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Introduction

Formulate a Financial Plan

Know Your Net Worth

Manage & Minimize Debt

Accumulate Assets

Budget to Live Within Your Means

Understand Investing Basics

Plan for Retirement

Insure People & Property

Deal with Financial Advisors

Review Your Employment Contract

Make Plans for Your Estate

Make Good Decisions

Conclusion

When a person passes away, the default process for disposition of assets is known as probate. Probate is the process of gathering the assets owned by the deceased, paying creditors, distributing the net assets to beneficiaries and reporting all those transactions to a court of law.

The probate process helps heirs to cleanly secure ownership of inherited assets. It also protects creditors. But the process can be expensive and complex. There’s also a loss of privacy as assets disposed of through the probate process are recorded and the records are made available to the public. These downsides can be avoided by having a properly drafted Will, discussed in greater detail below.

As estate related laws continuously change and evolve over time, attorney Michaela Muffoletto recommends completely rewriting estate planning documents at least once every ten years. It’s also important to redraft estate planning documents after major life events such as birth of a child, marriage, divorce, etc. Since estate related laws are state-specific, it’s also necessary to revisit such documents after a move to a different state.  

 

A Will

A Will takes effect upon a person’s death, and serves as an instruction guide for disposition of assets. The existence of a properly executed Will dictates that instead of the default court-governed probate process, a person’s specific wishes will be followed for disposition of any assets that are in that person’s own or sole, name. This applies only to those assets that don’t already have a designated beneficiary.

Assets that already have a beneficiary designated—for example, life insurance and retirement plans such as 401(k), 403(b), and IRAs—don’t need to be specified in the Will to determine their ownership when a person dies. That is, these assets don’t need to go through probate.

 

Trusts

A Trust is a legal arrangement in which property is transferred by a grantor to a trustee. The trustee conserves and manages the transferred property for the benefit of any named beneficiaries. Typically, the grantor is a parent and the beneficiaries are that parent’s spouse and or children. The trustee may be a family member or a professional. Professional trustees must be paid.

Trust-related laws are state-specific and can be quite complex. If constructed improperly, some or all of a Trust’s intended benefits may not hold up legally. Seek competent legal advice when drafting Trust documents. 

While prices differ across states and depend on the complexity of each Trust, a ballpark figure is that a basic Trust is likely to cost somewhere between $3,000 to $5,000 to set up. Thereafter, ongoing annual costs may apply, including annual payments to the trustees who oversee the operation of the Trust and accountants who file annual tax returns on behalf of the Trust. In most states, it’s typical to appoint a family member as trustee, often without any payment. Annual tax filing for basic Trusts usually costs less than $1,000.

 

Revocable Trust

A Revocable Trust is one which the grantor may access and change over time. That is, the grantor can revoke earlier instructions and replace them with new ones. A Revocable Trust (or Living Trust) avoids the probate process and its related costs but the assets in the Trust are included in the grantor’s estate and will be subject to federal tax. In some ways a Revocable Trust is effectively a Will substitute: a private instruction book for disposition of assets. The Trust holds all properly titled assets and provides instructions for their disposition. These details are not made public.

 

Irrevocable Trust

Assets transferred into an Irrevocable Trust, as the name implies, cannot be withdrawn by the grantor. Once the grantor transfers assets into this type of Trust, she generally loses control over them. The loss of control has an upside, in more favorable tax treatment. Since the assets are no longer under the grantor’s control, they’re not included in the grantor’s estate upon death. This can be used to reduce income and estate taxes and to protect assets from creditors.

 

Pour-Over Will

A Pour-over Will, in conjunction with a previously prepared Revocable Trust, puts all relevant assets into the Trust upon death. To avoid probate on any of these assets, however, it’s necessary, in advance of death, to re-title them. That is, to assign the title or ownership of those assets to the Trust. The Revocable Trust ends up holding all properly titled assets. Any assets that were not properly re-titled to the Trust in advance are still passed on to the Trust as stated in the Will, but they don’t avoid probate, and they are publicly recorded.

 

Testamentary Trust

A Testamentary Trust is usually made within a Will (note the connection to the full expression: Last Will and Testament). The Trust is typically created to hold assets for minors and specifies when and how much of the underlying assets may be distributed. Those triggers are often age based.

The Testamentary Trust comes into being upon the death of the grantor. The grantor is the person whose assets are being disposed of in the Will.

 

Advance Health Care Directive

Living Will and Health Care Agent Designations are separate legal documents. They are sometimes combined into an Advance Health Care Directive.

The Living Will contains instructions for end of life decisions—which apply prior to death. For example, what type of care should be provided to you, and under what circumstances should certain medical procedures be attempted or not attempted. The Living Will should not be confused with a Will, which governs what will happen to assets after death.  

The Health Care Agent Designation (HCAD) designates a person who is authorized to make decisions on your behalf. This agent is usually a spouse or adult child.

The designated Agent is expected to follow any instructions you provided, but may also be granted the authority to change your choices. The point for this power is that circumstances may change and it can be important for the agent to have the flexibility to make decisions you could not have anticipated in your original instructions.

In some states the Living Will and Health Care Agent Designation may be combined into a single document, referred to as an Advance Health Care Directive (AHCD).

An AHCD avoids a situation of guardianship by the public legal system over a person (we’re assuming that person is you). It’s much better to have these important decisions made by a trusted and loving relative or friend rather than the rigid, public, and expensive court system.

 

Financial Power of Attorney

Even if you’re no longer competent to make financial decisions, there are still bills to be paid and investment decisions to be made. The Financial Power of Attorney (FPOA) allows a designated person, sometimes referred to as an “agent,” to initiate banking and other financial transactions on behalf of the incompetent person.

The FPOA avoids a situation of guardianship by the public legal system over property (we’re assuming that property is yours). It’s generally better to have family or a trusted friend making financial decisions rather than these being controlled through public and costly court proceedings.


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