The below content is from episode three of the Foster & Motley podcast, A Conversation about Estate Planning and Financial Accounts with Rachel Rasmussen, MBA, CFA and Dave Nienaber, MBA, CPA, CFP(R).
Let's start by defining estate planning. Most simply, it's planning for a time when you can't make your own financial or healthcare decisions; that could be if you become incapacitated during your lifetime, or the more common thought of an estate plan is that it’s what happens to your assets at death. Together, those two items encompass estate planning.
Specifically here, we're going to be talking about the documents that you need and how they connect with your financial accounts. The documents fall into two main buckets: financial documents and healthcare documents. The financial documents include Durable Power of Attorney, a Will, and a Trust. The healthcare documents consist of a Healthcare Power of Attorney so that someone can consult with medical professionals on your behalf if you can't, and in some cases, a Living Will. In addition to the documents, you need to think about the people that are going to serve as your “helpers” in these documents.
Most people think they're finished when they sign their estate planning documents and we don't blame them! At this point they’ve had to face their own mortality, schedule an appointment with an attorney, pay for the opportunity to go sit with an attorney, review draft documents, sign documents - we all would just want to be able to say, “That's behind me.” But unfortunately, those documents need to get implemented, and what that means is account titling and beneficiary updates. Whether that's a bank account, a brokerage account, your home, or a 401(k), IRA, Roth IRA, life insurance policies, and so on - there are all types of accounts that need to be updated to reflect your estate plans. If there's a single takeaway from this, it's the fact that estate planning documents do not necessarily determine the disposition of assets; titling and beneficiaries trump those documents.
This point can best be captured by a real-life example that a friend experienced when her grandmother had passed away. She had a really small family and her grandmother had always told her that she was the single beneficiary of her estate. So, she took the time to mourn and then thought, “I need to figure this out.” Well, come to find out, her grandma's accounts had a different title than just her grandma's name. They had what's called a transfer on death designation on them that sent the assets to her granddaughter, but also to other relatives. So unfortunately for my friend, she had to learn the hard way that grandma's Trust and Will didn't matter because her brokerage accounts were titled differently. In essence, they weren't coordinated with her estate plans.
We share that example to explain that the flow of assets is driven by titling and beneficiaries. In the above example, the transfer on death instructions on the taxable account superseded the estate planning documents. In the case of retirement assets, beneficiaries drive the asset flow. Non retirement assets are driven by titling (joint, transfer on death, trust, etc.) The last thing that speaks is the Will. It can get more complex than that, but that conversation is better suited for personal consideration. We've all seen the Hollywood movies where they go to the attorney's office and they open up the Will and some people are happy and some are disappointed, but generally speaking, you don't want your Will to be doing the heavy lifting. If your estate plan is being driven by your Will, there's a pretty good chance that you didn't focus on implementation like you should have.
In our experience, people let things fall through the cracks because it's a hard topic to talk about and several of the sub-components of estate planning require some level of agreement. Let's say if a spouse or partner is involved, the couple may have kids and need to determine who will be the guardian of the kids. Sometimes people don't want to face those things and it makes it hard to want to sit down with an estate planning attorney. Our financial planners can help in a few ways:
- First and foremost, by prompting clients with the handful of decisions they should have made before they walk into the office with the attorney and reminding clients to start with their goals in mind. “At your passing, what do you want to have happen to your assets?” Often times couples just need the space to have those difficult conversations and it can certainly be awkward in front of a professional, whether that's your financial planner or your attorney. They just need some guidelines on what they should be thinking about, and then we give the client space to have that conversation as a couple.
- Then we encourage them to think about the who: “Who do you want to receive those assets during your lifetime?” “Who do you trust to make important financial and healthcare decisions for you?” For example, the people that you need to identify to help in the areas we mentioned earlier - we call them helpers. If this is done beforehand it goes a long way to making the process somewhat streamlined and a less daunting task. As a note, these helpers do not need to be financial or healthcare experts, someone who is organized and has strong communication skills would be a great choice.
- We often work with the client’s estate planning attorney to identify the items that need to be titled differently, or have beneficiaries updated. We follow up with the client to get those signatures and make sure the changes are implemented to the extent that we can.
- Revisiting the estate plan every few years to make sure that it’s up to date is another critical way we can help. Sometimes these changes are just due to passage of time, other times it might be prompted by something a client shares in a meeting. If there is a new grandchild, or purchase of a second home, these life changes would indicate that it’s time to revisit the estate planning documents. Generally, whenever there's major life events, it's always a good time to take a fresh look at your documents.
We know it’s hard to get your ducks in a row and put estate planning documents in place, but we also know the importance of implementing those plans so your assets go where you want them to at your passing. Contact our team today to get started thinking about your estate plans or to make sure the intentions set in your documents flow through to your assets!
Disclosure: The information discussed and posted, including mention of planning techniques, is for informational and for educational purposes only it is not intended as a recommendation or a substitute for professional financial or legal advice.