As shocked as the world felt when we heard the news that Prince passed away, those of us in the financial planning world felt even more surprised when additional details followed. The enormously successful and talented artist left behind massive wealth, but no estate plan. And with his estate anticipated to be valued between $300 and $800 million, there are quite a number of interested parties, including the Internal Revenue Service.
We see this same scenario play out over and over again: a wealthy celebrity passes away unexpectedly, and the press and pundits ponder the structure (or lack thereof) to their estate plan. It is not uncommon for the structure of the estate plan to fail to reflect the sophistication or success of the individual who passes away.
[See: 10 Costs You Can Eliminate in Retirement.]
Wealthy celebrities fail to plan for the same reasons as everyone else. Talking about death is not high on the priority list, and it’s also extremely depressing. Many people feel that if you avoid the discussion then you won’t be inviting death into your life. And sometimes it’s difficult to make the tough decisions necessary to develop a plan because family life can be complicated.
Although it’s understandable that you wouldn’t want to spend a lot of time thinking about what would happen if you were to pass away, creating an estate plan remains a critical thing to do — regardless of whether your net worth is princely. Here’s an overview of what you need in your personal financial life to avoid getting caught without an appropriate estate plan.
Beneficiary designations. The majority of your financial assets will be controlled by documents called beneficiary designation forms. Beneficiaries are set up for your retirement assets including employer retirement plans, such as 401(k)s, 403(b)s and 457s, individual retirement accounts, including traditional, SEP, Simple and Roth accounts, and life insurance policies.
Most people are surprised to find out that beneficiary designations are independent of what is listed in your will. They can also be extremely tax efficient if structured properly, especially if you are married and your spouse is the primary beneficiary.
Life insurance. Term life insurance can help you fulfill many of the financial and personal goals you may have for your loved ones, including paying off outstanding debt, replacing your lost income and providing for education goals like university tuition. Since term insurance provides only insurance and nothing else for a specified period of time, the costs can be quite low.
To determine how much protection you need, add up all of your unfunded goals including the replacement of your income and then estimate how long you think it will be before you are financially independent. Once those numbers are determined you can buy a term policy that reflects that total for the specific term of your need.
An easy baseline to consider using is ten times your gross income, and the term of coverage could be until your youngest child has graduated from college. For example, if you make $100,000 per year and your youngest child is two, you would buy $1 million in coverage with a fixed level term of 20 years.
Last will and testament. In the movies, the reading of the will is usually the big juicy plot twist. In reality, most inheritances are much simpler. A will is your legal declaration of who will manage your estate and what your final wishes are for the disbursement of your assets. Below are key planning points to consider:
— Executor/Executrix. This is the person who will be responsible for organizing and administering the process of dispersing your assets and ensuring that all of your debts and obligations are paid.
— Guardianship of minor children. Once you have your first child the will becomes a “must have” to ensure that a plan is in place for who will care for your children.
— Trust. Not everyone needs a trust. A trust can help you to ensure that the health, education, maintenance and support of your minor children is provided for. Sometimes the guardian for your children is great with child rearing but not so skilled with financial matters. A trust will work to ensure that your children get the best of both worlds. A trust can also help provide guidance from beyond the grave on when young adult children should receive assets. You may not want your 19-year-old child to inherit $1 million without guidance or restrictions until they can fully mature to appreciate how important good fiscal decision making is.
[See: 9 Retirement Planning Deadlines You Shouldn’t Overlook.]
Specific gifts and requests. Some people want to spell out who will receive specific possessions. It is important that you step outside of just making sure the financial decisions are made and address the sentimental holdings. There is no guarantee that all parties will be happy, but at a minimum the plan will reflect your ultimate desires.
Health care directives. One of the toughest decisions a person can make is what a loved one does and does not want done to them medically when they are unable to communicate and express their desires. Medical advancements can help you breathe with a machine and provide nourishment through a feeding tube, but not everyone wants to use them. Your family will have a much easier path of decision making if they know your specific desires. It also can provide tremendous peace of mind if you do not survive. It takes away the regret and pain of second guessing final decisions.
Where to go to set up an estate plan. While many people avoid the estate planning conversation because it feels morbid, you might also put this off because of the expense. Don’t let that hold you up. There are a few do-it-yourself options that you can explore, including WillMaker software from Nolo.com (which costs $55) or services like LegalZoom.com (for $69).
Ideally, you should work with an attorney who specializes in this area to ensure all your bases are covered and your documents will hold up in court if contested for any reason. However, legal professionals can be expensive. Since attorneys are typically paid by the hour, some advance preparation can save you time as well as hundreds of dollars. If you work with an attorney to draft your will and health care directives, here are a few tips that will save you money:
1. Prepare an updated and detailed net worth statement. This will be the overview the attorney will need to help you determine the appropriate structure of your estate. The key data that will be shared includes who owns what, what the assets are, where they are located, what property needs to be considered and how to address outstanding liabilities and debts.
2. Already know who you want to serve as your:
— Executor/Executrix
— Health care decision maker
— Guardians for your children
— Trustees for any trusts that will be created in the will
[See: 10 Retirement Rites of Passage.]
While estate planning and thinking about what happens after you are gone is not generally the most jovial of conversation topics, it is a necessity for those who want to make sure that their financial house is in order and their loved ones are cared for. With a few conversations and some consideration on the front end, you can remove a lot of heartache and turmoil for both yourself and your loved ones later in life and beyond.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, “The Money-Guy Show“.
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