Aug 08, 2023

Episode: 08-08-2023 | Estate Planning Fundamentals Do’s and Dont’s

What Is Estate Planning

Kevin Zywna, Wealthway Financial Advisors: Tonight we are going to talk about estate planning some of the do’s and don’ts of estate planning. What is it? What should you do about it? Why it’s important to your overall financial plan? Estate planning is going to be the topic of the show tonight. So what is estate planning anyway? Broad category. Big topic. Estate planning is the process of designating who will receive your assets in the event of your death or incapacitation usually done with the help of an attorney. And a well-constructed estate plan can help ensure that your heirs and beneficiaries receive assets in a way that manages and minimizes estate taxes, gift taxes and other tax impacts. So an estate plan is the orderly legal transfer of your ownership of assets. After you go to your great reward. It’s typically one of the last pieces, and I should say an estate planning is an important part of a financial plan. But it’s usually one of the last pieces of the financial plan that most people get around to. Usually having to do with that pesky idea of death and all and not such a pleasant topic.

Why Is Estate Planning Important?

Kevin Zywna, Wealthway Financial Advisors: But really, estate planning is not something you do for yourself anyway. Estate planning is something that you do for your loved ones, or your heirs, or your beneficiaries. You do good estate planning for the other people who are going to receive the assets that you want to transfer to them. A lot of times people we will see take a cavalier approach to estate planning that, you know, I’ll let the kids fight over it when I’m gone. That’s not my problem. There’s plenty of money there. They’ll figure it out. No, no, they typically don’t figure it out, at least not in a healthy productive way. When mom and dad die without an estate plan or without good components of an estate plan, then it’s up to the adult kids to try to figure out what mom and dad’s wishes were. And without an estate plan to guide them or without written instructions, from a will or found in a drawer somewhere, we often sit with the inheritors, who are distraught, trying to figure out what mom or dad would have wanted me to do with these assets. And how should I share them with my siblings? And what about the grandkids? Are they supposed to get any of this? All those questions swirl around the inheritor when there is not an organized complete estate plan. And so you really do a disservice to your family and to your heirs by just thinking it’s not your problem, it’s their problem. It will become their problem that is for sure. And often, it can fray the bonds of family structure, if not handled appropriately. Misconceptions, misunderstandings, jealousy, family dynamics, all that comes into play, when the inheritors are kind of left to their own devices to figure out what you wanted from an estate plan and who you wanted to receive, which of your assets. So, an estate plan is a responsible, important part of an overall financial plan.

IKevin Zywna, Wealthway Financial Advisors: We at Wealthway Financial Advisors do not create estate planning documents. Those are usually legal documents drawn up by a competent professional estate planning attorney. That’s who we recommend all our clients go to at some point in our planning process. We always put a friendly reminder on our agenda if our clients have not developed an estate plan yet. And then we have referral relationships with some good estate planning attorneys here in the Hampton Roads area. So, that’s the importance of an estate plan.

What Are The Components Of An Estate Plan

What Is A Will

Kevin Zywna, Wealthway Financial Advisors: Now, the main components of your traditional typical basic estate plan usually come in four parts. You’ve got your will, which most everyone is familiar with. A will is typically a written document that is the instruction manual on who you want to get and how you want them to receive your assets. It doesn’t always have to be written. It can be handwritten, it can sometimes be verbal, but we would never recommend those sources, even though they might be legally accepted because there is too much room for doubt, too much room for error. So, a well drafted will by a competent estate planning attorney is your first step to a solid estate plan.

What Is A Financial Power Of Attorney

Kevin Zywna, Wealthway Financial Advisors: Then another component of an estate plan that is important is the financial power of attorney. A financial power of attorney document allows somebody else to act as your attorney, in fact, to represent you in certain financial dealings. For instance, if you have a bank account, in your name only, but you signed somebody else, as your power of attorney to conduct business on your behalf, that person that you give the financial power of attorney can go to the bank and say I need to withdraw $50,000 on behalf of my friend here who I am his power of attorney. And you can conduct business on behalf of other people in in the event that you become incapacitated. So you’re in a bad auto accident, you have a disease, you’re in the hospital for an extended period of time, you can’t pay your bills. The financial engine keeps running behind the scenes, even though you can’t attend to it. By having a financial power of attorney that allows somebody to step into your place and take care of the financial business so that the bills stay paid, and your credit debt stays in good order.

What Is A Medical Power Of Attorney

Kevin Zywna, Wealthway Financial Advisors: Then the third component of a solid estate plan, medical power of attorney. A medical power of attorney is a power that you would give to another person who would be able to make medical decisions on your behalf in the event that you can’t. So again, you’re in the hospital, maybe an auto accident, incapacitated, not conscious, not able to speak, not able to make your decisions for yourself on what type of care and treatment that you want. Then the person who you give the medical power of attorney to can intercede on your behalf and work with the medical staff to ensure that your wishes needs and cares are met, if you can’t speak for yourself.

What Is An Advanced Medical Directive Or Living Will?

Kevin Zywna, Wealthway Financial Advisors: And then along the same lines, the fourth component of a good estate plan a Advanced Medical Directive, otherwise known as a living will. Advanced Medical Directives are instructions that you provide, in advance typically, to medical personnel that lay out your wishes on what you would like to happen in the event that you remain incapacitated for an extended period of time. So the most common example that we think of is if you’re in a coma, and how long would you want to be kept alive in the state of being in a coma. A lot of times we hear six months as the default, some people feel longer, some people feel shorter. That’s a personal choice. And that’s just one of the main instructions that you find in Advance Medical Directive, but there can be others, especially if you have certain views and beliefs about medicine and medical procedures, and what you would like to be treated with and how you would like to be treated all that should go in advance Medical Directive. So no one has to read your mind. No one has to guess. No one has to think what would dad have wanted? Dad puts it in the Advanced Medical Directive, takes the burden off the kids off the spouse and it keeps harmonious family relationships.

What Are The Steps To Writing Your Will?

Step 1: Take Inventory Of Your Belongings

Kevin Zywna, Wealthway Financial Advisors: Tonight we’re talking about estate planning, the importance of it, and how to do it wisely and effectively. Just went through the four main components of a basic estate plan. Now how about some steps to creating that plan? How do you even get to the will process? What do you put in your will? What type of assets and property do you typically find in in a will that you want to transfer?

It starts with an inventory of the stuff that you have. And the stuff that you have is generally broken down into two main categories: tangible personal property/tangible assets, and intangible assets. So tangible assets are stuff that you can look see touch: homes, land, real estate of almost any kind, vehicles, cars, motorcycles, boats, collectibles, coins, art, antiques, trading cards, and other personal possessions: grandma’s jewelry, the china set. If you want to pass those along, a lot of adult kids say Mom, Dad, just get rid of that. I don’t want the doilies, right. I don’t I don’t want all the china. But any sentimental personal property that you want to transfer would go into a will. Then intangible assets, checking and savings accounts, CDs, a lot of those financial assets that you probably own: stocks, bonds, mutual funds, insurance policies, your retirement plans, 401 K’s 403 B’s, TSPs, health savings accounts if you have one of those, and then any ownership interests in a business.

Kevin Zywna, Wealthway Financial Advisors: So start by taking inventory of the main assets that you own – anything with a title or a deed would be appropriate for transfer. And that’s where you start listing what you want to transfer in your will.

What Is A Beneficiary Designation?

Now, getting a little ahead of myself here, but a lot of the intangible assets, the bank accounts, the brokerage accounts, the stocks, bonds, mutual funds, the 401k accounts, the health savings accounts, all those vehicles can transfer via a beneficiary designation instead of a will. A beneficiary designation is a really simple, easy and cheap way to do some rudimentary estate planning, usually, on a form, or now I guess on a website. When you open up a bank account, you open up a brokerage account or you open up an IRA, there’s a place to list a beneficiary. The beneficiary is the person who will receive the contents of that account in the event of your death. It is the most efficient form of transfer in the estate planning process. Because your beneficiary just needs to show up with essentially a death certificate and maybe an ID and the assets get transferred from the decedent account into the inheritors account, usually in a matter of weeks, less than a month, a lot of times. Compare that to probating an estate and taking you through the probate process, which is a legal transfer of assets through the court system. That can be months or sometimes even years before probate gets settled. So beneficiary designations on those accounts. I’ll talk more about that a little bit later.

Step 2: Take Inventory Of What You Owe, Liabilities Impact Inheritance?

Kevin Zywna, Wealthway Financial Advisors: The liabilities as well, not just what you own, but what you owe: mortgage, car loans, credit cards, that’s good to know for the executor of your estate, those people that you owe a debt to have a claim against your estate, so that when you pass away, if you still owe a mortgage on your house, then at some point that mortgage has to get paid off completely, either through the other assets in your estate, or through the sale of your primary residence. The proceeds from that sale will go to satisfy the mortgage. So debtors have a claim against the assets in the estate. And so your executor, the person who administers your estate, should be aware of those because those debtors are going to come calling.

Step 3: Account For Your Family’s Needs

Kevin Zywna, Wealthway Financial Advisors: Alright, so after you sort of make a list of what you own, and what you owe, then you want to sort of account for your family’s needs. A big part of estate planning is making sure that your loved ones have enough to maintain their standard of living in the event of you’re untimely demise. So a lot of that has to do with life insurance. And in the early years, when you’re younger, have a spouse, family, mortgage, car loans, have college to pay for in the future, life insurance is a very necessary and efficient vehicle to give your family protection in the event of an early death. As life goes on, you do your financial planning properly, the need for life insurance typically deeply decreases. But know that accounting for your family’s needs in the event of your demise is a good exercise to go through for an estate plan.

Step 4: Name Guardians For Your Children

Kevin Zywna, Wealthway Financial Advisors: And then of course, when you make your will you want to name guardians for your children. So if your children are under the age of 18, and you and your spouse were killed in an accident, who’s going to take care of the kids? Well, that’s what the guardian does. You name or appoint a guardian in the event that you cannot care for your kids. Typically, it’s a close family member that you would name as a guardian. And you would also want to ask that person’s permission to list them as a guardian before you actually do that, because it goes without saying that would be a massive responsibility in the unlikely event that that were to occur, but good. That’s a big component of accounting for family needs.

Step 5: Assign Directions On The Division Of Your Assets

Kevin Zywna, Wealthway Financial Advisors: And then after we do that, then we want to establish the directives or the directions. Who’s going to get what, when, how, a lot of that I talked about in the initial components of an estate plan that’s taken care of from the will, medical care directive, durable, financial power of attorney, limited power of attorney, and sometimes a trust is appropriate as well.

Beneficiaries AKA Transfer On Death Or Payable On Death Designations

Kevin Zywna, Wealthway Financial Advisors: We have a caller on the line. We have Ron from Chesapeake. Good evening, Ron, you’re on Dollars & Common Sense. Thanks for the call.

Caller: Evening. My question was talking about beneficiaries. You know, there’s a I guess you could do a Pay on Death on bank statements and stuff like that. How does that differ from the traditional beneficiary?

Kevin Zywna, Wealthway Financial Advisors: Good question. It doesn’t differ that much at all. It accomplishes the same objective. Sometimes the financial institution kind of calls their transfer process something a little bit different. Typically, you don’t have beneficiaries, technically on a individual bank account. But you would set it up as a transfer on death or payable on death to another individual. And so the mechanism is the same. But the wording is just a little bit different, but it’s pretty much the same thing.

Caller: Gotcha. All right. Well, thank you.

Kevin Zywna, Wealthway Financial Advisors: Thanks for the question, Ron. That’s a common one that you find at banks, they don’t call it a beneficiary a lot of times, rather a transfer on death or payable on death. Usually, you have to request it special. They don’t automatically set it up for you. But it usually requires just a name and some signatures. I should say whoever you name as a beneficiary, typically, they want a little bit more information, than just the name. The usual is name, address, social security number, birthdate, email, phone number, a way to get in touch with that person, if necessary. So, a little bit more than just a name is what you want to use for a beneficiary.

Step 6: Assign Powers of Attorney, Financial POA and Medical POA

Kevin Zywna, Wealthway Financial Advisors:  And along those lines before the break I was talking about the next step in the financial planning process or the estate planning process – establishing those directives or directions to the will or trust or Medical Directive or Power of Attorney. The important point to note there is of the two power of attorney components of a good estate plan, medical power of attorney, or financial power of attorney, they can be two separate people, two separate and distinct people, you don’t have to have your medical power of attorney and your financial power of attorney be the same person. In many instances, you probably don’t want them to be the same person.

Select A Medical Power of Attorney That Is Near By

Kevin Zywna, Wealthway Financial Advisors: The medical power of attorney, somebody who probably knows you fairly intimately is close to you in close physical proximity to you. So a lot of times it’s a spouse or adult children. But somebody who is boots on the ground, if you have to go to hospital, they need to be close by to give instruction to medical personnel, they can’t be, you know, in Nebraska, or something like that, and effectively be your medical power of attorney.

Select A Financial Power of Attorney That Is Financially Savvy

Kevin Zywna, Wealthway Financial Advisors: So that could be one person and then the financial power of attorney doesn’t have to be quite as close in proximation physically, but that should be somebody who’s rather astute in financial matters. So, you know, if you have certain kids that are better with money than others, then the ones that are better, you probably want to name them as you’re one of those as your financial power of attorney. So two separate people are two different types of power of attorney.

Step 7: Assign Beneficiaries And Revisit With Major Life Events

Kevin Zywna, Wealthway Financial Advisors: Okay, now on to the beneficiaries, like I talked about earlier, and was talking a little bit about with Ron was how they work. So once you set up beneficiaries on accounts, a lot of times it’s set it and forget it. You do it one time at the setup of an account, and then you don’t check it again, pretty much ever. So when there is a life event: marriage, birth of children, divorce, job change, that’s a good time, a good opportunity to revisit the beneficiary designations that you set up on retirement accounts, insurance products like life insurance, brokerage accounts, IRA accounts, all those accounts that normally come with the beneficiary designation, kind of as a default. Those need to be kept up to date and refreshed. Most people put their spouse as their primary beneficiary on the account. If you get divorced, and you fail to remove your ex-spouse as beneficiary, a lot of times (and this is  just a little bit beyond my competency, because its in the legal realm) a lot of times the ex spouse, who’s still listed as beneficiary, would inherit your account and disinherit your second spouse say if that was part of the picture and you don’t change the beneficiary. So they’re important to stay up with. Stay up with and make changes as necessary, as needs and circumstances change along the way.

Unpacking Beneficiary Terms

Kevin Zywna, Wealthway Financial Advisors: Don’t leave any beneficiary sections blank. Because if an account goes through probate, it can be distributed based on state’s rules for who gets the property instead of who you intend to get the property. And then oftentimes, with beneficiary designations, there’s a primary and secondary beneficiary listed on the account.

What Is A Contingent Beneficiary?

Primary, or contingent beneficiary is another word that’s used. The contingent beneficiary is somebody in the event that your primary beneficiary predeceases, you, then that contingent beneficiary steps up from the number two spot into the number one spot. While the odds are very low of having that happening typically, it’s a good estate planning practice, to always name primary beneficiaries, and contingent beneficiaries on all these accounts, so make sure you stay up to date with the beneficiaries and know that once again, it is the easiest, quickest, fastest, cheapest way to transfer assets at your death. And for people who have relatively simple estates, I would say we often see that sometimes 90% of your estate can transfer via beneficiary designation, and there’s only some minor items like a car. My understanding is that you could put, I don’t know the exact term, but has the same effect as a beneficiary designation on a deed to property of your house so that it transfers outside the probate process. And again, quickly, efficiently, and cheaply. So just know that that’s available as well.

Understanding Tax Implications In Estate Plans

Kevin Zywna, Wealthway Financial Advisors: All right, after you’ve buttoned up all your beneficiaries, then you’d better know what you’re dealing with from a tax standpoint, whether that be inheritance tax, or an estate tax. Now, most people overwhelmingly are not subject under current law, to a federal estate tax, because we all have an exemption right now that this year is worth almost $13 million per person. So unless your estate is over $13 million, then you are not going to pay any federal estate tax. And there is no inheritance tax at the federal level either. So the people who receive your assets, your beneficiaries and your heirs who received that, there is no federal estate inheritance tax.

However, at the state level, there can be both a tax on the value of your estate, when you pass, and or there can be a tax on the inheritance that gets passed to your heirs or beneficiaries. Now, in Virginia, and North Carolina, because we reached down there as well, there is no state estate tax or inheritance tax. But that’s on a state by state basis. And generally speaking, you don’t want to die in New Jersey, because I think you’re subject to both and a long tied up probate process as well. In New Jersey there can be some state taxes at the inheritance level, but not here in Virginia or in North Carolina. And so something to be mindful of there.

Importance Of An Estate Plan

Kevin Zywna, Wealthway Financial Advisors: While a will can be drawn up by an individual, it does not have to be done by an attorney or an estate planning attorney. It can be handwritten by yourself. Ideally, it would need to be witnessed by somebody else as well. There are a lot of informal methods of creating a will and estate plan, but we would not recommend any of those because typically the estate is a relatively well, it’s the culmination of your life’s accumulation, all the assets that you own, all the bank accounts, all the investment accounts. And it’s usually a sizable sum. So when you have a large number, that you’re looking to preserve, and pass efficiently, it’s usually wise to invest in professional advice, counsel and activities to ensure that you have a proper will, that follows current law. All the other directives that you set up: the medical power of attorney, the financial power of attorney, if there is a need for trust (and I’ll get into trust a little bit more before the end of the show), because a lot of people are usually interested in those, but the language around the estate plan is good and proper and legal. Go to an estate planning attorney. Pay a few $1,000 for a basic estate plan. It’s a good investment for the amount of most estates.

Executor Of The Will Be Ware Of Fraudulent Interlopers

Kevin Zywna, Wealthway Financial Advisors: Tonight we’re talking about estate planning, how to do it effectively, why it’s important, and what you should do about it if you want to keep peace in your family after you go. Right now we’re going to go out to Chesapeake and speak with Sheila, who has a question on the subject matter? Good evening, Sheila, you’re on Dollars & Common Sense.

Caller: Thanks so much. And thank you for being on the air and giving some advice on this subject. And I hope it’s on topic. But a friend of mine in Norfolk, found out that the HOA board person went into the court clerk and applied to take over as administrator of probate. She had not done probate, she was told that she did not need to because primarily her mother had her home and she had notified the board. And then he asked for the will. So they should have been aware there was a will, but they stated to the clerk that there was no will. And were able to get administrative. I’m not sure what you call it? It’s not executor, it’s something else. And I wondered what s your advice on that? Because I know my sister has done the same in Florida, which may be different, but either some states where you think it’s small enough, and you have things named in the will that you don’t necessarily need to do probate, but maybe you do. I’m not sure what you think about that, as far as somebody else being able to swoop in like that.

Kevin Zywna, Wealthway Financial Advisors: So I’m not sure if I’m following that. You said, somebody swooped in? There’s rarely any swooping in like that. Somebody is named as an executor of a will, that’s part of when you do a will, you name an executor. All it takes is being executor of somebody’s estate one time and then you learn firsthand exactly the importance of good estate planning, because the executor’s job is a heavy one. That is the person who is responsible for following the instructions in the will and distributing the property according to the wishes in the will, to the right people in the right amounts. And so it helps to be relatively financially sophisticated, to be that executor. So that’s the person who kind of controls the administration of the estate, unless, as you kind of pointed out, unless property has to pass via probate, and then that’s a legal process. And the legal system, and a judge determined the distribution of assets at that point. But somebody swooping in outside of that. I’m not too sure about that.

WNIS: Can I just interject this one thing? I was an executor. The executor of my grandmother’s estate back in, I don’t know 2012. So it was many, many years ago. Long story short, I went to Arizona to wrap up this because nobody knew a darn thing. And come to find out, her sister, who had been estranged of three years, swooped in and sold vehicles, had yard sales had everything sold, claimed there was nothing and then the only reason we found out is because she was trying to basically sell the house for what was left on the mortgage. And a lawyer heard about it and realized that there were next of kin and stopped everything. Said, whoa, whoa, whoa, you’re not allowed to touch anything. You have no rights to nothing. You’re just a sister.

Kevin Zywna, Wealthway Financial Advisors: So how was she allowed to sell what was not owned by her and was owned extensively, I guess by your grandmother in this example?

WNIS: She forged her name. Absolutely fraudulent. We talked to a lawyer and he basically said it’s going to be tough, because you’re going to have to prove that your grandmother owned stuff that you can’t prove she owned. So when we got there, there was nothing in the house. And we heard family jewelry was all gone. It’s all costume jewelry. And this person was just a really, you know, long story short, we found out that you know, there’s a reason we live halfway across the country.

Kevin Zywna, Wealthway Financial Advisors: Sheila, does that make sense? Or do you have something to add? There?

Caller: It does. And she is the executor of the will. But she was told because the will was just mainly the house that she did not have to do probate. Meanwhile, a board member of the HOA went to the clerk of the court and claimed there was no will and put him as administrator through probate. And so now they’re having to go to court and she’s having all these costs and time and stress. Because somebody else came and claimed a spot that was not there.

Kevin Zywna, Wealthway Financial Advisors: Yes. Okay. So all I can really say is, yes, once you get into the estate administration process, all kinds of people come out of the woodwork. And not all are well intentioned. You know, it’s sometimes crude, but you know, vultures picking out a carcass. People see money, and then the rightful owner is now deceased. So it makes it a lot easier for people who have ill intent to victimize. So now I’m not saying that that’s happening in this situation at all. We don’t know enough of the facts about that. But I am saying it’s a complicated process. There are a lot of moving parts. Hence, if anyone serves as an executive one time, you know how complicated it can be. And the messier and the more incomplete the estate plan, the harder it is on the executor.

Caller: Okay, and so beforehand, you would have some advice for somebody, but then afterwards, would you say to just go ahead and go through probate or at least make sure you’re known to them so that somebody can’t come in and do that?

Kevin Zywna, Wealthway Financial Advisors: I mean, I guess so. I mean, there’s nothing inherently wrong with the probate process. It just takes longer and it costs more. But it is it is the legal transfer process that we all have available to us. Usually, we try to avoid it because there are cheaper, quicker ways of transferring assets. But when things get sticky, or dicey or, you know, you question some people’s motives, then sometimes probate court is the best place to work it out.

Caller: Sure, and I think probably the takeaway for everybody listening and myself is that you need to have that estate planning in place to avoid all the stickiness. This is not a DIY project. So exactly. I said to her after this, I said get a lawyer. This is not DIY. It’s just unavoidable. Thank you so much.

Kevin Zywna, Wealthway Financial Advisors: All right. Thanks for the call, Sheila. You know, I said earlier, like you can do a fair amount of estate planning yourself. But just because you can, doesn’t mean you should. A lot of things in finance, just because you can doesn’t mean you should and estate planning is one of the things you should not try to do yourself. There’s just too many nuances, too many legal wrinkles, and too much opportunity for messing things up. And as I said at the outset of the show, one of the best gifts that you can give to your family, your heirs, and your loved ones, is an efficient estate plan. Because without it, the inheritors the heirs often are left grasping for, what did mom or dad want? How did they want us to receive the inheritance? Who did they want to get what? The heirlooms though, all those things, those questions don’t get answered unless you have a good estate plan.

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