• May 2015

Understanding Estate Planning: A Two-Step Process

By Carmen Wu, CRPC®
Financial Adviser
Image: “The Elephant in the Room,” Banksy exhibition, 2006 “Barely Legal” show, Los Angeles

Have you established an estate plan? Are your estate planning documents accomplishing your estate planning goals? Did you know that even if you have not yet established your estate documents, you already have an estate plan?

Avoiding planning for retirement is “the elephant in the room,” for many people. But if you own assets — regardless of how much you have — you have an estate!

Upon an individual’s death, those assets, by law, must be properly distributed. Without proper planning, a court could determine their distribution in accordance with state law. And how the court distributes those assets may not be in accord with the wishes of the deceased.

Estate planning has changed over the years due to changes in laws, views of finance, lifestyle, privacy issues, nontraditional families, and longevity. These changes have made creating an estate plan more compelling for a greater number of people.

Estate planning encompasses the following categories:

  • financial issues
  • retirement
  • business succession
  • charitable giving
  • medical needs
  • disability
  • legacy
  • gift planning

Toss out the idea that creating an estate plan is intimidating. I propose that it is instead an exciting opportunity to get your financial house in good working order.

Step 1: Break down the process to make it easier to face the elephant, bite by bite

  1. Accept the emotional piece. The reasons many people do not create an estate plan range from believing they do not have sufficient assets, to not wanting to address their mortality. Others don’t want to dredge up family conflicts. Fair enough. People’s lives and legacies are complicated, and it can be emotionally exhausting to get everything just right. But postponing the process of establishing an estate plan doesn’t solve any of these issues.
  2. Know why creating an estate plan is essential. For many, building an estate takes a lifetime of effort and planning. Along with financial gains comes a set of objectives related to the distribution and possible taxation of your assets. Significant planning and implementation is likely to be vital to accomplish your long-term goals. And failure to make provisions during your lifetime for the distribution of your estate may result in unnecessary taxation and settlement costs — which can be avoided with proper planning. Therefore, a carefully developed estate plan may help you achieve lifelong financial goals that provide for your loved ones, the charitable organizations you care about, and others whom you may wish to receive a financial gift upon your death.
  3. Educate yourself, and get started. The first step in creating an estate plan is to take a “snapshot” of your current financial assets. This gives you a picture of your current estate and will provide a benchmark against which future progress can be measured. It can also identify potential issues you may need to address in your estate plan. Take the snapshot by listing the value of all of the assets you own and all the debts you owe. The difference between those will give you an idea of your net worth. Do not overlook your insurance policies!
  4. Explore your long-term financial goals. Once you have an idea of your current estate:
  • Consider how you want to distribute your assets in the long-term.
  • Keep in mind that your assets will most likely grow in value.
  • Set up a meeting with your trusted financial adviser to help you map a route to reach your financial goals, and to be sure your planning reflects your wishes.

The bottom line: Educating yourself is the key to taking control of your finances. Understanding the basic components of estate planning will assist you in reaching your current and future goals.

Step 2: Master the Basic Components of Estate Planning

I have found that many people are unaware of the estate planning opportunities available to them.

The categories outlined below can give you insight into things to consider so you can identify your goals and build the team you will need to assist you in creating a comprehensive estate plan.

  • Probate. This is the court-supervised process of “proving” and administering a will. Probate is often time-consuming and can be expensive, depending on the size and complexity of your estate. When a will is probated, its terms generally become public record, thus exposing these assets to public scrutiny.
  • A Simple Will. A will is a legal document that allows you to direct how your probated estate will be administered and distributed. Without a will, you forfeit your right to designate who will receive the assets of your estate. Those who die without a will are said to have died “intestate.” The intestacy laws of the state in which you reside will determine who will inherit your property, regardless of any desires you may have expressed while living. Also, your local probate court will choose an administrator for your estate and, if necessary, a guardian for any minor children. You can avoid all of this, however, by maintaining an up-to-date will that reflects your current wishes.
  • Durable Power of Attorney. This allows you to designate a representative to perform certain actions for you should you become ill, incapacitated, or otherwise unable to manage your affairs. The representative could, for example, pay bills, sell securities, or make major financial decisions on your behalf, depending on how broadly or narrowly you limit the powers. Without a power of attorney, your spouse or other loved ones would have to go through the delay and expense of seeking approval from the court to carry out needed financial transactions.
  • The Living Will. This is a written declaration of what life-sustaining medical treatments an individual will or will not allow in the event he or she becomes incapacitated. For example, a person may request that a critical nourishment be withheld or not be withheld if he or she is terminally ill.
  • Medical Durable Power of Attorney (aka: Health Care Proxy). This document authorizes a person to make medical decisions on your behalf, ideally to carry out what you’ve specified in your living will. Talk to the person before appointing them, and be sure they understand and are comfortable with your wishes, and will be strong enough to carry them out even though some family members may object.
  • Trusts. Many estates require more sophisticated planning, which involves the use of trusts. A trust is a legally created relationship between three parties. It is created by the grantor (the person establishing the trust) through a trust agreement in which one party (the trustee) holds and manages property for the benefit of the others (the beneficiaries). Trusts can be created during one’s lifetime or upon death. The complexity of your estate and the extent to which you would feel uncomfortable leaving assets outright to certain heirs will determine if the formation of a trust is necessary.
  • Titling of Assets. The appropriate titling of assets is essential when dividing your assets. Property owned as Joint Tenants with Rights of Survivorship (JTWROS), or as Tenants by the Entireties, passes directly to the joint owner or surviving spouse. Assets also pass outside of probate by matter of contract law. A beneficiary designation passes assets outside of probate. Assets that typically pass through beneficiary designation include insurance proceeds, qualified retirement accounts, annuities, and individual retirement accounts. These are only a few examples of titling assets, and with the help of an attorney, many individuals develop well-thought-out estate plans. However, many individuals frequently do not take the extra step of re-titling assets. Unfortunately, upon death, their wishes might not be fulfilled if the titling of estate assets does not coordinate with provisions made in their overall estate plan.

The next step is to build your team.

These are the people who will help develop your estate plan. Consider pulling the following professionals together to support and help you achieve your estate planning goals:

  • An estate planning attorney
  • Your trusted financial adviser
  • An accountant (depending on how complex your planning is)
  • Your insurance agent (depending on how complex your planning is)

Note: Attorneys and financial advisers who focus on estate planning counseling will spend time asking questions, listening carefully to your responses, and helping you feel more comfortable addressing the elephant in the room.

And, be sure to ask your advisers to take you through “what if” scenarios to help you define your estate and financial goals.

Questions? Send Carmen Wu an email: cmwu@ebwllc.com

About Carmen Wu

  • Partnered with Egan, Berger & Weiner, LLC in August 2007
  • Has 25 years of experience in the financial industry, serving as financial adviser, branch manager, regional manager, chief operations officer, and vice president of a regional banking institution
  • Graduated from the University of Southern California with a Bachelor of Arts degree in political science/international relations
  • Active member of the Rotary Club of McLean, a community service organization; has served on the board of directors for five years
  • Active member of the Financial Planning Association and the Financial Services Institute
  • Currently enrolled in the College for Financial Planning

Raised in California, Wu moved to the East Coast in 1987 and now resides in Falls Church, Virginia, with her husband, Art.

The oldest of nine children, she enjoys spending time with her 19 nephews and nieces, and two grandchildren.

In her spare time, she pursues one of her lifelong passions for art by drawing and painting portraits, landscapes, and still lifes.

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