Estate planning: a vital part of your financial plan

Roshani Pandey is a financial advisor and founder of True Root Financial. True Root Financial is located in San Francisco, CA and serves clients across the globe.

Meet Linda. She has a husband and two children. Besides taking care of her family physically, she also wants to make sure that they are financially secure should something happen to her. Over a conversation with her financial planner, Linda learns that an important part of her overall financial planning is estate planning.

Believe it or not, everyone has an estate. It is what you leave behind when you pass away. This may include your homes, investment accounts, family business, etc. Estate planning is how those assets pass to your heirs should something happen to you. 

The foundational estate planning documents

There are four foundational documents that typically all estate plans include. If you have a business or a larger and more complex estate, you may need additional planning. This is where trust planning merges with tax planning. An experienced financial advisor can craft the trust and tax plan and work with the right attorney for you.

Here are the four foundational estate planning documents to start with: 

1. Durable Financial Power Of Attorney

A durable financial power of attorney allows you to appoint someone to take over your finances in case you are incapacitated and unable to make financial decisions.

The person you grant it to (your “agent” or “attorney-in-fact”) will be able to make financial decisions on your behalf such as paying your bills, depositing your checks and also making decisions over your investment accounts. Needless to say, this person needs to be someone you trust as well as someone with sound judgment.

If you don’t make this document beforehand, your loved ones may need to go to court to get the authority to act on your behalf.

2. Advance Healthcare Directive

An advance healthcare directive is a set of instructions regarding your healthcare wishes for your treatment in case you are incapacitated as a result of an accident or a disease. It can also serve as a way for you to express your wishes for end-of-life care. To make your wishes clear, it has two parts to it:

• A living Will

A living will states your health care desires for how you want to be treated should you be incapacitated and no longer able to make healthcare choices.

• A Durable Healthcare Power Of Attorney

A durable healthcare power of attorney appoints someone to carry out your healthcare wishes, when you’re unable to do so.

3. Will

A will allows you to decide where and how your assets are transferred upon death. One of the most important and useful stipulations in a will is appointing a guardian for your minor children should something happen to you.

A will can be a vital part of your estate plan but depending on your circumstance, it may not always be necessary. If you decide to leave a will, it needs to be written properly to be effective. Hence, an important first step is talking to an attorney who is licensed to practice in your state. The attorney can walk you through your options and help you craft a sound will.

4. Living Trust

Like a will, a living trust also allows you to decide where and how your assets are transferred upon death. But, a trust gives you even more flexibility in doing so and it also has many advantages. One of the biggest advantages of a living trust is that it avoids the probate court.

Normally, upon a person’s death, their will goes through the probate court, where the court validates the will and starts a procedure to pay off creditors and pass the assets to the rightful owners. Depending on the state and the complexity of the assets, this can be a lengthy and costly process. On the other hand, if a person dies with a living trust, the estate passes to the beneficiaries in the trust without having to go through a probate court.

A living trust also provides privacy because the content of a will is a matter of public record, whereas that of a living trust is private. Additionally, for individuals with a large and complex estate, a living trust may serve as a part of a bigger tax and estate plan. However, a living trust is more costly to set up and there are a number of steps to take to make sure that it is effective.

Correct asset titles

Just having a will or a trust is not enough. You also need to make sure your assets such as homes, and investment accounts are titled accordingly. The title determines if the assets follow the wishes of your will or trust or just the title itself. Here are some examples:

Home

A home’s title describes who has ownership of it. If you have a living trust, the trust needs to be the titled owner. This is to ensure that the home passes to your heirs according to the instructions of your trust. If your home is titled in your individual name, then it will pass according to the instructions of your will.

If you and your spouse jointly own the home and if it is titled as joint tenancy with rights of survivorship, it automatically goes to your spouse, should something happen to you. In community property states such as California, community property with rights of survivorship serves the same purpose. It ensures that the home automatically passes to your spouse, should something happen to you.

If your home isn’t titled appropriately, don’t worry! You can always re-title.

Re-titling a home requires you to change the title on the deed. To do this, you will typically need to contact the county and fill out a form.

Investment Accounts

Similarly, the title of your investment account dictates its ownership. Again, if you have a living trust, the trust should be the titled owner of the account. If you want to pass it outright to your spouse, then joint tenancy with rights of survivorship means that it will pass to your spouse.

Changing the titling of your investment accounts is easy. Ask your financial advisor or the custodian where you keep your assets what forms they need to make the change.

Vehicles

Similarly, the titling of your vehicle should also reflect your trust or will if you have one. In some states, if you simply want it to pass it directly to someone upon death, you can register it to transfer upon death to that person.

Beneficiary Designation

Certain accounts such as life insurance or retirement where the account provides a payout after death, the beneficiary designation determines who gets the payout.

To make sure your payouts go to the right place, make sure you’ve listed the right beneficiary on the following assets:

• Life insurance policies
• Retirement accounts like your 401(K) or IRA

Next steps for you

Estate planning decisions can feel heavy and complex. But don’t let that delay you from getting started on this important guardrail. Your estate plan is not set in stone; it can change as time passes and as your circumstances change.

At True Root Financial, helping our clients with their estate plan is a vital part of the financial planning process. If you would like to know more about how we do this, please book an introductory call below: