The Checklist of Estate Planning Essentials

Improving the estate plan is a top concern for more people these days for several good reasons. The pandemic showed many peo- ple that delaying estate planning isn’t a good idea. The aging of the Baby Boomers naturally increases the number of people who know it is time to button down their plans.

Also, various proposals to change estate taxes spur discussions of estate planning. There are essential elements that should be in every estate plan and common mistakes to be avoided, regardless of your reasons for creating or updating your plan or the value of your estate. When starting or updating your plan, keep these key points in mind. Review the beneficiary designa- tions.

I put this first because it is over- looked so often. Plus, you can update the designations without involving an attorney. Some assets pass to beneficiaries by con- tract or operation of law. Your will or living trust don’t determine who inherits them.

These assets include IRAs, 401(k)s, pensions, annuities, life insurance, transfer on death accounts and health savings accounts. The assets are in- herited by beneficiaries you named in the contract, account application or beneficiary designation form.

I know it’s important to review and update these designations, because I read a lot of court cases in which the wrong person inherited valuable assets because the owner never changed the beneficiary designation that was made a decade or more earlier. The assets often are inherited by ex-spouses, estranged children or the estates of long-deceased parents or others. In some cases, the list of beneficiaries excludes new children, grandchildren, or others.

Review all your beneficiary designations and up- date them if needed. Know what you own and owe. Another step to take before visiting an estate planner is to compile a current list of what you own and any debts you owe.

You can’t plan an estate until you know what the estate is. It’s amazing how often people who do this exercise realize they own accounts, assets, or property they forgot about. The list isn’t only for you and your estate planner. It’s needed by your estate executor, successor trustee to your living trust and others who will manage your estate. You make the estate administration and settlement process easier, cheaper and faster by giving them a road map to your estate.

They need to know everything you do about what you own and how it can be accessed and managed. An easy way to take this step is to use what is probably my most popular report, To My Heirs: A Book of Final Wishes and Instructions. Find informa- tion at www.RetirementWatch.com by going to the “About Bob Carlson” tab and clicking on “Bob’s Library.” You don’t want to be like W.C. Fields.

The classic story is that he thought banks and the stock market were un- safe. His solution was to deposit small amounts in banks all over the country. Unfortunately, he didn’t give anyone a list of all the accounts and his heirs never were sure they located all the money. The story might be apocryphal, but it makes an important point. Prepare the essential documents and keep them updated.

Your estate plan should, of course, include a will and probably a living trust. But they’re only the beginning. This is where many people fall short and felt the effects during the pandemic. You also need a durable power of at- torney designating one or more people to manage your assets when you can’t, either because you’re in the hospital for an extended stay or have become disabled. After preparing the form, it’s important to contact your financial services providers to be sure they’ll recognize the authority of the agents named in the document.

Another essential document is the advance medical directive or similar document in which you name one or more people who can make medical decisions when cannot do so. Be sure your medical providers have copies. Many states have online registries where you can post these documents so any medical providers can access them easily.

The IRS requires its own power of at- torney form, Form 2848, which is avail- able free on its website. It won’t accept a regular power of attorney document, only its own form properly completed. Social Security also requires you to complete its form designating some- one to manage your benefits when you aren’t able to. See our May 2020 issue for details.

Learn about and plan for probate. A key question is the extent to which you want your assets to avoid probate. Discuss the local probate process with your estate planner to determine how important avoiding probate is to you.

Probate is the legal process through which a will is administered. It ensures debts are paid and legal title to assets is passed to new owners according to the terms of the will and state law. In some states, probate delays the processing of the estate for many months or longer.

It also increases costs and can take a lot of the execu- tor’s time. The advantages of probate are that it verifies legal title to the as- sets and reduces the potential someone will distribute your assets in a way you didn’t intend. Probate is avoided primarily by creating a revocable living trust and transferring most of your assets to it. Assets owned by a living trust don’t go through probate.

They are distributed to beneficiaries according to the terms of the trust. I discuss the other ways to avoid pro- bate, and the pros and cons of them, in the February 2022 issue. Decide how much of your estate should avoid probate and restructure the ownership to meet that goal. Anticipate conflicts and reduce them.

Conflicts among surviving family members and other beneficia- ries are a frequent cause of failed estate plans. Often, the conflicts could have been avoided with some planning. Sometimes the details of the plan cause or exacerbate conflicts.

Try to anticipate potential conflicts. For example, don’t create an estate plan that forces adult children or others to agree or work together if they have trouble doing that now. Consider not naming an adult child as sole executor when one or more of the other kids re- sent that sibling having greater respon- sibility or say than the others.

Be alert for the potential of an individual’s roles to create conflicts. A classic conflict is when a surviving spouse is made trustee, receives in- come from the trust, and the children receive the “trust remainder property” after the spouse dies.

The children can come to believe the spouse is investing for maximum current income at the expense of earning capital gains for their future.

Your estate plan should avoid such built-in conflicts. Choose executors and trustees with care. People will execute your estate plan and, to a large extent, determine its success. Take some care when naming execu- tors and trustees. People selected should be both willing and capable of perform- ing the duties.

They also need to have the time to do the jobs correctly. Some- times a disqualifying factor should be that the person lives too far away from you because the estate will have to be probated in the state where you reside.

Consider appointing multiple people to fill these roles instead of only one. Also, consider if it would be better to name a professional to some of these positions instead of a family member or friend or to split duties. For ideas, see our July 2021 issue.

A good estate planner will be able to talk you through the pros and cons of the different options and determine the best choice based on the details of your estate and your plan. Have a digital asset plan and inven- tory. I’ve mentioned this in the recent past and repeat it for emphasis.

Digital assets are vital elements of many estates. For details, see our April 2022 issue. Don’t forget the personal side. A good estate plan isn’t solely about assets and money and how to distribute them. You’re likely to have some items that are personal and sentimental to you and to other people.

Give careful thought to how these should be distributed among your loved ones. Review our October 2021 issue for some ideas. Also, consider leaving a non-financial legacy. Some people want to leave a few reflective or philosophical thoughts, expressions of love for survivors, person- al instructions, family history or other information.

These can be done in a written state- ment, often known as an ethical will or family love letter, among other titles. Or you might want to use technology to leave an audio or video record. See our Decem- ber 2021 issue for details.

Follow through. Many people realized during the pandemic that they hadn’t paid attention to their estate plans for years, and the plans were badly out of date. A plan needs to be reviewed and reconsid- ered at least every few years and certainly after a life-changing event for you or your family.