Episode 11: Certified Financial Planner Jeb Jarrell is joined by estate planning attorney Matt Doane for an important discussion. A comprehensive financial plan should take into consideration estate planning issues for you, your heirs and your estate.
The Biggest Misconception about Estate Planning for Young Families
Matt begins the conversation by addressing this topic. In general, it’s when people think they don’t really need a Will or estate plan. He explains that if these don’t exist, it’s the government that will decide where your money and assets go, after your death.
Young families should have Wills, a guardianship nomination for minor children and other important estate planning documents. Many mistakenly focus on estate taxes, which aren’t nearly as important for the majority of individuals and households. Jeb comments that the primary focus should be on making sure your spouse and children are financially protected.
Doesn’t My Spouse Automatically Get My Assets?
The answer usually surprises most people. In Kentucky, if you die intestate (i.e. without a Will), your spouse is actually 4th in line, in terms of succession. The spouse can get half of the estate, but the remainder will go to your children. If you don’t have children it’s your parents. If you don’t have any living parents, it’s your siblings. If you don’t have any living siblings, then the remainder will eventually go to your spouse.
Matt explains that certain assets don’t pass through the probate process. Those would normally go to the surviving spouse.
Key Components of an Estate Plan
The most common element is a Last Will and Testament outlining the division and disbursement of your assets. Next, you should have a Financial Power of Attorney enabling someone to handle your finances. Then, there’s a Medical Power of Attorney designating a surrogate to make decisions if you are incapacitated. Also important is a Living Will. This designates a surrogate to make end-of-life decisions, based on the directives you codify in your Living Will.
Beyond the above, four documents, you may also need a trust or trusts. The options could include a Revocable Living Trust, Irrevocable Trust and many more, depending upon your situation and concerns.
These are assets that are excluded from the probate process. Jeb explains that these may include an IRA, 401(k), certain types of bank accounts and/or certain non-qualified, investment accounts. These types of assets allow for a beneficiary designation.
The designations should be reviewed or updated, regularly. In the case of a divorce, you may need to update your beneficiary designations.
Leaving Assets to Minors
Jeb comments that the situations are different should someone want to leave assets to an underage child verses a spouse or adult child. Matt explains that you can direct assets to go into a trust on behalf of your minor child or children. Those assets do not have to automatically be disbursed when the individual reaches the age of 18. You can include specific instructions regarding how the funds and other assets are to be given to your child and when.
Granting a young adult access to a significant amount of money may not be the wisest decision. Matt discusses how a tier-distribution can provide funds to the individual at specific ages and/or milestones.
Jeb offers the concept of using matching funds as a way to distribute the funds to your children. This could allow for the individual to gain some level of financial independence on his/her own, while also being supplemented by the funds in the trust. This could be an interesting alternative for someone who may want to work for a non-profit or to be used for some other milestone, such as a down payment on a house or for education.
Issues with Trusts
Matt discusses a big issue with Trusts. Even though the Trust has been set up, people often forget to fund the trust (i.e. transfer property into the trust). Another mistake is the failure to change beneficiary designations on qualified plans or life insurance policies.
If there’s a big life event, such as a birth, a death or a windfall inheritance, the Trust documents should be reviewed and properly updated.
A Revocable Living Trust may include a “Pour-Over Will” to ensure assets not specifically added to the Trust will pour over into the Trust. This can require the creation of a probate estate. One objective of the Revocable Living Trust is to avoid probate. The probate process takes time and subjects assets to probate taxes and other related fees.
Jeb comments how a surviving spouse could lose access to the monthly distributions from the deceased spouses IRA, if the situation isn’t handled properly.
Should My College Age Child Have a POA?
Parents often incorrectly assume that the will have full access to medical information and the assets of an adult child, should something happen to him/her (i.e. an automobile accident).
Matt recommends a Financial Power of Attorney and a Medical Power of Attorney be executed for college age children. A Living Will is also recommended. Remember, at the age of 18, your child is considered an adult.
Estate Planning Considerations for Retirees
Matt advises that your estate plan should be reviewed on an annual basis. There are always transitions in life. At the same time, the law changes. One of the more significant considerations, as you approach retirement, is the issue of long-term care. Effective Medicaid planning may enable you to provide a legacy for your heirs, while also providing for your care in a nursing home. Matt has a solid background in the complexities of Medicare planning.
Long-term care insurance is an important consideration. The cost of nursing homes is very expensive. Long-term care insurance can help you to avoid the need to sell off assets to pay for an extended nursing home stay.
Specific Considerations for Farmers
As the politicians consider a reduction in the estate tax exemption, the lower threshold could present specific challenges for family farms. Matt explains how this situation needs to be monitored. The price per acre of a decent parcel of farmland often results in a significant asset. Luckily, there are ways to plan for the impact of changes in the law. It could become a significant concern for many family farms.
Would You Like to Contact Estate Planning Attorney Matt Doane?
Phone: (502) 602-0008
At the end of the day, you should sit down with a qualified, investment advisor who can help you to think through your investment strategies. A good advisor will bring a solid perspective, but also know how to develop and implement your strategy.
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Thanks for listening!