Co-Authored by Katy Vermeer
Estate planning is one of the key components of the integrative wealth management process. However, for many people, absent major life changes, drafting or updating estate documents is a process they may only consider every five to ten years. We recommend, however, that clients consider the following five key related items on a more frequent basis:
Beneficiary designations are a very important part of one’s broader estate plan because they list the person or entity who would benefit when the account owner passes away. For many, beneficiary- designated accounts represent the majority of their assets so it is critical to be deliberate about who is named to receive these assets. These include Individual Retirement Accounts (both Traditional and Roth), 401(k)s, pensions, annuities, and insurance policies. We encourage clients to name both primary and contingent beneficiaries and review these designations annually to ensure they are consistent with their intentions.
If one has a trust-based estate plan, it is critically important to properly title the assets in the name of the trust. Assets may include primary residences, vacation homes or cabins, bank accounts, and brokerage accounts, among others. Assets not titled in the name of one’s trust will likely go through probate, which may be contrary to the intentions of a trust-based estate plan. We recommend that clients regularly review the ownership of all of their assets to ensure titling is consistent with the design of their estate plan.
The two main incapacity documents are a healthcare directive and a financial power of attorney. These legal documents allow a person to name an agent who may make medical and financial decisions on their behalf during times of incapacity. Note that these documents vary by state, so if an individual has a second home or spends significant time in a state other than where the documents were drafted, the individual may want to ask an attorney about drafting additional incapacity documents for that other state.
For testamentary charitable gifting, we encourage naming preferred charities as beneficiaries on qualified retirement accounts. We encourage this practice because a charity named as a beneficiary of a qualified retirement account will receive distributions free of any income taxes. On the other hand, an individual named as a beneficiary of a qualified retirement account will pay ordinary income taxes on all distributions.
Understandably, clients are concerned about maximizing what they leave behind to their heirs or to charities. To ensure current gifting preferences are accurately reflected, we recommend conducting an annual review of the gift amounts intended for various beneficiaries. At the same time, one should regularly monitor and review (with their advisor) any changes to federal and state laws governing estate tax exemption amounts. In fact, the state of Minnesota recently passed a tax bill that increases the estate tax exemptions. (More information about this change is available in the July 2017 Update from the Tax Team.)
In addition to the aforementioned considerations, we encourage conversations with family members about estate planning intentions. These conversations are opportunities to communicate what is important to you, to pass on family values, to achieve a better understanding of desires and goals, and to best plan for the future. Our team at CCM is here to facilitate that process, and step through the above review items, with you and your family at any time.