What is Estate Planning?
Estate planning can have many uses: it can control the transfer of wealth to those you care about, it can protect assets from creditors and others, it can minimize taxes, it can create some privacy, it can provide you peace of mind, and finally, it can create a legacy for philanthropy.
It is an intensive process that uses various types of documents to secure your assets after your death. In most cases, a Last Will and Testament is one of these documents.
Estate plans provide your family with a more comprehensive understanding of what you would like done in the wake of your death. This can be particularly beneficial if you have had more than one marriage, own a business, want to donate a portion of your assets to charity, or have specific requests regarding various aspects of your health and property. An estate plan can also be beneficial if you are concerned that your requests might be ignored or that your assets will not be given to the correct people
Control and peace of mind are often the two things that stand out when completing their plans. Estate Planning enables you to control how your estate is handled both during your life and after your death. Because of this, the peace of mind that follows is in knowing that you have set things up the way you want them to be and in a way that you think benefits those you love the most.
Two mistakes can significantly impact whom you name as a beneficiary of your assets. By transferring assets outright rather than in trust or failing to coordinate your beneficiary designations between financial accounts and your Will, the likelihood of your estate being distributed according to your intentions decreases dramatically.
One of the most common questions is, “Why does it matter if we give our assets outright to our children versus in trust?” Again, “control” is the key term. With assets placed in a properly established and administered irrevocable trust, the trust protects those assets from outsiders or creditors. The most common threat to these inherited assets in today’s society is a divorcing spouse.
For example, let’s say you leave your child R1 Million outright. Two years, later your child goes through a divorce. That R1Million and all it has grown to can be subject to division in a divorce, effectively cutting your gift in half. However, if you leave R1Million for your child in a trust, the money is protected from the divorcing spouse.
Does leaving money in a trust for your children take away all of THEIR control? Not if you don’t want it to. You can designate the child as their own trustee while the assets are in trust for them. By naming the children as their own trustees, you allow them to control the assets while protecting them from 3rd parties. Doing so does not take away any protections afforded by the trust. Of course, the trust will have to file its own tax return, but that is an issue generally far outweighed by the protection the trust provides.
It’s vitally important to understand how various assets transfer at the death of an individual when making designations within your estate plan. The estate plan and financial accounts must align properly to ensure that your desired outcomes are possible. There are generally three ways assets transfer at death,
- Bequest,
- Contract, and
- Operation of law.
The first type of asset transfer is by bequest. Transfer by bequest means that the transfer of the assets follows what your Last Will and Testament indicates, and the state probate system validates the transfer. For example, if in your Will, you request your assets pass to your spouse upon your death, they would transfer to your spouse after being validated in probate.
However, many assets do not pass through your Will. Assets that pass by contract are assets/accounts with a beneficiary designation: IRAs, retirement plans, pensions, life insurance, bank accounts payable on death (POD), and investment accounts that transfer on death (TOD). These assets avoid probate and pass by the terms of the contract you signed when setting up the account.
The most common mistake we see for assets passing by contract is naming minor children as contingent beneficiaries. If minor children inherit assets, the courts have to set up court-administered trusts for the benefit of the children until they reach the age of majority. While setting up a trust is beneficial, making this mistake removes much of the family’s control in the situation. Additionally, it can be costly and time-consuming to deal with the court until the children reach the age of majority (at a minimum). Simple wording on a beneficiary designation form in coordination with your Will can avoid this issue altogether.
Another way assets can pass outside of your Will is by operation of law. This type of transfer is specific to how assets and accounts are jointly titled, including bank/investment accounts that have joint tenants with right of survivorship (JTWROS) or joint tenants in common (JTIC) designations.
Let’s consider another example. If an elderly single parent has three children and wishes all three children to inherit equally, the parent would put the provision in their Will that all three children inherit the same. But, suppose one child who lives near the elderly parent is the caretaker. For simplicity’s sake, the parent put that child as a joint owner on all the bank accounts, which comprise 33% of the estate. At the death of the parent, that child will take all of the bank assets and 1/3 of the other assets (as outlined in the Will). So, instead of an even 1/3 split between the children, it will be closer to ½, ¼, ¼, which is not the parent’s intention. These situations are much more common than most realize.
Assets passing by operation of law also include an intestate death (death without a will). Intestacy will trigger the law to guide where and to whom assets are distributed .
If you do not control the transfer, then state law will.
Do You Have a Plan for your Digital ‘Estate’?
Just as traditional estate-planning relates to the management and transfer of financial accounts and hard assets, digital estate-planning encompasses your digital possessions, including the tangible digital devices (computers and smartphones), stored data (either on your devices or in the cloud), and online accounts such as Facebook and LinkedIn.
The basic idea is to knit these digital assets in with the rest of your estate plan.
‘The New Reality’
As we’re all spending more and more time pecking at our phone screens and transacting online, digital assets are taking up an increasingly important role in all of our lives.
“The new reality is that our lives are largely digital, and the artefact’s of our digital lives have value, from both sentimental and financial standpoints.
At first blush, making plans to allow your loved ones to gain access to your digital property may not seem like a pressing concern—certainly not on par with issues like who should inherit your financial accounts or look after your minor children. Many digital assets have little or no financial value. But there can be significant value if you know what to look for.
An obvious example of a valuable digital asset would be a manuscript on the PC of a best-selling author. But domain names and advertising from Web pages and blogs may also have financial value.
Downloaded assets such as digital music and book libraries may be worth something, too.
And even if they don’t have monetary value, digital assets may have sentimental worth. If you don’t specifically outline what should happen to such assets when you craft the rest of your estate plan, the implications could be that your wishes are unknown to your heirs and they won’t have access to precious family mementos or important documents.
Logistical Hurdles Abound
Digital estate planning is, in many respects, more complicated than traditional estate planning.
Whereas finding and managing financial and hard assets after a loved one has died or become incapacitated isn’t always straightforward, identifying and gaining access to the digital assets of a loved one is apt to be an even more cumbersome process. Unless the owner of those assets has left specific guidance about the existence and whereabouts of the digital assets, the deceased or disabled individual’s fiduciaries may not even be aware of their existence.
Additionally, those digital assets may not only be password-protected or encrypted, but they may also be covered by data-privacy laws or criminal laws regarding unauthorised access to computer systems and private data. Fiduciaries may be able to unearth passwords and gain access to their loved ones’ online accounts, but they may not be doing so legally.
What is Will Planning?
Will planning can be a relatively simple process that involves creating a last will and testament. Your will can dictate who should take care of your children after your death, who should take over your business if you have one, who receives your assets, and other property-related wishes. Your last will and testament will also require the appointment of an executor, who will be responsible for ensuring that all of the instructions left in your will are followed. Creating a will helps your family avoid disputes over your property and makes legal decisions after your death easier. It can also help save them money, because if no will is left, your family will have to pay attorneys and rely on a public trustee to execute your will properly.
Other things to consider.
To many, will planning and estate planning are one and the same. While the terms may seem interchangeable, they are actually very different processes. Both provide your relatives with instructions about how your property should be handled after your death, but estate planning goes even further to outline your wishes regarding your health, finances, and more, even while you’re living. An estate planning lawyer can help you determine what type of planning you need and can assist you with creating all of the documents necessary for a comprehensive estate plan that will easily and accurately distribute your property and more after your death.
While Wills and Trusts do have a lot of overlap, there are also several differences between the two. Ultimately, both are ways to say who will receive your assets. They just do it in different ways, and each has its own advantages and disadvantages.
One big difference between the two is in how and when they take effect. Wills don’t go into effect until you pass away, whereas a Trust is effective immediately upon signing and funding it.
It may be easier to think of a Will as a “simple” document. Wills allow you to:
- Name guardians for kids and pets
- Designate where your assets go
- Specify final arrangements
While it is an easier process, the simplicity of a Will does come with some drawbacks.
For example, Wills offer somewhat limited control over the distribution of assets. They also most likely have to go through some sort of probate process after you pass away.
A Trust is a bit more complicated, but can provide some great benefits. Trusts:
- Offer greater control over when and how your assets are distributed
- Apply to any assets you hold inside the Trust
- Come in many different forms and types
Keep in mind that after you create a Trust, you also need to fund it by transferring assets to it, making the Trust the owner. This does make Trusts a little more complex to set up, but note that Trusts have one major benefit over Wills. They’re often used to minimize or avoid probate entirely, which is a huge plus for some people. This alone could more than justify the additional complexity of setting up a Trust.
Your estate administrator or executor will be in charge of administering your will when you die. It is important that you select an individual who is responsible and in a good mental state to make decisions.
Don’t immediately assume that your spouse is the best choice. Think about how emotions related to your death will affect this person’s decision-making ability. If you foresee an issue, consider other qualified individuals.
Name the executor and include details of their fees. The executor makes sure your Will is implemented and they are paid a fee for this. Fees can be a set percentage of the estate’s assets, or some other amount.
Professionals will also be up on changes in legislation and income or estate tax laws, which could impact your bequests.
To be on the safe side work with an attorney/lawyer in your Country/Province to determine which tools are best for you and to understand the implications of using different kinds of legal tools to transfer assets, protect yourself, and protect your loved ones.
For some, privacy concerns may be the deciding factor in adding an estate plan to their end-of-life planning. Many of the documents used in an estate plan do not become public record after you die, unlike a will or probate court cases. By avoiding probate, you can save your family time and money while also protecting their privacy and helping ensure that no legal cases will be brought against your Last Will and Testament.
The first session is free.
Getting Started.
The first step on this journey is to create this Peace-of-Mind-List in preparation of drawing up your will / estate plan.
