Estate Planning—Leaving Behind a Financial Legacy

February 2016 View more

NMAG0216_Finance_iStock_000020683765_Large_800pxWe’re used to controlling every aspect of our financial lives, from how much we contribute into our 401k to our kids’ allowances.

Imagine, then, the chaos that could result if we’re no longer in the picture and a court-appointed advisor is deciding what happens to our assets and how much each family member receives.

That’s why experts say estate planning has to be on your long-term planning to-do list, whether you’re a millionaire or a parent living paycheck to paycheck.

“Some believe estate planning is only for the wealthy. Others see no need for it until they reach a certain age. But in truth, it’s wise for everyone to start the estate planning process as early as possible,” said Andy Saeger, senior financial consultant at Charles Schwab in Naperville.

“When there isn’t an estate plan in place, attorneys or state officials can make important decisions on your behalf. For example, the state could decide who will care for your minor children. Without a specified plan, disputes could arise between your loves ones. Taxes and legal fees could eat away at your estate, and distribution of your assets could be delayed at a time when your heirs need them most,” said Saeger.

Important Documents

An estate plan includes planning documents such as wills, trusts and powers of attorney. “The goal is to help protect, preserve and manage your estate at the time of your death or during incapacity,” said Saeger. Unfortunately, multiple surveys have shown half—or fewer—of Americans have completed documents like these.

Preparing an Estate Plan

To prepare an estate plan, work with an experienced estate planning attorney, someone who can discuss your needs and circumstances when making your plan.

A key part of the plan is selecting the estate executor who will settle final affairs including debts, assets and legal documents. The ideal choice is a detail-oriented person who is diligent and persistent according to John W. Lisy, CFA, Vice President—Wealth Management and Senior Portfolio Manager at UBS in Chicago.

“A relative—such as the oldest child—or friend is usually best,” said Lisy. “They should be familiar with the person’s wishes, have a personal stake in the outcome and won’t charge for their services, unlike an attorney or bank.”

Avoiding Probate

“By listing beneficiaries or titling an account into the name of a trust, people can avoid probate,” said Saeger.

Probate is the court procedure for proving a will, paying the bills, and distributing the estate. “Probate can be expensive, time-consuming and frustrating. Probate often runs 2 to 5 percent, even on small estates, and can take nine to 24 months. Probate is also a matter of public record. So, once probate is opened, anyone can examine your file,” said Saeger.

Charitable Gifts

If you’re interested in leaving money to charities in addition to your family, the most common methods are pledges and legal structures.

With a pledge, there is “no contractual agreement, it’s more of a formal intention as part of your legacy,” said Lisy.

Legal structures include a charitable remainder trust, which segregates an amount of assets into a legal trust so some of the money goes to the charity during the donor’s life and the rest when the donor dies. Also, some charities prefer a charitable gift annuity, in which the charity receives the gift and some money comes back to donors for the rest of their lives.

Don’t Set It and Forget It

Once you have a plan, update it regularly. For example, major life changes like divorce and remarriage can cause your original estate plans to go awry.

“Most attorneys recommend that people review their estate plan any time their family changes, their financial status changes or laws change,” Saeger said. “The last few years have seen a lot of change regarding estate taxes.”