When the federal estate tax exemption started climbing rapidly in the 2000s (and even went to zero for one year in 2010), an estate lawyer friend told me he was glad because estate planning shouldn’t be so focused on tax avoidance.
“What do you mean?!?” I thought. I had always believed that tax savings were the main point of estate planning. And in 2002, when we launched Acropolis, the tax was a bigger factor because the exemption was $1 million, and anything over that was taxed at 55 percent.
Today, the exemption is $13.61 million, and importantly, the rules around portability effectively doubled that number for married couples. The rate remains high at 40 percent, but the number of estates included is far lower.
My lawyer friend was right; estate planning is incredibly important, even if you don’t have a taxable estate. This week, I will walk you through the basic documents that are commonly included in a typical estate plan.
Let me quickly add my usual caveats: I’m not a lawyer, Acropolis is not a law firm, and we don’t provide legal advice.
- Seek a qualified, licensed estate attorney who can address your situation specifically. And, if you need the names of some great estate lawyers, we can help.
- I’m just scratching the surface today, whetting your appetite for discussions with your lawyer.
- These documents might be labeled differently depending on your attorney, but the concepts are consistent. It’s similar to finance—what we call a mortgage-backed security can also be described as a bond or fixed income, depending on the perspective (not to mention MBS).
The Last Will and Testament
This document explains how your property and assets will be distributed upon your death—a critically important step to avoid having the state decide on your behalf. If you pass away without a will, you’re considered intestate, and your state’s probate laws will determine how your estate is distributed.
Living Will
A living will outlines your preferences for life-sustaining treatment if you become terminally ill or incapacitated. It typically addresses interventions such as ventilators, feeding tubes, resuscitation (e.g., DNR orders), pain management, and organ donation.
While it’s often confused with a Healthcare or Medical Power of Attorney, the two are distinct—your living will expresses your wishes, while a power of attorney designates someone to make medical decisions on your behalf.
Healthcare Power of Attorney
As mentioned earlier, a healthcare power of attorney names someone to make medical decisions for you if you can’t do so yourself. Depending on how it’s written, it can either take effect right away (durable power) or only if you’re incapacitated (springing power).
This can be particularly important for parents of college students. When a child turns 18, parents typically lose the legal right to make medical decisions on their behalf. Yet in most cases, both parents and children still want parents to step in if something happens while the child is away at school.
Financial Power of Attorney
This document grants someone the authority to make financial decisions on your behalf. I think of it as similar to a Healthcare Power of Attorney—but for money. These decisions can range from small tasks, like paying bills, to major ones, such as selling your home to cover the cost of care if you become incapacitated.
Revocable Living Trust
When I think of estate planning, I think of trusts, but notice how I was able to list four documents without mentioning trusts. It’s just one part of the package.
A revocable living trust explains how your property and assets should be distributed upon your death. Now, if you take a look at the paragraph about a last will and testament, you might think you’ve already done this with your will.
There are many differences, but the main ones are that a trust avoids probate court, keeping the estate private, and ensures that your wishes are carried out immediately. We often know how badly celebrities’ estates are handled because they weren’t in trusts, which means that prying eyes can take a peek and judge accordingly. Google James Gandolfini, Michael Jackson, Supreme Court Justice Warren Burger, Sonny Bono, Aretha Franklin, etc., for more.
Wills are typically still used in conjunction with revocable trusts to ensure that any assets not retitled in the name of the trust are ‘poured over’ into the trust and distributed according to the trust’s terms. I think of it as a safety net in this context.
Conclusion
Next week, I will review the individuals you select for your estate plan, from the grantor (you) to the guardians. This group of people matters a great deal and serves as a valuable reminder of why it’s essential to review and update your estate plan every few years. Sometimes they pass away, sometimes they become incapacitated, and sometimes they just make you mad when you’re out to dinner.
Seriously, though, I hope I’ve made the case for estate planning even when you don’t have $13.61 million. I had them done when my kids were born, because if their mother had died too, then someone would need to take care of the kids and the insurance proceeds (and I didn’t want the same people doing those separate jobs).
Too often, people believe that once they’ve created an estate plan, they don’t need to update it. Laws change ($1 million to $13.6 million), people change, assets change, etc. I don’t want to use scare tactics, but I’ve seen poor estate planning go horribly wrong, and for every story I’ve heard, an estate lawyer has dozens more.
Estate planning is one of the most loving and responsible things you can do for the people you care about and who care about you. It might not be fun, but neither is untangling a poorly done estate plan!
