5 key things to know when you create a will and make other end-of-life plans

Personal finance

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Contemplating your own death may not be on the list of things you’re eager to do.

Yet for your family or other loved ones who would find themselves trying to sort out your affairs while also dealing with the emotional fallout from losing you, your having a so-called estate plan is important, experts say. And this is the case whether you are wealthy or not.

“When you get your things in order, it’s a gift you’re giving your family,” said certified financial planner Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia. 

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In simple terms, your estate plan spells out who you want making decisions and who will inherit what you own. “Estate” simply refers to possessions and other assets.

Experts say most estate plans don’t need to be complicated. But to make sure your wishes are carried out, they do need to be done correctly — which may make it worth consulting with a local attorney who specializes in estate planning.

Here are five key things to know if you start thinking about how you’d craft an estate plan.

1. A will may not cover all your bases

A will is a basic part of an estate plan. It lets you identify who you want to receive certain property and allows you to name a guardian for dependent children. If you don’t have a will in place when you die, the courts may decide who gets what or who is appointed guardian.

However, some assets pass outside of the will, including retirement accounts such as 401(k) plans and individual retirement accounts, as well as life insurance policies and annuities. This means the beneficiaries listed on those accounts supersede any instructions in your will.

“If your ex-spouse is listed on the beneficiary designation, your ex-spouse will get the money regardless of what your will says,” said CFP Stephen Maggard, an advisor with Abacus Planning Group in Columbia, South Carolina.

Be aware that many 401(k) plans require your current spouse to be the beneficiary unless they legally agree otherwise. 

Regular bank accounts, too, can have beneficiaries listed on a payable-on-death form, which your bank can supply. Same goes for brokerage accounts.

If your ex-spouse is listed on the beneficiary designation, your ex-spouse will get the money regardless of what your will says.
Stephen Maggard
Advisor with Abacus Planning Group

If no beneficiary is listed on these various accounts or the named person has already died (and there is no contingent beneficiary listed), the assets automatically go into probate.

That’s the process by which all of your debt is paid off and the remaining assets that are subject to probate — which includes those that pass through the will — are distributed to heirs. This can last several months to a year or more, depending on state laws and the complexity of your estate.

2. You’ll need to carefully pick your will’s executor, other key roles

When you create a will, you name an executor to carry out your wishes and handle your estate. It can be a big job.

Things such as liquidating or closing accounts, ensuring your assets go to the proper beneficiaries, paying any debts not discharged (i.e., taxes owed) and even selling your home could be among the duties overseen by the executor.

This means that you need to make sure whoever you name is up for the job — and that they are amenable to taking it on.

Additionally, an estate plan should include other end-of-life documents, including a living will. This outlines the health care you want and don’t want if you become unable to communicate those desires yourself.

You also can assign powers of attorney to trusted individuals so they can make decisions on your behalf if you become incapacitated at some point. Often, the person who is given this responsibility for decisions related to your health care is different from whom you would name to handle your financial affairs.

Just be sure to name alternatives.

“It’s super important to have backup people in all roles in the estate plan … in case someone cannot serve,” said CFP Jennifer Bush, a financial planner with MainStreet Financial Planning in San Jose, California.

3. Some assets get a ‘step-up in basis’

If you have assets such as stocks, bonds or real estate (i.e., a house) and are considering gifting them to children or other heirs while you’re alive, it might make more sense to wait.

When these assets are sold, any increase from the so-called cost basis (the value when the asset was acquired) and the sale price is subject to capital gains taxes.

However, upon your death, your heirs who inherit those assets get a “step-up in basis.” In other words, the market value of the asset at your death becomes the cost basis for the heir — which generally means any appreciation prior to that is untaxed. And when the heir sells the asset, any gains (or losses) are based on the new cost basis.

On the other hand, if you were to gift such appreciated assets to heirs before your death, they’d assume your original cost basis — which could translate into an outsized tax bill when the assets are sold.

“We find ourselves often recommending that clients give adult children cash instead,” Maggard said.

4. You may want to consider setting up a trust

If you want your kids to receive money but don’t want to give a young adult — or one prone to poor money management or other concerning behaviors — unfettered access to a sudden windfall, you can consider creating a trust to be the beneficiary of a particular asset.

A trust holds assets on behalf of your beneficiary or beneficiaries, and is a legal entity dictated by the documents creating it.

If you go that route, the assets are left to the trust instead of directly to your heirs. They can only receive money according to how (or when) you’ve stipulated in the trust documents.

5. You’ll need to revisit your estate plan

Anytime you have a major life change — such as birth of a child or divorce — it’s important to review your estate plan.

You’ll want to confirm that your named executor (or trustee, if you set up a trust) is still an appropriate choice. Additionally, check all listed beneficiaries on your financial accounts to make sure no updates are needed.

Additionally, If you move to a new state, be sure to check whether you need to update any part of your plan so it follows that state’s laws.

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