Many of us do not consider estate planning when undertaking financial planning. Most individuals see financial planning simply as collecting assets, lowering debt, paying for children’s education, retirement, and maybe even savings to start a new business. They do not consider estate planning as part of financial planning; however, estate planning is an essential part of financial planning. When you purchase your car, do you know what happens to it if something happens to you?  And how would your state transfer the car to your heirs if there is no will or trust providing direction? Do you know that each state has its own estate planning regulations as well as taxes? Do you know if you live in a state that is a community property state? 

The answers to these questions will ensure your wishes are communicated clearly to your loved ones and help your heirs make sure your final wishes are carried out. 

Let’s consider the Smith family. Joe and his wife Jane have two children and own a home in California. If something happens to Joe, how would Jane and the kids manage? Thankfully, Mr. and Mrs. Smith have made an appointment to talk about estate planning with their CFP®.

In this blog, our goal is to introduce you to the basics of estate planning in a simplified way. What is the difference between a will and a trust? What is the difference between “intestate” vs. “testate”? What is probate vs. community property?

Before we dive into answering the above questions, the basics of estate planning require a few documents such as a will, durable power of attorney for health care, power of attorney for property, a living will along with an advanced medical directive.

One of the first things the Smiths will need to do, is make sure they have these documents. A durable power of attorney for healthcare will allow Joe to designate Jane as the person authorized to make medical decisions on his behalf if he is not able to. If Joe has a living will and an advanced medical directive, it will be a legal document that takes the pressure off of Jane if decisions need to be made regarding his healthcare, because he will state what actions he wants taken, or not.

Proper estate planning minimizes transfer costs, is an efficient way of transferring assets, and achieves distribution based on your control/wishes. So, by having these legal documents in place, Joe can help minimize the financial impact Jane and the kids would have in the event he passes away. Carefully considered estate planning allows Joe to take care of his family after he is gone. Estate planning can also help the Smith family plan for healthcare costs because it plans for liquidity later in life.

Here is a list of terms you might hear when discussing estate planning with your CFP®. You should feel comfortable discussing the benefits of estate planning and the types of options available to you; after all, this is your opportunity to make sure that your final wishes are carried out the way you prefer. 

Will: This is a legal document that allows you to control how your assets will be distributed.

Since Joe has a Will, he knows how his family will be taken care of when he passes away.

 Trust: A trust is a fiduciary relationship in which you have your property or assets held by a trustee for the benefit of your heirs. 

If something were to happen to both Joe and Jane and since the children are under age 18, Joe has named his sister as Trustee. This means that Aunt Susan will manage the inheritance for the children.

Testate: A person who dies with a valid will is said to have died “testate.”

Since Joe has a will that was written by a lawyer and signed and witnessed, he will die testate.

Intestate: A person who dies without a valid will is said to have died “intestate.”

 Intestate This term is also used when individuals die with a valid will but have not disposed of all their assets.

At the time of his death, Joe had not disposed of his assets since his wife and children were living with him in the family home. Although he has a valid will, his estate is considered to be intestate.

Probate: This term is used when there is no will. The process of dispersing property and assets will be expensive and lengthy. It is important to note that the property would transfer following state law instead of the individual’s wishes.

Community Property: This is property owned by both spouses. Even if one spouse contributes 100% of the funds towards buying a house, couples living in a community property state each own 50%.

Joe and Jane own their home in California, which is a community property state. Even though Joe paid for 100% of the value of their home, they each own 50%. When he dies, Jane can inherit his 50%.

There are different types of wills, so it is crucial to understand each one and how it fits your estate plan. 

Types of Wills: 

Holographic wills: This type of will has been hand-written, signed, and dated by the testator. You must realize that not all states permit a holographic will, and those that do, have requirements that must be met for it to be valid. 

Nuncupative wills: This will is also referred to as a “deathbed wish” because it is typically implemented by those who are close to passing away. A nuncupative will is stated orally by the testator with witnesses present. Only a few states allow nuncupative wills, and they have requirements that need to be met.

Statutory wills: This will is made on behalf of someone who is not capable of making decisions for themselves. A statutory will is written based on the state’s laws, and then it is signed, dated, and witnessed. 

Through good planning and foresight, Joe and Jane met with their CFP® and their lawyer to work out the best estate plan for their family. Joe is relieved to have a living will and advanced directive for healthcare in place, as well as a medical power of attorney. These documents give Jane power to make medical decisions on his behalf. They also take the burden away from her in the event that end-of-life-decisions need to be made. The Will that Joe crafted with his lawyer gives him peace of mind that his wife and children will receive his assets. And should something happen to both Joe and Jane, they are reassured knowing that the estate will be held in trust for the minor children by Aunt Susan.

If you do not want there to be any doubt about your final wishes, you must have a Will in place. Most people are thinking about a simple will when discussing wills, but you can see several options could possibly be used. The only way to guarantee that you have final control over your estate and gifting to your heirs is to speak with your lawyer and have him or her craft a Last Will And Testament that meets your expectations. 

At Luminous Financial & Tax Advisors, we are happy to discuss how your will or trust fits into your estate planning. This is a crucial piece of your estate, and we are here to walk you through this critical piece of your plan. Estate planning not only provides for your loved ones, but it gives you peace of mind.

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