By: Joey Casolaro, CFP® and AnnaMarie Mock, CFP®
In 1977, a celebrity suffered a heart attack and passed away with an estate of about $10 million dollars. Of that $10 million, about 70% was wiped out from taxes and fees, resulting in a net estate of $3,000,000.
So, whose estate was this, and how did they end up losing $7,000,000 of their assets? The celebrity was “The King of Rock & Roll” - Elvis Presley, and improper estate planning was the culprit for the significant reduction of the estate.
The main objectives of estate planning are to provide for loved ones, direct and control where your assets go and how they are managed, reduce taxes/fees, and maintain privacy by avoiding probate.
One of the reasons Elvis Presley paid so much in fees is because his estate had to go through probate, which is an expensive and time-consuming process that involves identifying the deceased person’s assets and liabilities, paying debts and taxes, and distributing what’s left to the named beneficiaries (if any) all under the court’s supervision.
Had proper estate planning been done, his assets could have remained out of probate, which would have saved his estate a large sum of money and kept everything private since anything that goes through probate is public information.
Estate planning is something many people put off, usually because they don’t feel like they have enough assets for it to be a problem, or they don’t want to think about it and instead wait until they’re “older” to address it. These reasons, however, could not be further from the truth, and by avoiding estate planning, you are putting yourself and your loved ones at risk.
Estate Planning Documents
Outlined below are the main types of estate documents, along with an explanation of their purpose.
1. Last Will and Testament
The last will and testament is a legal document that captures and outlines the disposition of an individual’s possessions and assets.
A will appoints an executor to act on behalf of the decedent to administer the estate through the probate process. It is the foundation of an estate plan in that it identifies how the decedent’s assets will be divided, including the recipient(s) and amount(s).
However, some assets will not be directed by the will but will be based on the beneficiary designations listed on the account. Accounts like qualified retirement accounts, individual retirement accounts (i.e. IRAs), employer retirement accounts (i.e. 401(k)s), and life insurance are all directed based on beneficiary designations. The will should be written in a consistent manner with the assets that pass outside of the will.
The will, also, establishes guardian arrangements for any surviving dependents, including the care of special needs children or aging parents.
In the event that the decedent died intestate (died without a will), and there is no living spouse, the court will name a person to act as the guardian and a conservator to manage the child’s financial affairs until they reach age of majority.
A court appointed guardian/ conservator may not be an appropriate option, as they may not be able to tailor their care to the needs of the dependent. In addition, it may take months for guardianship to be granted.
2. Power of Attorney (POA)
A power of attorney (POA) names an agent or attorney-in-fact to act on your behalf during your life. The agent can have broad or limited authority to make financial decisions.
A conventional POA will lapse when the creator is incapacitated, but durable POAs will remain in force and enables the agent to continue to manage the affairs.
A springing POA is valid only when the creator becomes incapacitated.
For any long-term care scenarios, a durable power of attorney (DPOA) provides control to the agent for making financial decisions like handling bank accounts, signing checks, selling property/assets, paying bills, and filing taxes.
3. Health Care Directive & Power of Attorney
Similar to a financial POA, a medical power of attorney appoints an agent to speak on your behalf for medical related decisions when you do not have the capacity to do so. The medical POA can take affect for short time periods or for a longer health crisis.
A Medical Power of Attorney allows the health care agent to readily access medical records and make decisions related to your healthcare. These decisions could include medical and surgical treatments, hospitalization, home health care, and prolonging interventions.
The medical power of attorney should specifically incorporate the HIPAA release provisions and identify the agent as the personal representative. Coupled with the Medical Power of Attorney, you should, also, get a Health Care Medical Directive, which allows you to express your desires related to end of life care.
There is particular language that has to be included in Medical Power of Attorney documents based on Health Insurance Portability and Accountability Act (HIPAA) updated in 2004. Please refer to an earlier article that goes in depth on Medical Power of Attorney documents.
4. Revocable Living Trust
A trust document used to avoid probate, direct assets, minimize estate taxes, and protect the privacy of the trust owner and beneficiaries of the trust.
Estate planning can be very overwhelming, especially when utilizing complex strategies. If you would like to have estate documents reviewed or drafted for yourself and don’t know where to start, please reach out to your Advisor. We are not estate attorneys and cannot prepare legal documents, but we can provide an analysis of your current estate documents if you already have them and join meetings with your estate attorney.
Joey Casolaro is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, a Fee-Only fiduciary wealth advisory firm that offers comprehensive financial planning, retirement planning, and investment management. Joey graduated from the University of South Florida with a bachelor’s degree in personal finance and successfully passed the CFP national exam in 2021. Joey enjoys working out, spending time outdoors, and hanging out with family and friends in his free time.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.