Estate Planning 101: Back to Basics

When considering one’s wealth, it’s natural to think about how it will help fulfill your goals – retirement, travel, a nice home, helping family and charity, to name a few. Less obvious, but just as important, is making sure that your family and financial goals are met after you die. Without an estate plan, your assets will be left to a list of your heirs determined by state law, and the courts would place any minor children with relatives. (We don’t know of anyone who would be pleased with these results!) Moreover, the distribution of your assets can be a public and costly process. Fortunately, all of these potential negative consequences are easy to avoid.

This article discusses the pertinent pieces of a basic estate plan. (Of course, laws vary by state so you should consult with a local attorney to prepare your estate plan.) While we’ve written this with Aspiriant clients in mind, it’s perhaps even more relevant for clients’ young adult children… few young adults put an estate plan in place until they have their own children (and many don’t do it even then). We encourage you to pass this along to any young adults who might benefit from an estate planning primer.

What documents should I put in place to cover my basic estate planning needs?

A basic estate plan for most people should feature five components:

  • Living Trust
  • Will
  • Assignment of Assets
  • Durable Power of Attorney
  • Health Care Documents

Your plan’s centerpiece: the Living Trust

What is a Living Trust?

A living trust is a legal document that allows you to name who will receive your assets upon death and specifically how and when the beneficiaries will receive the assets (i.e., in trust or outright, at what ages, any requirements to receive the assets, etc.). In addition, you can structure the trust to help protect the beneficiaries’ assets from creditors and spouses. Finally, a living trust can include provisions that reduce estate taxes, thereby leaving more assets for the beneficiaries.

In order to create a valid trust, you must choose a person or entity – known as the trustee – to hold the assets on your behalf. Generally with a living trust, the person who creates the trust (the grantor) also serves as the trustee during his or her lifetime. The grantor has full access to the trust assets during life and has the ability to change the terms of the trust at any time before death. After the grantor dies, a secondary trustee – a person (often a spouse or family member) or institution – is named to manage the assets and distribute them to the beneficiaries according to the terms of the trust.

Why do I need a Living Trust and how is it different from a Will?

A living trust helps to avoid the potentially costly and public court process known as probate and ensures that your information (what assets you have and who the beneficiaries are) remains confidential. Additionally, any assets titled in the name of the living trust can be managed and distributed by the trustee according to your directions without court involvement.

In contrast, if you rely solely on a Will to transfer assets at death, the named executor may need to file papers with the court to distribute the assets to the beneficiaries and the information becomes public knowledge. However, as discussed below, a Will is still a critical component of any estate plan.

…a Will serves in a limited but important capacity when used in conjunction with a living trust.

Where there’s a Will, there’s a way…

What is a Will, and why do I need one?

A Will was historically used to indicate who would receive your assets upon death. Some states still use a Will for this purpose in place of a living trust and, in fact, a Will can afford you most of the benefits of a living trust (with the exception of avoiding probate and keeping your financial affairs from becoming public knowledge).

More commonly today, though, a Will serves in a limited but important capacity when used in conjunction with a living trust. The Will states that any assets not titled in the name of the living trust should automatically be transferred to the trust upon death. This is known as a “pour-over will.” The Will also allows you to name guardians for any minor children. Finally, a Will names the executor responsible for filing an estate tax return.

Making your planning count: the Assignment of Assets

What is an Assignment of Assets?

An Assignment of Assets is a document which indicates the intent to transfer title of your assets to the name of a living trust.

Why do I need an Assignment of Assets?

The terms of a living trust only apply to assets that are titled in the name of the trust. For example, if you own a home that is not titled in the name of your trust, the property would pass through your Will at death and may be subject to probate, which largely defeats the purpose of having established the living trust.

You should transfer title to most of your assets into the name of your living trust, but if you die without having done so, your executor may be able to use the Assignment to avoid probate. Additionally, the Assignment states your intent that personal property for which there is no evidence of the owner on record, such as jewelry and household belongings, be distributed according to the trust terms.

Power tool: the Power of Attorney

What is a Power of Attorney?

A Power of Attorney (POA) is a document which allows you (the “principal”) to designate one or more people to act on your behalf, generally with respect to business and financial matters such as managing financial accounts and filing tax returns. The designated individual is known as your “agent”. The scope of the power of attorney may be broad (a general POA) or more limited (a special POA).

Generally, a POA is effective upon the principal’s incapacity, known as a springing power of attorney, making it an important tool for managing your financial affairs in the event that you cannot; however, the POA can be made effective as soon as it is signed. If effective immediately, the POA will remain in effect until the principal becomes incapacitated. More typically, though, the POA will remain in effect even if the principal becomes incapacitated and will last until death – this is known as a durable power of attorney.

A POA only applies to assets not titled in the name of your living trust, as the trustee of your living trust administers assets held in the name of the living trust (often, the trustee and agent are the same person).

What if a person does not have a Power of Attorney? If you do not complete a power of attorney and you become incapacitated, a court will likely need to appoint a conservator to handle your financial matters, which is a time-consuming and cumbersome process to go through at the time of a family crisis.

Estate planning Rx: Health Care Documents

What is a health care document?

A health care document advises your physician, family, and friends about your health care preferences. In addition, it allows you to name a specific person or persons (an “agent”) to ensure your health care preferences are followed should you become unable to make your own health care decisions. More specifically, it can indicate preferences for end-of-life decisions such as whether to remain on life support, burial wishes, receipt of pain medication, and organ donation. Any health care decisions not specifically stated in your health care documents are left to the discretion of your named agent.

There are different types of health care documents depending on your state of residence. A local attorney can confirm the proper form to use in your state.

What if a person does not have a health care document?

If you do not complete a valid health care document designating an agent to make health care decisions in case of your incapacity, the physician and/or hospital will determine the most appropriate person to make such decisions (usually family or close friends). In some cases, a court will need to appoint a conservator to make such decisions. Either way, there is a lot of room for conflict among family members, which proper health care documents help avoid.

What do I do once I have completed my estate planning documents?

We recommend retaining your original estate planning documents in a safe place. You should provide copies of your POA and health care documents to the individuals named as agents. You may also consider discussing your estate plan with your successor trustees so they understand your wishes while you are still alive… this provides a valuable opportunity for them to ask questions and seek additional guidance from you about your wishes. To the extent you have minor children you should have a discussion with those appointed as guardians. Finally, you should properly title assets in the name of your trust.

It’s easy to put off estate planning as something that’s not relevant until some distant future. This can leave one’s family and estate dangerously exposed. Fortunately, putting a comprehensive and effective estate plan in place does not need to be difficult or time consuming.

Post-DOMA planning

The Supreme Court’s decision in United States v. Windsor struck down key portions of the federal Defense of Marriage Act as unconstitutional. This ruling, coupled with recent guidance from the US Treasury on federal taxation, mandate that same sex couples be treated as married for all federal tax purposes if lawfully married under state law, irrespective of where they are domiciled. These landmark changes present a vast number of financial considerations for same sex married couples including:

  • Is it appropriate to change estate plans and life insurance coverage now that the unlimited marital deduction and portable lifetime gift exclusion are available?
  • Should couples file amended income, estate or gift tax returns to take advantage of potential refunds and exclusions?
  • What changes to beneficiary designations and retirement plan contributions are appropriate?
  • Are investment accounts titled properly and invested strategically in light of these changes?

Aspiriant is working with clients to review these and other considerations to determine the appropriate course in light of these new planning opportunities.

1Bureau of Labor Statistics, Change in Total Nonfarm Payroll Employment (June 2014).
Important disclosures: Past performance is no guarantee of future performance. All investments can lose value. Indices are unmanaged and you cannot invest directly in an index.
S&P 500 is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. The volatility of an index may be materially different than that of a model. You cannot invest directly in an index. Index returns assume the reinvestment of dividends and capital gains. The MSCI ACWI All Cap Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. It is not possible to invest directly in an index. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
S&P GSCI: The S&P GSCI© is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment.
Wilshire Global RESI: Is a broad measure of the performance of publicly traded global real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). The index is capitalization-weighted.