MoneyMonday: Estate Planning Basics

Welcome to this session, Estate Planning Basics. I’m Janel Cross, one of your MoneyNav coaches.

If you’ve attended other sessions, you’ve been introduced to the three stages of financial wellness. If this is not familiar, plan to join an Intro to MoneyNav session offered at the beginning of every month. Or look for the Money Milestones course which explores these stages in detail.

This session is considered a Stage 3 course.

Proper estate planning gives you control over important financial and personal decisions. It can help you and your family preserve your legacy and accomplish goals even after you die. Another important thing to note is that estate planning isn’t just for some people. Whether you are working or retired, single or married, wealthy or not, careful estate planning can benefit you and, more importantly perhaps, helps those you may leave behind.

Before we go further, I need to point out that this is not, nor is it intended to be legal advice. Our goal is to provide some “food for thought” and define some key terms but you should consult with an attorney regarding your situation.

Estate planning begins with the preparation of several essential documents, your Last Will and Testament, Living Will, and Power of Attorney. Most attorneys will prepare all three of these documents at the same time. Let’s walk through each one.

Your Last Will and Testament is a document that contains your direction for several key decisions related to handling your affairs and distributing your possessions at death. First, take note that your Will provides direction for accounts that do NOT transfer to a joint owner or by beneficiary designation. For example, your 401k and IRA accounts and life insurance policies have beneficiary designations that direct their distribution. If you have a bank account that is jointly owned by a spouse, the account will transfer to the surviving owner. For everything else, your Will provides the necessary instructions.

There are some key people you need to designate in your Will too. First is the executor. This is the person who will be responsible for carrying out the instructions in your Will. They will need to be appointed in a court process and will then act on your behalf. If you have minor children, you may also designate guardians to care for them in your Will.

Next, your Living Will is a document that spells out medical treatments you would and would not want to be used to keep you alive, as well as your preferences for other medical decisions, such as pain management or organ donation. Note that your Living Will only become active in situations where you cannot speak or decide for yourself. Most often, one or more doctors must certify your conditions before your living will take effect. Think of this document as defining what life-sustaining measures you would like to have taken in the event you have reached a likely permanent state of mental and physical incapacity.

Finally, your Power of Attorney documents grants your designated person or person(s) the ability to act on your behalf. The person given the POA may have either broad or narrow legal authority, depending on how it is spelled out in the POA document, to make legal decisions about your property and finances, medical directives, or both. Some attorneys will prepare a financial and medical power of attorney that allows you to give different authority to different people. Finally, note that the POA is applicable only while you are living but disabled. Upon your death, the executor in your Will steps into a very similar role.

What happens if you don’t have these documents?

First, your Will gives YOU the ability to direct and control the distribution of your responsibilities and possessions after your death. If you do not have a Will when you die, you essentially give control to state law. Dying without a will is referred to as dying “intestate” which means a probate judge will distribute your assets according to the intestate succession laws of your state.

Note: this doesn’t mean your money and things go to the state. It does mean you lose the ability to direct who will receive your money and things.

Also, if you have children, there are many good reasons to prepare your estate documents. Among the most important, however, is to determine who will serve as guardians for your minor children. Without a Will, the judge will determine who will be their guardian.

If you do not have a living will and you become incapacitated, your doctors will turn to your closest family members to make decisions about your care. This can place a heavy burden on family members during a very difficult time and can also cause problems if there is disagreement. There was a very famous case in 1998 highlighting this. A 41-year-old woman fell into an irreversible persistent vegetative state. Her husband and her parents disagreed on her wishes leading to a 7-year court battle which ended only when she died of complications. This could have been avoided if she had indicated her wishes in a Living Will.

Finally, without a Power of Attorney in place, if you are disabled and cannot request financial transactions, your bills may go unpaid. If your disability is prolonged control of your financial management generally reverts to the state. Probate courts will usually appoint a guardian or conservator to oversee the management of your affairs.

I’d like to take a moment to dive a bit deeper into what happens if you die without a will.

Your estate will be settled through probate, a state, legal process to identify the value of what you own and to distribute your assets following your death.

Probate can be time-consuming and expensive. So we recommend you attempt to transfer as much as you can outside of the probate process.

There are some advantages of probate. It provides a consistent legal process for people who die without a will. It determines the validity of your Will and interprets its intent and provides court supervision to ensure your executor is acting according to your Will

But the disadvantages, including fees and expenses which usually range from 3-8% of the value of the probated estate, the time involved, often 6 months to 2 years, and the fact that your “business” becomes public information, are the reasons why we say estate planning is one of the best gifts you can give your loved ones.

But many assets can transfer outside of your Will and are not subject to the probate process if the asset is owned by someone else or if the asset has a beneficiary designation.

Let’s start with joint ownership. If two more persons are listed as owners of an asset, which may include real estate, vehicles, a business, bank accounts, and investments, the type of joint ownership determines how the asset is transferred and whether probate is avoided.

There are different types of joint ownership including Joint with Rights of Survivorship, Joint Tenancy by the Entirety, and Tenants in Common.

While similar, there are differences between these types of ownership

Let’s tackle Joint with Rights of Survivorship first. This type of ownership avoids probate because when two or more people own property as joint tenants, the deceased’s an ownership interest in the property is automatically inherited.

There are some downsides though including potential gift and estate tax liability and the possibility that some heirs who are not listed as joint owners would be excluded from inheritance.

Let’s talk about a few examples.

A common situation for the joint with rights of survivorship ownership is between spouses. If two married persons own an asset that is titled joint with rights of survivorship, they each legally own 100% of the asset. If one of the spouses dies, the other spouse retains 100% ownership of the asset. For example, you might own your home, vehicles, and bank accounts with your spouse. If you have an investment or bank account, be sure those are jointly owned even if one person manages the finances for your household. In my family, my grandfather was the financial manager. When he passed away before my grandmother, we discovered that he had several accounts that he opened in his name only. While this was probably because my grandmother was handicapped and did not get around well, the result was that we had to get her through the probate process when he died which was much more difficult than getting her signature on some forms at the bank.

Another common situation is an aging parent who adds a child or children to their bank account. If a parent owns an asset jointly with survivorship, each of them owns 100% of the asset. Note, that this also means each has 100% authority to manage the asset. While that can make it convenient if a child is managing finances for you, be sure to think through the potential complications. Also, if you have any children NOT included as joint owners, they will be excluded from inheriting that asset.

Let’s tackle Joint with Rights of Survivorship Tenancy by the Entirety next. This somewhat outdated type of joint tenancy is still allowed in some states.  

It is available only to married couples. One advantage is that your residence is protected from the claims of either the husband’s or wife’s creditors (but not protected from joint creditors)

The final joint ownership we will discuss is Tenants in Common. When two or more people own property as tenants in common, the deceased’s ownership is not automatically inherited by the other owners. Rather, it is included in the deceased’s estate and distributed according to their individual wishes, if they have a Will, or by a probate judge if they don’t.

If you are a tenant in common, in a business, or perhaps in a vacation property, keep this in mind. You may wind up owning the assets with someone you don’t see eye-to-eye with. What happens if a fellow tenant dies and passes their interest to a child who wants the sell the property you look forward to visiting every summer?

While an in-depth discussion on this last topic is beyond the scope of this workshop, let’s chat briefly about Trusts.

A trust is a legal entity that can be created to hold title to assets. The trust then manages and distributes assets according to specific terms and conditions

There are many different types of trusts, each used to accomplish different outcomes. Some are permanent and some can be changed or revoked. Some are established while you’re living, and others are established upon your death.

There may be tax benefits for establishing a trust or the goal may be to maintain strict guidelines for managing the asset. They can be used to care for a child with special needs or to limit inheritance by a family member battling addiction, for example.

Depending on your personal situation and the laws of your state, a trust may be more or less beneficial. Here's a good rule of thumb: If you have a significant net worth, have a substantial amount of assets in real estate, or have very specific instructions on how and when you want your estate to be distributed among your heirs after you die, then a trust could be for you. The best thing to do is to ask your estate attorney while you’re drafting your Will and other important documents.

We covered a lot of very complex topics. This workshop is just designed to be an introduction and, as I mentioned, not to be considered legal advice. To review your specific situation or to take steps to get your estate planning started, consult an attorney familiar with the laws of your resident state.

Before we sign off, let’s run through the key points we covered. We talked about the three key documents included in a basic estate plan. We talked about assets that transfer by the various types of joint ownership and beneficiary designations.

We reviewed the probate process which takes control of the distribution of your estate if you die without a will. Finally, we mentioned trusts which are entities that can take ownership of your assets and manage and distribute them in life or death according to the terms of the trust document.

With that, I’ll remind you that a great next step in your financial wellness journey is to complete your MoneyNav assessment. This questionnaire takes about 5 minutes and results in a series of To Dos, or best next steps, that are built into your personalized MyMoneyNav dashboard.

You can also schedule to meet 1-on-1 with a coach in your dashboard or by sending an email to .yourfinancialcoach@moneynav.com.

And we hope you will continue to join us here for MoneyMondays. Visit moneynav.com/moneymondays for upcoming sessions and to sign up. Also, look for MoneyNav on your social media channels where we post reminders of upcoming sessions and links to the video workshops after.

On behalf of the entire MoneyNav team, thanks for joining me! If you have questions on this topic or another, please reach out. We look forward to connecting with you.