting. It may involve multiple types of trusts, powers of appointment, and powers of attorney.

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What is the Difference Between a Will and Estate Planning?

A will is one of the legal documents in your estate plan that identifies the important people in your estate plan. Your will may identify administrators or people who are going to come in and act on your behalf. They will distribute assets in the event that you’re not here to do it. Your will not only identifies beneficiaries, but it spells out what you’d like them to receive.

A will is simply a component of your estate plan. A good analogy would be comparing a blueprint to a building. The estate planning is the completed building in this case.

What Documents are Needed for Estate Planning?

The documents you’ll need for estate planning depends on the complexity of your estate plan. However, even the most straightforward estate plan will require similar documents.

  • Last Will and Testament - This document ultimately gives you the power to decide what is in the best interest of your minor children after death, what will happen to your assets, and will name an executor - a person in charge of following your directions.
  • Revocable Living Trust - This document is a great tool for passing assets to heirs while avoiding the potentially expensive and time-consuming probate process.
  • Beneficiary Designations - Your beneficiary designation documents name the person(s) you want to inherit proceeds from things like life insurance, retirement plans, and bank accounts. They take precedence over instructions in a will.
  • Durable Power of Attorney - This document designates someone who will act on your behalf, financially and legally, in the event that you can’t make decisions.
  • Living Will & Health Care Power of Attorney - This document lets you explain in advance of your death what types of care you do and do not want, in case you can’t communicate it in the future.
  • List of Important Documents - Make sure that your family knows where to find everything. Make a list of documents, including where each one is stored. These documents will include things like:
    • Life insurance policies
    • Bank accounts
    • Annuities
    • Pension or retirement accounts
    • Real estate deeds
    • Stocks, bonds, and mutual funds

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Is it Better to Have a Will or a Trust?

In California, you need to have both a will and a trust. Your will is designed to identify the people that are going to administer what your wishes are. A living trust serves multiple purposes.

Your trust lays out what you want to have happen with the assets that you leave behind. A trust also keeps everything private. If you don’t have a trust in the state of California you have to go through probate in court. Probate is a public process. It’s a court proceeding where your creditors have an opportunity to make a claim against your estate.

In California, a trust helps you and your family avoid the time, costs, and delay of having to go through a legal proceeding to settle your estate.

Will and Estate Planning Checklist

It’s important that your financial advisor or estate attorney verifies that each document in your estate plan does what you expect it to do.

For example, what if you expect all of your money to go to your three kids? Part of that checklist is to go through and verify that in the document there’s a provision that says that those assets are going to get split equally. The checklist is a review process ensuring all the details are correct and will play out once put into the motion.

What is the Difference Between a Living Will and a Living Trust?

Your living will states what you wish to happen in the event of you become incapacitated and can no longer articulate or communicate your wishes. Often a living will comes into play after a severe accident or medical emergency. It ensures you receive the medical treatment you want and relieves the burden from your loved ones. It also helps avoid family conflict. Nobody wants to make the decision to remove a respirator or feeding tube. A living will allows you to make that decision for yourself.

A living trust, on the other hand, controls the distribution of assets. As mentioned above with the example of wanting your estate to be split equally among your three children. But what if your three children have different levels of financial responsibility? Maybe you want to ensure your estate will achieve the maximum benefit for each one despite one’s financial illiteracy. Your living trust can state that one of your kids will not get control until they’re 45, and more mature. Maybe another child will never get control of the assets and the trust will manage the assets on their behalf. These types of nuances are what a living trust can do for you.

What are the Pros and Cons of a Trust?

The biggest benefit of a trust is the ability to keep the settlement of your estate private. It allows you to avoid probate. Keeping it private also comes with the benefit of being less expensive from an administrative standpoint. It also, of course, expedites the process not having to go through a court proceeding.

The cons of a trust in California really come down to the cost of the document itself. The cost could be around $2,000 to draft the document. If you’re a resident of the state of California you need a living trust. Despite the upfront cost, it saves you a lot more in the long term.

What you Should Never Put in Your Will?

The biggest thing to remember here is a will should not be used to spell out the control of your asset distribution. A revocable trust is much preferable. When you do it through your will you’re putting your estate settlement into the hands of the courts. You don’t want to use your will to do what a revocable trust is designed to do.

Who Should Have Trusts?

In the state of California, anybody with more than $150,000 of assets should have a revocable living trust.

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What Should you Put in Your Will?

Your will is to specify the important people that will be involved in your estate planning. For example, you will name an executor. They will be in charge of identifying all of your assets and making sure that your trust and will are followed.

Another critical aspect of your will is guardianship. You need to name guardians for your minor children if you pass before they reach adulthood. If you fail to name guardians for your children in a will, it’s possible they can become wards of the state.

Where is the Best Place to Keep a Will?

Your will is a private document that you may not want everyone to see, but if nobody can find it or see it after you pass then it’s effectively useless. If you want to keep your will in a safe deposit box or a safe that is fine, but just make sure you’ve got copies of your will in the hands of the people that are going to need the document.

Ideally, you will keep your estate planning documents together in a file in a file cabinet in your home and office. You may have your attorney keep it for you. The main thing to remember is that whoever you appoint as your executor should have a copy or they will not be able to fulfill their duty of carrying out your instructions.

Estate Plan Document Review

An estate plan can be described loosely as a living document. Life is full of unexpected changes, and if your estate plan reflects your life it will change when life changes. Your estate plan document review is the process of taking your estate plan out, blowing the dust off, and reading through it to make sure it’s still in alignment with your life goals. Family and businesses change, and your estate plan will sometimes need to be adjusted with those changes.

Your children get older and eventually become ready to inherit assets. Or maybe you went through a divorce. Whatever the case, your estate plan review will identify areas within your plan that need adjustments for personal life changes.

Additionally, your estate plan document review will make sure that your estate plan is in alignment with rule changes with the tax code, which is periodically updated. It’s important that your documents match up with the current tax code to avoid penalties.

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Business Agreement Review - How it Ties into Estate Planning

If you’re a business owner, part of your estate plan may directly involve what happens to your business asset. Your business asset may not go to the same people that the bulk of your assets in your estate plan goes to.

For example, if you have a business partner, the terms you both agreed upon when you formed the business may say that the surviving partner will buy out the deceased’s half of the business. In this case, if you’re leaving your entire estate to your children, your business partner may not want to be business partners with your minor children in the event of your death. So, business documents often go hand in hand with estate planning documents and need to be coordinated and maintained.

The goal of the business agreement review is the same as the estate plan document review. The business owners are taking out the document and making sure everything is up to date and still in alignment with their short term and long term goals.

Buy-Sell Agreement Review

The buy-sell agreement review is a part of the business agreement review. The buy-sell agreement lays out what happens in the event of a death, disability, retirement, or a felony conviction - anything that could break up or affect the principles of a business.

Life Insurance - What Role Does Life Insurance Play in Estate Planning?

Remember, estate planning is an economic process which is about matching resources with objectives and is supported by legal documents. All the documents within your estate plan are there to express your wishes in a legally binding way. But at the end of the day, the big picture goal of estate planning is matching financial resources with objectives as best you can to create the life you want today, and the future you want for your family.

Life insurance serves as the financial cornerstone of an estate plan. When you pass, if there aren’t enough available financial resources to meet your long term vision, then your family can suffer. Life insurance creates a kind of built-in balance sheet to ensure that your financial goals for your family can come to fruition after your death, even if it’s an early passing.

What Does Life Insurance Do in Estate Planning?

Only 59% of Americans have life insurance, and about half of them are underinsured. Life insurance can do a lot more than just pay for funeral expenses. A good life insurance policy can ensure your estate plan meets its objectives in a number of ways.

  • Money for Your Loved Ones - Life insurance provides a sum of money for the people you care about. It can pay off student loans, home mortgages, and pay for your children’s education and care.
  • A Source of Retirement Income - A whole life or universal life insurance policy allows you to use the policy to accumulate cash value, which can be useful if you’ve maxed out your 401(k).
  • Protect Your Business - Life insurance can be used to facilitate the transfer of a business ownership, fund nonqualified retirement plans and keep a business afloat during any transition after the death of an owner or key employee.
  • Leave a Legacy - If you want to leave a meaningful amount of money to the people you love and causes you care about, life insurance policies can help you minimize your tax burden. list of documents, including where each one is stored. These documents will include things like:

Conclusion and Takeaways

If you made it this far you’re probably seriously considering taking action and getting an estate plan in place. Everyone needs an estate plan because everyone has an estate. Keep in mind that estate plans grow and change with your life. Establishing one early cost less than when your financial situation becomes more complex.

But even more importantly it provides a layer of protection and ensures the fruits of your life’s work are distributed to the people you care about the way you want. It also ensures that in the event of a tragedy that takes your life or leaves you incapacitated your wishes will be carried out.

A quick recap….

Terms to Understand

  • Last Will and Testament
  • Executor
  • Revocable Living Trust
  • Living Will & Health Care Power of Attorney
  • Beneficiary Designations
  • Power of Attorney

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