Most people understand the general importance of estate planning, but can get murky on the details when it comes to what, exactly, it entails. It’s a common misconception to assume an Estate Plan and a Will are interchangeable. That’s not exactly the case. While a Will is part of an Estate Plan, it’s just one piece of the pie. And all of the pieces are integral to creating a strong, comprehensive Estate Plan.
If you’re focused on dialing in your financial plan, it’s important to make sure you include a strong Estate Plan. There is no such thing as a comprehensive financial plan without an Estate Plan built into it. It’s also something you’ll need to reevaluate every few years as life evolves.
What is Estate Planning, Really?
The technical definition of “Estate Planning” is the ‘management and distribution of financial assets and non-financial considerations in the event of incapacity or an untimely death.’
You are likely going to incorporate Wills, Trusts, Directives, Power of Attorneys (POAs), and Beneficiaries into your estate planning strategy. A truly comprehensive Estate Plan is likely going to involve most, if not, of all those items, working together in unison, to ensure all of your wishes are respected in case tragedy strikes.
When Should You Create an Estate Plan?
There are a number of reasons people shy away from estate planning. You might be a millennial, for example, and don’t consider yourself “at risk” of handing down your assets any time soon. You might be a high earning professional who assumes a Will is comprehensive enough to divvy up your resources. Or, perhaps the word “estate” makes you feel like you need to own an excessive amount of assets like real-estate, for example, to warrant a comprehensive Estate Plan.
As it turns out, everyone should have an Estate Plan, no matter their age or financial status. If you have any financial assets at all—real estate, investment accounts, even a simple savings account—you should build an Estate Plan. But its even more imperative to have an estate plan when things in your life start to get more complicated like getting married, having kids, and building your wealth.
If something were to happen to you and you don’t have an Estate Plan set up, the government will step in and make your decisions for you through a process called probate. It will distribute your assets and determine who your heirs are. Probate can take years—and be very messy—to unfold, and it makes the process public.
What Does a Strong Estate Plan Look Like?
A strong Estate Plan ensures that your wishes are followed, it can reduce uncertainty for loved ones, can minimize taxes on your wealth, and can mitigate legal issues and challenges.
Starting young will actually benefit you in the long run because you can build your Estate Plan from the ground level. As life evolves and you begin to amass more wealth, updating your plan will be far easier than starting from scratch once you hit your financial goals and things get more complicated.
At Four Points Wealth Management, we are used to working with young wealth creators who are on their way to becoming future multi-millionaires. Even though untimely death or incapacitation is unlikely, their financial plans benefit immensely when they consider all the elements of estate planning.
The 4 Essentials of a Strong Estate Plan:
1. Ensuring Your Wishes are Followed
You really don’t want any confusion when it comes to this. If you have children, you have the right to be crystal clear about how they’ll be taken care of if something were to happen to you. If you have financial assets, you get to decide who inherits them.
This is often done through a Will or Directive, as well as Power of Attorney. Inside of a Will, you can map out exactly what you want for those who outlive you.
If you’re a parent, you can choose who will take care of your children, what faith they’ll be raised under, where you want them to attend school, which assets you leave to them, and other wishes you have for them.
This is where you really get to consider your values. My wife and I used our Will to ensure the people who will take care of our kids, in a worst case scenario, are in alignment with our values and parenting styles. The last thing we want is to upset our children’s lives any more than those tragic circumstances already would.
2. Reducing Uncertainty
Estate Plans aren’t used only in the case of death. They’re also used in the case of an incapacitation of some sort. That includes situations where you might not be able to verbalize your wishes, but are still alive. And this can create a whole slough of uncertainty.
With a strong Estate Plan, you can mitigate that uncertainty by laying out what you want in a variety of unlikely situations. This could be by way of health directives. If you’re not in a position to make a medical decision for yourself, you can lay out your wishes ahead of time. If you ever had to be put on a ventilator, is that a choice you’d refuse if you could? Would you prefer a non-resuscitation clause? And if you don’t survive a medical emergency, would you want your organs to be donated to save another person’s life?
These are decisions that will be made by others if you don’t outline what you want ahead of time. And, for obvious reasons, they’re incredibly emotional. It’s extremely helpful for those closest to you if you’ve thought it through ahead of time.
3. Minimizing Taxes on Your Wealth
This is where I think a lot of people prefer to focus their attention. People care, of course, about the financial aspects of their Estate Plan. That makes sense. And it’s important to note that this piece of an Estate Plan isn’t just for the ultra-wealthy who are above the estate tax threshold.
Regardless of your financial status, having the right trust and life insurance in place has a major impact on your taxes, in case of death or incapacitation.
This might also mean taking care of how you’re naming your properties. I have a client who, many years ago, when the estate tax rules were a little different, put all of his real-estate into an S-Corp. While an S-Corp can be really great and provide a lot of benefits, there are some downsides to it as it relates to passing down assets. So today, we’re working through the process of potentially unwinding these past decisions.
A strong Estate Plan will take these kinds of considerations into account. Do you have any assets that have a large financial gain embedded into them? You want to do your best to pay attention to the areas of your life that are likely to be targeted by estate taxes—even if not directly linked—and try to get a step ahead of it. This is also where having a CERTIFIED FINANCIAL PLANNER® on your team is helpful. Fiduciary advisors can spot these issues much faster than the average person.
4. Mitigating Legal Issues and Challenges
This one falls into the health camp, but it’s an inevitable reality that your body will eventually need extra care. It’s a medical advancement paradox: we live longer, but we’re not necessarily declining any slower. This is often referred to as ‘lifespan vs. healthspan.’ If you want to dive into this deeper, I highly recommend reading the book, Outlive: The Science and Art of Longevity by Peter Attia, MD.
Ultimately, though humans are living longer, they are more likely to require long-term care, also called custodial care, toward the end of their lives. This can be home-based or in a residential living environment. Insurance companies define a need for long-term care when a person cannot accomplish two of the six essential daily tasks of living. We’re talking about activities like using the bathroom, eating, dressing, or transitioning out of a chair.
It may not be the retirement lifestyle you’re dreaming about, but ideally you’ll have plenty of time during your “go-go years” to adventure before needing long-term care.
Regardless, you’ll need to decide whether you want to self-fund that long-term care or consider insurance.
You’ve likely witnessed the elder generation in your life as they decline. It’s not always physical. Often, it’s cognitive. If you were in that position, what would you want your care to look like?
This is a tricky one because it’s often an unknown expense. But as long as you’re having these conversations and thinking about it for yourself, you can plan around it.
A Strong Relationship Between Financial Planner and Attorney is Major Bonus
Here at Four Points Wealth Management, we have strong relationships with a number of Estate Planning attorneys. It’s important to us that we make sure we know who those individuals are.
An Estate Planning Attorney might look at something a little differently than I would, considering they are looking at it from a legal perspective and I am looking at it from a financial perspective. Having both vantage points on your side, working together in tandem, ensures you’re covered from all angles.
In Short: Make Estate Planning a Priority
It might not sound like fun, but a strong Estate Plan is the only way to ensure your assets and end-of-life wishes run smoothly when you’re not around to delegate. It’s a major player in your comprehensive financial planning process. You’ll not only be gifted with peace-of-mind, but it will also help you sharpen your understanding of your financial (even personal) values. Another benefit? It can help you hone your financial planning goals. You might realize your targets change based on how you want things to run in case of your absence.
If you’re in the Denver, Colorado area and looking to dial-in your Estate Plan, a CFP® professional at Four Points Wealth Management would be happy to ensure your best laid plans actually go to plan. It’s an incredible feeling to know your finances are in order. We love to help our clients experience that sense of financial confidence and freedom they deserve.
Four Points Wealth Management
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