CHAPTER 14

The Ultimate Gift

ESTATE PLANNING

“A lasting relationship with a woman is only possible if you are a business failure.”1 Despite lousy pickup lines like that, J. Paul Getty had—and lost—five wives. Maybe it was because he was rich? Actually, he wasn’t just rich. Fortune magazine named him the richest living American in 1957. He is rumored to have made his first million in 19162—two years after completing college—and subsequently pseudo-retired in 1917 to live the high life in sunny L.A.

George Getty, his father, apparently never much approved of his son’s style and told him he expected him to destroy the family company before he died. His father was wrong about his son’s business acumen, but the fractured relationship did pass from George to J. Paul, then to his six sons. True to form, J. Paul Getty refused the initial request of his son, Jean Paul Getty, Jr., for ransom money when his grandson, Getty III, was kidnapped. “The boy’s grandfather only changed his mind after one of the boy’s ears was cut off and sent to a newspaper,” reported the BBC News.3 Some legacy.

Contrast that with the scene I witnessed at the funeral of a close friend’s father in 2008, in the middle of the darkest days of the financial crisis. The room was filled with friends, family, and employees of the deceased, and I recall feeling as though time had stopped for that couple of hours. No one looked down to check the BlackBerry to see which bank had failed that morning or how far the market had tumbled. Real life had taken over. Honor and respect were paid by all to this man who’d left such an impression on so many. Even the priest conducting the service shared stories of what he had learned from this man, but the indelible impression the experience left on me was the sight of his adult children.

Arms locked with his sisters, my friend shared a number of stories that tactically recognized the love that his father had for each of the subgroups that came to honor him that day. But the eulogy concluded when the son and daughters publicly recognized that there was never any doubt that, above all, the chief love of his father’s life was his wife, their mother. There may never be an article in Fortune chronicling this man’s collection of material possessions, but his legacy has already taken hold. I met him only once, very briefly, but after attending his funeral, I want to live up to his legacy. How many others who were there—and more so, those who had known him for years or grew up in his family—have received a deposit into their character?

At the very least, the financial planning to-do of having estate planning documents drafted is an exercise in informing your state of residence how to dole out your stuff when you’re gone. At most, it is a life-giving exercise that changes lives—yours included.

Despite the profound and often solemn tone accompanying most discussions of after-death planning, you needn’t leave your sense of humor behind. On actual tombstones reads the following:

And another:

This book is an analysis of the intersection of money and life, and there is no financial planning topic for which the nuanced juxtaposition is less understood or more important than in estate planning. It is also a topic attracting a lot of attorneys, so your coauthors are compelled to give the following disclaimer to keep our behinds from being sued:

All of the recommendations contained herein are merely suggestions for your consideration that should be weighed by you and your estate planning attorney and acted upon in your own judgment forthwith. We are trained in said subject matter, but are not appointed as legal counsel in any state nor do we purport to be attorneys licensed to draft or administer wills, powers of attorney, health care powers of attorney, or advance directives at the behest or on behalf of any party other than our own persons.

Because most estate planning documents are written in tone and text more difficult to follow than our disclaimer, it is our goal to provide a bridge from the legalese jargon (that actually does play a role) to a more down-to-earth understanding of what is important and why. The most official estate planning term I must introduce to you in the interest of facilitating our discussion is—bucket. It’s an especially appropriate term considering the subject matter. One kicks the bucket when passing away. One creates a bucket list—now made famous by Jack Nicholson and Morgan Freeman for their aptly named movie, The Bucket List—of things you intend to do before you kick the bucket. But in the context of our discussion, the bucket will be the name we give to places, things, accounts, and trusts that house or hold assets other than people. You’ll see what I mean.

For starters, here is an outline of the primary estate planning documents almost everyone should have:

• Will
• Durable power of attorney
• Advance directives (or health care power of attorney and living will)

Wills

It is estimated that 80 percent of Americans—give or take—don’t have the most basic of estate planning documents, the will. If you think you’re off the hook because you fall into the 20 percent who do have a will, I encourage you to read further. Most of the hundreds of wills I’ve read in my career were unsatisfactory. Typically, they were thrown together when a couple, blessed with children, decided to go on vacation to Cancun without the kids and one of their friends said, in jest, “I hope your will is done!” The husband and wife suffered enough guilt that they called the first attorney they could think of (who probably wasn’t an estate planning attorney) and had simple wills drawn up.

For parents with young children, the most important directive in these documents has nothing to do with financial assets; it is the establishment of guardianship for their children in the case that both parents leave this earth. Here are the primary positions parents can and should designate even before they meet with the attorney:

• Guardian: The designee charged with the day-to-day care of your minor (and disabled adult) children.
• Trustee: The designee given the authority to steward the funds left behind for the purpose of caring for your minor and adult children.
• Personal representative or executor: The designee given the duty of guiding your estate through the probate process.

Probate is the name given to the process of transitioning assets from the estate to its intended recipients. The estate is the bucket holding the deceased’s assets until they are transferred to the beneficiaries. Prior to the disposition of the assets, the estate acts as their “owner.” If you chuckled because you’ve always associated the word estate with the ultrawealthy and you don’t see yourself in that category, consider this a promotion; in the eyes of the law, the assets you leave behind are an estate too.

The personal representative (PR), or executor in some states (same job, different name), watches over the estate bucket. The will sets forth the rules describing how the PR should handle that bucket. It typically suggests debts can be paid from it as well as the costs for burial and final arrangements, for example. The personal representative is the first person who has work to do after someone passes away, and he or she directs traffic through the probate process. Many estate planning attorneys handle estate administration and will offer to handle the duties of the PR or executor. There is nothing wrong with this—most lay people are not qualified to properly probate an estate and will likely seek legal counsel anyway—but please recognize attorneys don’t do it for free. Estate administration is a valuable service, but a profitable one as well.

The most important office parents of young children have to fill is the guardian. The guardian is given the enormous responsibility of taking care of your minor children, effectively becoming their parents. This should be the person or couple you believe will do the best job of molding the character of your children. It doesn’t take long for this to become a political decision. You may be afraid if you don’t ask your parents to be guardians, they will be offended. You may have already accepted the role of guardian for your best friends and feel tension if you don’t reciprocate. Recognize and stamp out any of this type of mental clutter around this decision. If needed, it will be the most important decision you’ve ever made and it shouldn’t be swayed by the thoughts, implications, or perceived influence of any outside party. The objective should be to find the person or people you believe will most closely align with your Personal or Family Principles discussed in Chapter 2.

Your children’s grandparents are often the first who come to mind for young couples. It may be true there is a high likelihood Granny and Gramps would instill similar values in your children. It’s also true they may be the first who come to mind when you and your spouse want to get away for the weekend. But remember what they look like after you get back from the weekend. They may not tell you, but after watching your two-, five-, and seven-year-olds for a three-day weekend, it takes Granny and Gramps another three days to recuperate. They would never say no if you ask them, but they’re happier being grandparents now and probably don’t have the energy or desire to be full-time parents again.

“I want to keep it in the family,” is an oft-heard refrain in my conversations with couples. This can be an ideal circumstance for some, but there are other considerations that may actually take precedent. Remember to first consider if the Personal Principles are in alignment, but also consider the geography. If your kids are a bit older, and attending school where they are deeply embedded with friends (who you like), it may make their lives without you much easier if they can stay in that environment.

Statistically speaking, being asked to be the guardian for someone’s children is largely ceremonial, but it is an honor worthy of a heartfelt invitation over dinner. Allow the individual or couple the time and space to consider your invitation, because if lightning strikes, it will be a major undertaking indeed. You, as the will planner, should also consider the financial and logistical set up of your prospective guardian(s). If they would have to put an addition onto their home, for example, you can add provisions into the will to help facilitate that.

The final primary designation you’ll want to make is the trustee. The trustee is the individual or individuals who will steward the money you leave behind to provide for your family in the absence of your paycheck. Enter another bucket—the trust. The trust is the bucket into which the assets flow that you intend to be there to care for your heirs. Trust is another word most people associate with significant wealth, but I’m not talking about a trust fund here—which incidentally can be a very useful tool for families of significant means. A testamentary trust is a bucket that doesn’t come into being until you cease to be. In most situations, the testamentary trust is only triggered at the death of the second spouse, or in an accident resulting in simultaneous deaths. In your will, you write the rules for this trust that will house the assets you’ve earmarked for your heirs, including your life insurance proceeds.

Let’s bring back into the picture the “Leave it to Beaver” couple from our life insurance calculation to illustrate the function of a testamentary trust. Ward and June go to Cabo San Lucas for their 20th anniversary. They’re fishing for marlin 20 miles off the coast when a squall overtakes the boat, and Ward and June meet their end. Between the two of them, they have $1.5 million of life insurance alone. The life insurance goes into the testamentary trust for the benefit of their two children, ages 10 and 16. Beaver and Wally are in no shape to handle the large sum left behind by their parents, and Ward and June knew that. They figured Eddie Haskell would convince Wally and Beaver to buy motorcycles and fund the startup of an illegal gambling ring, so they put a trustee in charge of the money and set specific provisions in place to ensure the money is there only for their sons’ benefit.

The money is to stay in the trust bucket to be used for health, education, maintenance, and support (also known as HEMS provisions). The HEMS provisions are broad enough that the funds could be used to pay for the boys’ undergraduate and graduate education, the down payment on a new home, or even the start-up money for a new business. The trust stays unified to be used fairly in the trustee’s discretion until Beaver reaches age 25. At that time, the pooled trust splits into two—one for each of the boys. The trustee is then instructed to give each of the boys a principal distribution of one-third of the trust at age 31, one-half of the remaining principal at age 37, and 100 percent of whatever’s left in the bucket at age 45.

You know your children better than any financial planner or attorney, so be creative in how you determine how you’d like the proceeds to be distributed. Your planner or attorney may help you think of contingencies you hadn’t considered, though. While spreading the distributions of principal over an extended schedule is certainly designed to protect the money from the child, it is also designed to protect the money for the child. For example, in the case where a child has a marriage fail early on, the provisions in the trust may help shelter your estate for the benefit of your children and grandchildren instead of the ex.

Many think they can make quick work of their estate planning by making the same trustworthy person the personal representative, guardian, and trustee. While this has the appeal of simplicity, consider the benefit of establishing a system of checks and balances by dispersing the duties. The PR will normally have a short-term job, but should be someone who has an eye for detail. The person you would deem ideal to raise your children may not be the most financially responsible person you know, so it can often make sense to split those duties.

If you are a single individual without children, you may think making a will just isn’t as important for you. Ironically, it may be even more important, because you have no default beneficiaries. Although the laws are different in each state, spouses and children are likely to be the default beneficiaries when someone dies intestate, the applicable term when one dies without a will in place. If you are single with children, the stakes are also high, especially if there are specific custody issues that apply. Who then, does not need a will? Someone who owns little or nothing and has no dependents in his or her care.

Durable Powers of Attorney

The will stipulates how things should happen when you die, and the durable power of attorney (DPOA) gives instructions on how your assets should be handled in the event that you are unavailable or unable to act while alive. It is especially important in the case that you are disabled and incapable of making decisions. The DPOA will give direction to the individual(s) whom you make your attorney(s)-in-fact. A “springing” document will not take effect until certain criteria are met, usually that you have been deemed unable to make decisions by specified medical authorities. While this seems only logical, it can create inconvenience when action needs to be taken immediately. A springing document may require your family physician and the attending physician at the hospital to certify your incapacity. With the fear of lawsuits in the medical realm at an all-time high, you can imagine the difficulties coming into play with a springing power of attorney.

A document that is “effective upon signing” is empowered as soon as the documents are signed. Well-written documents are extremely powerful—for all intents and purposes allowing your designee to wipe you out financially if they devise some nefarious plan—but my layman’s, nonlegal, please-don’t-sue-me opinion is that you should only pick someone in whom you have implicit trust, and then, trust that person.

A document that is effective upon signing can be a great convenience as well. If you are in the midst of buying or selling a piece of real estate while on a Tahitian holiday, your attorney-in-fact can help seal the deal for you. If your spouse makes most of the financial decisions in your household, your DPOA can allow your spouse to call your financial advisor or banker and give instructions on your behalf; however, in order for these conveniences to be available, you must register your powers of attorney with your banks and financial institutions. If you walk into your local bank branch, show the teller a 10 page legal document, and ask for all the cash in an account that is not in your name, things are not likely to go how you’d planned.

Not all durable powers of attorney are created equal. You might think a simple document declaring so-and-so has the right to act on your behalf in all matters would get the job done, but legal documents follow decades—sometimes centuries—of legal precedent seeking to find a balance between terms that are generically too broad or too rigidly specific. Ideal documents will likely be several pages long and specify financial provisions allowing for certain types of gifting, and especially, powers enabling your attorney-in-fact to make decisions regarding your IRAs, 401ks, or other retirement plans.

Advance Directives

The Terri Schiavo case brought to the entire country’s consciousness the issue at hand with the last of our primary estate planning documents, the advance directive, or as it’s known in some states, the health care power of attorney and the living will. Schiavo’s case was an extremely private family matter that was dragged into the media spotlight for many years. Terri Schiavo had suffered respiratory and cardiac arrest in 1990, and after years of attempts at rehabilitation, was diagnosed as being in a persistent vegetative state, a medical term defined by Mosby’s Medical Dictionary as “a state of wakefulness accompanied by an apparent complete lack of cognitive function, experienced by some patients in an irreversible coma.” Effectively, the body has the ability to be maintained, but brain function is lost and not expected to return.

In the Schiavo case, Michael Schiavo, Terri’s husband, claimed that it was Terri’s wish that she not be kept alive if found in a persistent vegetative state, but her parents insisted she be kept alive indefinitely. If Terri Schiavo had drafted a living will declaring how end-of-life medical decisions should be made, the painful, public ordeal Michael Schiavo and Terri’s parents endured would never have happened. In its absence, the family battle played out in public from as early as 1993, when Michael first entered a do-not-resuscitate order, until 2005 when a court ordered that life-sustaining measures for Mrs. Schiavo should cease. We in no way seek to impose any particular belief on you regarding these decisions, but urge you to make them for yourself so that no one else must.

An advance directive is a legal document comprising two other forms, a health care power of attorney and a living will. While the durable power of attorney stipulates who may act in your stead in matters of assets and liabilities if you are unavailable or unable to act, the health care power of attorney gives someone else the ability to make medical decisions for you in the case that you are unable. If you suffered a disabling injury and were unresponsive, who would make the decision to pursue the elective surgery? Your health care power of attorney designates that person. The living will portion of your advance directive spells out in plain language how you would like your end-of-life medical decisions to be made if you reach a persistent vegetative state.

Advance directives can also be written to be effective upon signing or springing, requiring a doctor or two to confirm you are actually unable to make decisions. I have spoken with medical professionals who have indicated springing advance directives can bog a process down at a moment when time is of the essence. When completed, the advance directive can be submitted to area hospitals to ensure, in the unlikely case it is needed, it will be optimally empowered. This is also the single document a young adult, without assets for which to write a will or durable power of attorney, should definitely have. Once you pass the age when your parents must make your medical decisions, a young adult should have an advance directive declaring who should be responsible to make those decisions. You can learn more information about your state’s advance directives at http://www.caringinfo.org/stateaddownload.

Estate planning documents you write on the back of a napkin may work in the movies—and in theory—but in practice, you should have official documents drafted. Documents that you find online for free or purchase for $19.99 from a spam e-mail are not guaranteed not to work, but let’s just say they’re worth precisely what you pay. These are the most important documents you’ll ever write, so don’t be a cheapskate and look for the most inexpensive way to accomplish this.

I also don’t recommend going to your sister-in-law or the guy on your softball team because you know she or he is a lawyer. They may do you the favor of creating estate planning documents from some old boilerplate templates they dust off, but the chances are good the documents won’t be much better than the online resources available. Like doctors, attorneys have specialties. You wouldn’t go to your family doctor for laser eye surgery, nor would you ask an orthopedic surgeon to give you a colonoscopy. There are attorneys who specialize in estate planning. I recommend asking your financial planner or CPA to refer you to a few, and then interview them yourself. Estate planning attorneys inside of large law firms are likely to cost more than a smaller practice specializing in estate planning. I also recommend asking for flat-fee pricing so you don’t have to worry about skimping on good questions for fear that you’re on the hourly billing clock.

Beneficiary Designations

These three estate planning documents—the will, durable power of attorney, and advance directive—are very important and surprisingly powerful when properly drafted. For that reason, it is mandatory you set aside the time and effort required to ensure you understand what you are doing. But despite their great importance, it’s time to share with you the most important estate planning document—the beneficiary designation form. Your 401ks, 403bs, IRAs, Roth IRAs, 529s, life insurance policies, and more have designated beneficiaries or successor custodians that outrank your will. That’s right; your beneficiary designations will trump your will, if different.

Many a divorcee has learned this lesson the hard way. Mr. Johnson got caught having a long-term affair with his secretary. Mrs. Johnson got a very good divorce attorney and got her fair share on her way out the door (actually, she got the door). Mr. Johnson felt the financial punishment didn’t fit the crime, so he was sure to redo all of his estate planning documents to ensure if he dropped dead, the former Mrs. Johnson wouldn’t get a penny. Then, he was struck by lightning in the middle of his backswing on the 13th hole at Pebble Beach, and met his untimely end.

His will had everything going to the secretary, but Mr. Johnson forgot to change the beneficiary on his 401k, his IRA, and his insurance policy, the value of which made up 70 percent of his entire postdivorce estate. The former Mrs. Johnson was still listed on each of those as beneficiary, so regardless of what the will says, as soon as she finishes the bronze plaque that will be placed on the 13th hole at Pebble Beach in memory of her late ex-husband, she’ll be meeting with her financial planner to figure out how to spend his money. A beneficiary designation trumps a will, and the titling on an asset trumps a beneficiary designation, so after you complete your estate planning documents, you must ensure the beneficiary designations and titling of your assets are in alignment with the wishes in your will.

So how should your beneficiary designations read once you’ve completed the will? Should the beneficiary designation on your life insurance and retirement accounts be a person, the trust bucket, or the estate bucket? Opinions vary widely on this, and choices will also differ depending on the laws of your state, but let’s review the available options.

If you are married, it will be the intent of most estate plans to have everything pass from one spouse to the other upon a single death, the most likely scenario. The “simple will” tells the courts to take whatever’s mine and give it to my spouse, and vice versa. Similarly, the primary beneficiaries on most retirement plans and insurance policies for each half of a married couple should be the other spouse, so that, in the case of death, the surviving spouse has immediate access to the family assets. The more difficult question arises: who or what should be the secondary or contingent beneficiary in the will, and then for the retirement plans and life insurance policies?

The tug-of-war in this decision-making process is between the maintain control camp and the save money camp. The control camp tends to be represented by attorneys and the money camp, by accountants. First, the simpler example of life insurance. If you and your spouse die simultaneously, the benefit of life insurance is to care for your children or other dependents. The trust bucket has the rules you’ve set forth giving you control beyond the grave to finance your children in a way fitting with your Personal Principles. The simplest way to ensure this works as planned is to designate no contingent beneficiary. In that case, the life insurance proceeds will go into the estate bucket, and the will directs the funds from the estate bucket into the trust bucket. This is the simplest way to ensure that the money gets where you want it to go without complication.

But why not send the life insurance proceeds directly to the trust bucket? You can. This becomes an even more attractive option as the size of the estate grows. You may ask the attorney for verbiage to be listed in your contingent beneficiary space to direct the insurance proceeds directly to the trust bucket, bypassing the estate bucket. The advantage of this method is that the money bypasses the probate process. Additionally, since the personal representative, the attorney, or both will likely be taking a fee based on the size of your probate estate (the stuff that ends up in the estate bucket), eliminating the life insurance proceeds from that process should decrease the associated costs. The disadvantage is that you’re adding a layer of complexity, and each time that happens, the risk of making a mistake increases.

So for most of your assets, the objective is to get them into the hands of direct beneficiaries and/or the trust; in both cases, you are controlling the process with the estate planning documents and beneficiary designations. But in dealing with retirement accounts, the Feds already have a set of rules in place for how distributions should be made. Here is where the set of rules you’ve created and the set of rules the Feds created tend to conflict. According to the Feds, here is how distributions are taken from the following retirement accounts:

For employer-sponsored retirement accounts and IRAs, beneficiaries have the right to take full distribution immediately if they choose and pay the tax in the year in which the distribution is taken, but beneficiaries may also have the ability to stretch those distributions out over their own life expectancy. Again, distributions from 401ks, 403bs, and IRAs (with the exception of Roth IRAs) are taxed—even to beneficiaries. Therefore, it is very possible that being forced to take a full distribution from an inherited IRA or 401k could cause a serious tax problem for a beneficiary.

For beneficiaries who don’t need the money and would prefer to spread the tax burden over their lifetime, this is an excellent option that has become unofficially known as the “Stretch IRA.” Similar distributions are allowed in 401ks, although the life expectancy table may not be as favorable as in an IRA. Special dispensation is made for spousal beneficiaries. A spouse may choose to allow the IRA to be treated as an inherited IRA as any beneficiary would, and take the distributions based on his or her own life expectancy; but the surviving spouse also has the ability to choose to roll the deceased spouse’s IRA into his or her own IRA.

The advantage of consolidation is simplicity—the surviving spouse need not worry about two different accounts and required distributions, but the consolidated IRA will be treated as if there were no death, and the surviving spouse beneficiary will be subject to the normal distribution rules (no distribution without penalty before 59½ and mandatory required distributions at age 70½). The advantage to a spouse who keeps his or her deceased spouse’s IRA separate, as an inherited IRA, is that a spouse under the age of 59½, who may need funds from the IRA on which to live, would be able to take those distributions free of penalty (although not free of tax, of course).

With all those rules set forth in the IRA, you can probably see how things can get a little hairy when you try to incorporate your rules with those of the IRS. If you make your spouse the primary beneficiary and the estate your contingent beneficiary, explicitly or by default, and then the cruise ship with you and your spouse goes down, you will have voided all the IRA tax privilege for your heirs. Effectively, tax will be paid on the entire amount as it is distributed to the estate. Your trust will now be able to control the leftover funds, but after almost half of the IRA is slashed in taxes, your heirs have a lot less money; however, if you keep your heirs listed as direct beneficiaries of your 401ks and IRAs, they would have access to the funds once they reach the age of majority. Do you see the battle between maintaining control and saving money?

For the broad cross-section of Baby Boomer parents—and younger—for whom this would be a concern, consider the following suggestion. If, heaven forbid, you and your spouse “go” simultaneously, leaving your children behind, it is likely the majority of your estate will be your life insurance and real estate proceeds. Your 401ks, 403bs, and IRAs are of reasonable size, but still less than your life insurance, the purchase of which was to care for your family in your absence, and your real estate. You can maintain control over those IRA assets while your beneficiaries are still minors. Minors can’t inherit an IRA anyway, so you’ll want to make the person you’ve chosen as your trustee the custodian for your minor children. But when they reach the age of majority (21 in most states), they will have full control of how they spend the money.

Therefore, consider taking advantage of the control outlined in your trust with your life insurance, real estate, and personal assets, and opt for the money-saving method with your retirement plans by making your children direct beneficiaries, allowing them the option of stretching that IRA out over time. If your kid decides to blow it all on his 21st birthday and throw a party with gold-plated beer kegs and U2 as the night’s entertainment, the IRA will be gone, but the trust bucket will still have control of the bulk of your estate. However, if your children are wise enough to listen to the good advice of their trustee, stretching their distributions out over their lifetime, all the better. It is possible to maintain elements of the tax privilege and the control you desire by creating a trust specifically designed to work with IRA assets, but it is much more complicated and costly, and you’ll recall that added complications increase the risk of something not working in the future.

Latin may be a dead language, but it’s alive and well in the legal realm. In order to properly complete your beneficiary designations, you need to understand the difference between per stirpes and per capita. Most beneficiary designations, if not otherwise noted, will default to per capita. Consider another Cleaver scenario. Later in life, Ward has already passed on. June lives at a retirement community, and Wally and Beaver are married with children of their own. Beaver, ever the good son, drives to pick Mom up to take her to lunch, but he’s blindsided by a truck that ran through the red light and pronounced dead on the spot. June, upon hearing the news, dies of cardiac arrest.

If June’s beneficiary designations are per stirpes, Wally would receive his half and Beaver’s lineal descendents—his children, not his wife—would receive the other half. If listed as per capita, and Beaver predeceases June, the remaining beneficiaries would split the accounts; in this case, Wally would get 100 percent, since there were only two of them. If there were three children, instead of the account or insurance policy proceeds being split ⅓, ⅓, ⅓, it would be split ½, ½ between the still-living beneficiaries.

Because most of your beneficiary designations will default to per capita, it is very important that you specify per stirpes if it is your intent to have your respective grandchildren receive the inheritance of any child who predeceases you. Some IRA custodians may even refuse to do it, because it creates more work and legal compliance for them; but most will comply, and it is a common practice with most insurance companies.

Whether you are talking about the personal representative, guardian, and trustee in your will; your designation of attorney-in-fact in your durable power of attorney; your designation of health care attorney-in-fact; or your beneficiaries, you should always list a primary designee and at least a contingent designee in the case that your primary is unwilling or unable to fulfill his or her duty.

Probate

We have mentioned the process of probate several times, and it deserves another look. As mentioned, each state has its own process, and some are more notorious than others. The primary negative implications of probate are the cost and the lack of privacy. Considering the cost, some states have caps on the amount a personal representative or executor—often an attorney—can charge to walk an estate through the probate process. Examine these costs to see if yours is a state with notably onerous probate costs. Elvis Presley didn’t do proper estate planning, and his estate was hammered by the probate process, making his private life public for the whole world and eating up much of his estate in fees and taxes.

One technique becoming more widely known for individuals and families attempting to avoid probate is the drafting of a revocable living trust (RLT). Unlike the testamentary trust bucket that doesn’t exist until you don’t, the RLT is a bucket that is supposed to own your stuff while you’re living. The idea is that you title all of your worldly possessions in the name of the trust while you’re still alive so that when you die, there is nothing left to go through probate. The trust lives on. There are some states in which optimal estate planning practically requires a revocable living trust, but most can avoid probate without paying significantly more to create a revocable living trust.

Your retirement accounts and life insurance policies already have beneficiary designations. As long as you designate a person or trust directly, those assets will avoid probate. Your liquid investment accounts without beneficiary designations can have beneficiary designations by having a transfer on death (TOD) feature added to the account. Your bank accounts, similarly, can be fitted with payable on death (POD) designations. Even your home can pass free of probate with a life estate deed, which transfers the property directly to a beneficiary of your choice with a valid death certificate.

Estate Tax

While most families will be well served with a simple will directing one’s assets to primary and contingent beneficiaries, or the slightly more complex will with a testamentary trust, if your net worth is already in the millions, you’ve been blessed financially and cursed to deal with state and federal estate tax. Federal estate tax, in 2011 and 2012, is levied on estates in excess of $5 million, but with the proper estate planning, a married couple can shelter up to $10 million from federal estate tax. Most people won’t have this problem, but those who do face a tax of up to 35 percent of everything over the limit. That tax is on top of any state estate tax, state inheritance tax, and federal income tax. To make matters more confusing, the estate tax is currently set to “sunset” back to a $1,000,000 exemption and a top rate of 55 percent in 2013. Majority opinion is that Congress will deal with it before we celebrate New Year’s Day 2014 (but they seem to have a lot on their plate).

Be wary, however, because many states have an estate tax for estates over the $1 million level, and life insurance proceeds alone (which are included in the estate tax calculation) will put many in the crosshairs of state estate tax. And, if the federal exemption drops back under $1 million, with a whopping 55 percent top tax rate, it may well be worth doing some additional estate planning to seek ways to avoid it.

As you go through the process of considering the many decisions you have to make surrounding your estate plan, it is best to create a survivor guide to accompany your documents. This is not an official legal document, but a booklet articulating important information like the following: the names and contact information of the folks closest to you, churches and associations of which you’re a member, memorial plans, names and contact information for your financial planner, attorney, accountant, and insurance agent, as well as additional information or personal wishes that didn’t make it into your estate planning documents.

Hopefully your estate planning documents will reflect your wishes, but they will never articulate in your words what you want your legacy to be. These financial planning recommendations are more meaningful than your investment asset allocation or the amount of personal liability protection, and I encourage you to go beyond thinking about your estate to consider your legacy. Even if you are penniless and in your 20s, you’re making a mark on this world, and careful consideration about how you’d like to leave it is a worthwhile pursuit.

1. Bradley Coates, Divorce With Decency (Honolulu: University of Hawai’i Press, 2008).

2. In today’s dollars, that is the equivalent of $16,578,160.77!

3. BBC News. Profile: Sir John Paul Getty II June 13,2001. http://news.bbc.co.uk/2/hi/uk_news/1386478.stm