Having a plan for what happens with your savings, investments, real estate, and other assets after your death may not be something you want to think about. But estate planning is very important—after all, you have worked hard for what you have. Do you really want someone else to make decisions about the transfer of your assets?
Two specialists recently shared their insights on estate planning essentials with Andrew Hamil, senior vice president with Fidelity Investments Wealth Planning and Personal Trust group:
- Mark Albertson, an estate planning specialist for Fidelity Investments, provided an overview of the benefits of establishing and maintaining an estate plan.
- Matthew George, a senior product manager for the Fidelity Center for Applied Technology, highlighted the secure electronic document storage option called FidSafe®1 as it relates to storing estate planning and other documents.
Does everyone need an estate plan?
Regardless of how much wealth you have accumulated, almost everyone could benefit from creating an estate plan.
“Sometimes, people think that estate planning is just for very wealthy people,” says Albertson. “Not so. Whether you are married or single, you may want an estate plan to help ensure that your dependents or heirs are taken care of financially upon your death or in the event of incapacity.”
In fact, without realizing it, most people have created an estate plan of sorts simply by naming beneficiaries for their financial accounts or by titling their accounts in a certain manner. The key question to ask yourself is whether, by doing this, your assets will be distributed as you intend.
Estate planning is also helpful for:
- Members of blended families and second marriages
- People interested in supporting philanthropic causes
- Business owners interested in succession planning
“An estate plan can help you manage your assets, and it can help ensure that your heirs’ immediate and future needs are taken care of,” notes Albertson.
Read Viewpoints: Do you need an estate plan?
Here are seven potential benefits to consider. An estate plan can:
- Preserve an estate for the benefit of heirs
- Maintain control over the distribution of assets
- Help reduce—or potentially eliminate— estate taxes
- Designate someone to act on your behalf should you become incapacitated
- Protect your privacy by avoiding probate
- Name an individual or entity to manage estate assets
- Provide a plan for payment of estate taxes and help beneficiaries cover immediate and future needs
What goes into an estate?
An estate asset is any type of asset that passes to another person upon the owner’s death. With regard to how assets are distributed upon your death, we’ll focus on the four most common methods of distribution: contract, trust, operation of law, and probate.
Contract. Assets can pass by contract to designated beneficiaries on life insurance policies, annuity contracts, retirement plan accounts, and transfer-on-death registrations.
Trust. Assets registered in the name of a trust can pass, in accordance with the terms of the trust, to beneficiaries or entities (e.g., charities) or be held in further trust for the benefit of the designated beneficiaries.
Operation of Law. Assets that pass by operation of law are typically assets that are jointly held, such as by “joint tenancy with right of survivorship,” or by “tenancy of the entirety” ( typically, real estate or joint bank or investment accounts).
Probate. Generally speaking, if an asset does not pass by contract, by trust, or by operation of law, then upon your death the assets will pass to your heirs via the probate process in the state in which you resided at your death. Keep in mind that if you own real estate in more than one state, probate in multiple states may be required to transfer the real estate to your heirs.
Read Viewpoints: Five ways to protect what’s yours.
What are the essential estate planning documents?
There are three documents that form the essential building blocks of an estate plan. They are:
- A will, which allows for the payment of final debts and expenses and the orderly distribution of assets upon death
- A durable power of attorney, which generally authorizes someone to act on behalf of another during the individual’s lifetime for purposes of financial affairs
- A medical power of attorney or health care proxy, which authorizes someone to make medical decisions on behalf of another in the event of incapacity
In addition to the three documents listed above, you may want to consider executing a living will. This document typically expresses your wishes with regard to end-of-life decisions (e.g., the starting and stopping of life support, artificial nutrition and hydration, and the like). Always consult an attorney as you consider which documents make sense for your situation, especially in light of state law differences.
What about a revocable trust?
Many estate plans also include what is called a revocable trust, sometimes called a revocable living trust. Your attorney, or perhaps a tax adviser, should review your situation to determine whether a revocable living trust is right for you.
Generally speaking, a revocable trust is a legal instrument that functions much like a will. It generally allows you to control how your assets are distributed or managed for your benefit or the benefit of your heirs upon your death.
“The primary difference between a will and a trust is that, assuming your assets are transferred to the trust during your lifetime, those assets have the potential to avoid probate,” explains Albertson.
Among the key benefits a revocable trust offers:
- Flexibility, allowing you to amend or revoke terms or beneficiaries during your lifetime
- A way to avoid probate, a public process that can be costly and time consuming
- Protection for the inheritance of children and other heirs; control of the timing, amount, and purpose of distributions
- Control over the administration of assets in the trust during your lifetime by naming yourself as a trustee
“One very important component of a living trust is choosing a successor trustee,” Albertson says. “This individual steps into the shoes of the trustee after the trustee becomes incapacitated or passes.”
What steps could be taken today?
Let’s look at how these documents fit together in a typical estate plan. Even if you have a trust, you probably still need a will, which in this case is typically called a pour-over will. A pour-over will gathers individually owned, non-beneficiary assets and transfers them into the trust upon your passing.
Given the complexity of estate documents, we always suggest that you speak with an attorney and tax adviser regarding your particular situation. All your estate planning documents should be reviewed for potential updates every three to five years. In addition, consider updating your estate planning documents following:
- A major life event
- Change of state of residency
- Receipt of inheritance
- Health issues
- Estate tax law changes
- Change in wealth
Where should you keep your important documents?
“When you’re building an estate plan, there are lots and lots of documents you might need to collect based on your specific situation,” George notes. You’ll need a secure place for storing all your estate planning documents, because someday you may need to share these documents with others.
“Maybe that person is an attorney, or maybe it’s a financial adviser or family member,” says George. In addition to having a physical location to store your documents, a secure electronic storage location for storing and sharing documents could also be useful.
Watch a video of Matt George discussing FidSafe®, a service of XTRAC, LLC, a Fidelity Investments Company.
Creating an effective estate plan is not a “do it yourself” project. Engage your professional advisers—your tax accountant, lawyer, and financial adviser—and consider engaging family members as well. Doing so “gives you an opportunity to bring your family a sense of empowerment, and it helps your family to develop a common philosophy about your family’s legacy and how it could be carried out for generations,” Albertson explains.
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