Leaving Well #2 - Creating the Plan
In the previous post, I outlined some of the reasons for ensuring you have an estate plan. In this post, I will address how to do it.
Full disclosure - I am not an attorney nor a licensed estate planning professional and would encourage you to find a professional to get your plan created. The notes below are some lessons learned that were helpful to my family as we went through the process of creating a plan.
Note we have also not taken tax into consideration. Federal Estate Taxes currently apply to estates over $12.06m (at time of writing) and so the vast majority of Americans won’t need to take it into account. New Jersey, however, is one of a few states that has an **Inheritance Tax *that you may wish to consult.
Important Notes:
Laws are very state-specific - check your professional is licensed for your state and understands any nuances that might apply to your situation. If you move to another state, check whether you need to update your plans.
Beneficiaries on accounts matter - don’t assume your will will supersede your named beneficiaries. Quite the opposite - if you have named beneficiaries on your accounts (such as life insurance policies, 401k accounts etc), the transfer of the assets to the beneficiaries will happen BEFORE the will.
Your employer may offer free / subsidized legal services, including estate planning.
As part of your will, you will need to name an executor - this is a person responsible for executing the will.
Usually this is a trustworthy and savvy person in your immediate circle; but can also be a professional.
The executor is able to pay him/herself a reasonable cost of doing this so they can be compensated for the role.
I strongly suggest that you talk to them and get their agreement to ensure they have the time and understand what they’re signing up for; and so that you can choose an alternative if your first choice is not able to do it. For example, you may want the person to focus on looking after your children (see below).
If you’re married and you die first, the process is relatively straightforward for your spouse - s/he will get access to the assets and there will be no issue in terms of guardianship for children. (If you have children from previous relationships, I would recommend you consult a professional to talk through what this means for your situation.)
With that, I will recommend you spend the bulk of the planning and discussion time planning for the scenario where you and your spouse die at the same time; leaving dependent surviving children.
Picking a guardian
Aside from an executor, you will name guardian(s) to look after your children. Note the guardian and the executor don't have to be the same person. There may be benefits in them being the same person but there are also circumstances when you may want them to be different people.
For some of you, this will be an easy choice. I’m an only child and my wife’s brother’s family have been close to us and involved in our children’s lives since they were born. My in-laws have children of their own and we trust their values, their lifestyles and, most importantly, their faith and so it was an easy choice to leave our children to them.
For some of you, this may not be an obvious choice either because you feel like you have zero choices; while for others you have too many viable options. How to pick guardians is beyond the scope of this article - but we would be happy to talk through the situation and pray with you as you make it.
How will you distribute money & assets?
There are 2 schools of thought as you think about how much of your assets to give to the guardians of your children.
The first is to pay the chosen guardians’ cost of raising your children until adulthood and leave the rest of the assets to your children when they reach a certain age (which could be 18, 21, college graduation or even older such as 25 or 30).
The second approach is to give most, or all, of the financial assets to the guardians and allow them to make the decision - understanding that your children will essentially be joining their family and so they ought to be trusted at a financial level too.
Much of this will depend on the relative amount of assets between you and the guardian(s) you’ve chosen to look after your children as well as their family situation.
On the one hand - if you’ve chosen your sister and she’s a billionaire that never had kids and wants to pay for your children - you may well be able to set aside everything for your children when they reach a certain age or life stage as a gift to them.
On the other hand, if your sister has children of her own and is living paycheck-to-paycheck, you may well set all of them up for failure if you choose the previous approach. In that scenario, your children will essentially become their cousins’ new siblings but will be considerably richer, inherit a trust fund while your sister’s family struggles financially - this does not make a healthy dynamic to an already difficult situation.
For my family, as mentioned earlier, we have planned for my in-laws to take care of our children should God decide to take us both home first. Although they are doing well with their finances, the reality is we will leave a large amount of assets, including the life insurance policies, relative to their current net worth. We don’t want our children to become clients of their uncle/auntie’s guardianship services - instead we want our children to join their family and set that family up for success and not let finances be a burden; including giving the parents the financial ability to step out of the workplace for a while to focus on the new situation. Therefore we have carved out a relatively small amount for our children to receive at the age of 25; but the rest will be entrusted to the guardians to manage.
As a separate note, don't forget parents / non-children dependents. For my family, knowing that some of our older family members are likely to need help from us, we also ensured that we would leave behind some assets to help them.
Communicate this well ahead of time
Once your estate plan has been decided, I would encourage you to spend some time talking through the plan with all of the parties involved - this includes the individuals that are part of the plan and, just as importantly, the parties that are not part of the plan. That is, if you choose for your sister to look after the children but not your spouse’s brother - I would suggest telling both parties! During the conversation, it would also be worth explaining the financial side of the will and would be a way to demonstrate love and care for them that you have covered all the angles.
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Much of the series so far assumes that you will have life insurance to pass on - stick around for our next post on Life Insurance.
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