We’re coming to the end of the holiday season. With 2022 just around the corner, many of us may be reflecting on the time we just spent with family and friends and ways to do right by them. It’s been a wild few years and we’ve all seen how quickly a sudden emergency can force us to course-correct. One of the best things we can do to help our families weather these emergencies is having our affairs in order.
If you’re not sure what estate planning is, think of it like risk management. It’s a way to protect and guide your loved ones should you die or become incapacitated. During these times, giving clear instructions on how to handle your affairs, assets like bank accounts and real estate, or even your pet bird Princess Sophie, is the easiest way you can remove frustration and doubt during a stressful situation.
The most common estate planning document you hear about is a will, yet less than half of adults in the US have one. However estate planning can be much more than that and we can actually plan for anything that would require our loved ones to step in and handle our day-to-day affairs.
Now, we all have different plans and wishes for how we want our affairs handled. But estate planning can be so time-consuming and confusing! So, let’s break this down…
🧑🏫 Basic Planning
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Organize your account logins and passwords. If you’re subscribed to this newsletter, I’m going to assume you already have all of your passwords setup in a password manager like 1Password (my fav). If not, you should. Even the New York Times thinks Everybody Needs a Password Manager. I also migrated all my two-factor codes from apps like Google Authenticator to 1Password to make it easier to share secure logins (and has eliminated most of the “can you send me the code you just got” texts with my wife).
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Organize important documents. This should include things like your insurance docs, medical records, a list of financial accounts and any important contacts. If you’re not sure where to start, EverPlans has this list or two inexpensive books that provide guides are: Sorry for Your Loss - It’s Me and Get it Together. My easy/free system is organizing everything in a Google Doc that links to various files in Dropbox or Google Drive (that I assume anyone needing to read the doc will at that point have access to). That said, I’m really interested in an online platform that would make this much more organized. My top pick would be Trustworthy, followed by EverPlans, but they’re just expensive enough that I haven’t pulled the trigger yet (though I could see that changing soon). You could also check out Cake, which is less expensive, but I haven’t spent much time with it.
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Decide who gets access to your docs. This doesn’t have to be the same person you want to handle things like your finances or health care decisions. Google has Inactive Account Manager which is like a kill-switch for your accounts and makes it easy to grant access to your account if you’re inactive for a period of time. For everything else I rely on 1Password’s family access and emergency kit. I’d also suggest checking out this Wirecutter article about getting your digital accounts ready in case of death.
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Create a Last Will and Testament. Consider this your final wishes for your possessions, dependents, and arrangements. While I put most estate planning docs in the next section, this one is especially important if you have any valuable assets (money, real estate, etc.) and want to specify where they go. It’s also important if you have children or pets, so you can designate who you would want to look after them. It also can include how you want your assets divided, who gets what portion of your assets, special wishes, or other designations (like charitable donations). If you take my advice below to set up a full estate plan, then this will be part of that. If you’d rather not, or you know you’ll put off that project for long enough that you should at least set up a quick will sooner, my pick would be Trust & Will (who I used for my full estate plan), but you could also check out Willing or LegalZoom.
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Designate your beneficiaries. While you can specify what happens to your financial assets in a will, one major exception is that in most cases if you’ve specified a beneficiary on a specific account (most common with retirement accounts and insurance policies), that designation will take precedence over your will. In many cases we set these up when we first opened the account, often before we met our spouses, had kids or even got divorced, so make sure to double check that you have the right beneficiaries specified.
📝 Full Estate Plan
When it comes to the next level, I’d definitely recommend a full estate plan, because it helps cover other circumstances than just your passing. You also need to consider any event that would leave you unable to make your own decisions. Who do you want to handle your affairs if you’re unconscious in the hospital? How do you make sure your medical or financial wishes are executed? How can you help your loved ones avoid the hassle of probate court?
When I first set up our estate plan 10 years ago, I enrolled in Google’s legal benefits during open enrollment and used an in-network attorney to do a comprehensive estate plan for (almost) free. However, since then some great online/DIY options have entered the market. So when we updated our estate plan after our first child, I decided to do everything with Trust & Will (← 15% off for our readers). It was a great experience and I plan to continue using them as things change in our lives. However, if you have a large estate, complicated wishes, lots of possessions, or a “blended family” (kids from multiple marriages, second spouses, etc.), I’d recommend working with an estate planning attorney. Here’s what a full estate plan commonly includes (and when/why it’s important).
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Revocable Living Trust. This will be the hub of your estate plan and specifies the management, control, and distribution of your assets during life and after death. A trust offers more control than a will, especially when it comes to how and when your assets will be distributed. Another benefit of a trust is that it will help prevent your loved ones from lengthy and costly proceedings in probate court (see this article on How a Simple Estate Plan Pays for Itself). For example, in California, estates valued over $166,250 have to go through probate when the assets aren’t held in a trust.. While some trusts can be quite complicated (have you watched Succession?), a basic revocable living trust is easy to set up, doesn’t change your tax situation and is easy to revoke (hence the name).
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Pour Over Will. You’ll want your trust to be your primary tool for distributing your assets after you die, but you might not end up having all your assets titled in your trust – maybe because you forgot or maybe because some online financial institutions don’t even support trust accounts. So think of a pour over will as a kind of “safety net” that takes any property you didn’t put in your trust while you were alive and transfers it into the trust.
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Advance Healthcare Directives, Living Wills, and Medical Powers of Attorney. These detail how you want your medical care approached if you can’t make those decisions yourself. What kind of medicines and treatments will you allow or not allow? Who is allowed to make these decisions for you? When do you want to cease life support should you get to that point?
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Financial Power of Attorney. Much like a medical POA, a financial POA designates how you want your money handled while you’re incapacitated and who can handle that for you. Remember, bills don’t stop in the event of an emergency. Having a financial POA in place means less worrying about if your bills are getting paid on time and more time focused on healing.
Finally, you may also want to consider writing a Letter of Intent. It is an informal document that will give your loved ones important information that isn’t covered in your estate plan. Letters of intent aren’t legally binding but can be a nice complement to those documents. For example, even if your trust dictates that your children wouldn’t receive any inheritance until they turn 30, it likely also states that the trustee in charge of the money has the authority to make distributions for “health, education, maintenance, and support.” In this circumstance a Letter of Intent could give them important guidance like wanting to support private education or providing them with funds for their first downpayment.
🧐 Advanced Tactics
When most people think of estate planning and trusts, it’s often about tax avoidance. However, in 2022 the estate and gift tax limitation will be $12.06 million per person, meaning a married couple could transfer up to $24.12 million in their lifetime before being subject to high estate tax rates. So realistically, unless you think your assets will approach this level, you likely won’t need any advanced estate planning tactics to avoid estate or gift taxes. That said, I think it’s fun to read about some of the ways you might legally avoid taxes should you be fortunate enough to cross those limits (or if the limits actually drop back down like they’re supposed to in 2026). I’m not a lawyer, so this is obviously not legal advice and I might have gotten some nuances wrong in the summaries below, but here are some of the most common tactics:
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Grantor Retained Annuity Trust (GRAT): An irrevocable trust you would establish to minimize estate tax on highly appreciating assets (investments or businesses). It allows you to transfer assets into the trust and then receive annual payments of a fixed amount of principal and interest for a prescribed number of years. Any appreciation that stays in trust can be passed to your spouse or children and avoids estate tax.
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Charitable Remainder Trust (CRT): You typically transfer appreciated assets into a CRT and retain a stream of income from the trust, but unlike a GRAT, the beneficiaries at the end of the trust term are not family; they are charities. However, even though the charitable gift is not made for years, you get the charitable income tax deduction when you first transfer the assets into the trust.
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Family Limited Partnership/Limited Liability Company (FLP or FLLC): When I first heard about this tactic it was described as letting you stuff a big peg through a small hole. It works by transferring assets into a corporate entity and making your heirs limited partners (or non-managing members of the LLC), and because they don’t have any management control or ability to demand distributions, the value of their ownership of the business is only a fraction of the value of the assets owned. Therefore you can transfer the interests to your children at a discounted value and minimize estate taxes. Also, because you’re a managing member, you still maintain control of the assets and can receive distributions throughout your life.
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Irrevocable Life Insurance Trust (ILIT): This tactic allows you to avoid estate tax on life insurance proceeds by setting up a trust to purchase life insurance on your life (or you can transfer an existing policy). You also need to gift the trust the cash necessary to pay premiums on the policy. Then, upon your death, the payout is paid to the trust and not subject to estate tax. The ILIT states where the proceeds end up, frequently in trusts for your spouse or children.
☑ Things to Keep in Mind
As with anything, there are certain things that are helpful to be aware of as you start getting your information together.
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Estate laws vary by state. Whatever documents you have drawn up need to meet state requirements or else the document(s) can be voided. That means if you move to a new state you may need to update your documents.
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Parents, start having conversations with people you would like to become guardians for your kids should you pass away while they’re still minors. It’s a big responsibility, and those people need to be aware of and agree to your wishes well ahead of time.
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Check your employer benefits for low-cost, discounted, or free legal services. This can cover things beyond just estate planning too.
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Remember to include important contacts like your boss or HR rep, financial advisors, landlord or tenants, etc.
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Don’t forget pet care in your directives. Who gets Buddy if you pass away? Who is designated to take care of Felix if you end up hospitalized?
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You should probably do a quick review of everything every year. Hey, the start of a new year is a perfect time huh? Some things to keep in mind: reviewing beneficiaries on new accounts, updating addresses/contacts, adding any new assets you’ve acquired.
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Make sure you follow through with notarizing and filing paperwork. The last thing anyone wants to deal with is finding out a will isn’t enforceable because someone didn’t get it notarized. While some states allow online notaries, many don’t, but it’s really easy to get a mobile notary to come to your home (and surprisingly not much more expensive). However, before you pay for a notary, check out this list of places where you might get your docs notarized for free.
👵👴 Estate planning isn’t just for yourself
Many of us are getting to that point in life where our parents and grandparents are noticeably aging. We need to start thinking and having conversations about their wishes and how best to support them. If your parents didn’t have the chance to establish an estate plan or some sort of central information hub, I highly suggest having the conversation with them. Yes, it’s uncomfortable and can bring up so many emotions. However, if anything happens, you need to know the same things for them as your family would need to know for you. In this week's podcast, Joe Saul-Sehy recommended this book: Mom and Dad, We Need to Talk: How to Have Essential Conversations with Your Parents About Their Finances. It’s also beneficial to share this with siblings so everyone is on the same page as far as who is responsible for what and the overall wishes of parents and grandparents.
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Editor’s Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.
