Written by: Carrie L. Fellon, CFP®, CRPS
Think an 18-year-old doesn’t need an estate plan? Think again.
Once a child turns 18, his or her parents can no longer make medical and financial decisions for them.* Most young adults would likely want their parents to be able to receive information from health care providers and make decisions for medical treatment if they were to become incapacitated. They might also want their parents to be able to sign a lease in their absence or wire them money from their bank account if studying or travelling far from home. There’s a lot to consider, so let’s discuss various estate planning documents and the life stages at which they should be updated.
Estate planning affects every individual. An estate is the net worth of a person at any point in time, alive or dead. The goal of estate planning is the effective and efficient transfer of assets from owner to beneficiaries. It provides financial management direction should an individual become incapacitated or incompetent, as well as medical directives to attending doctors and family. Estate planning also provides guidelines for guardianship of minor children and for any charitable intentions. In short, estate planning is an essential aspect of every individual’s life management and administration.
Before we review the life stages at which we advise clients to revisit their estate plan, let’s first introduce key estate planning documents.
Key Estate Planning Documents:
Durable Power of Attorney (POA): This document authorizes another person as agent to control your finances and to sign legal documents on your behalf if you were to become mentally incapacitated or otherwise unable to make these decisions on your own. A POA does not distribute your property after death.
Durable Health-Care Power of Attorney (HCPOA): This document appoints an agent to make medical decisions on your behalf, such as hiring or firing medical professionals or admitting you to a hospital. A HCPOA does not distribute your property after death.
Advanced Medical Directive (Living Will): This document provides direct instruction to attending medical professionals regarding life sustaining medical treatment. It makes your wishes known via a written statement, yet by itself does not appoint a person to act on your behalf and make those decisions.
HIPAA Authorization: This document allows your health information to be used by or disclosed to a third party.
Last Will and Testament: This document provides direction for administration and distribution of your assets, specifying who is to manage the distribution process – the executor – and which individuals or charities are provided for. It also names guardians for minor children and establishes any testamentary trusts that are created to shield assets from taxation or to establish future interest provisions.
Be aware that beneficiary designations on retirement accounts or life insurance policies supersede the terms of a will.
Revocable Living Trust: By transferring the ownership of your assets to this trust, you maintain control of the assets while removing them from probate – a process whereby a will is proved in a court of law and accepted as the true last testament of the deceased. Upon your death, assets held in the trust will immediately fall under the control of your named trustee and avoid the time, expense, and public openness of probate.
All Estate Planning Documents: All estate planning documents should name primary and contingent agents to act on your behalf so that your estate may be handled smoothly during your lifetime as well as at or after your death. As you go through life, your estate plan should reflect the changes you’ve experienced.
Life Stages Requiring Estate Plan Review/Action:
Age 18: At age 18, your vital documents should include durable and health care powers of attorney, living will, and HIPAA authorization. You’ll likely appoint as agents your parents or other close family members.
New Job: Anyone starting their career or a new job should meet with their human resources department to learn which benefits require you to appoint beneficiaries. You will want to name someone to receive the proceeds of any employer provided life insurance, health savings account, and 401(k) or other retirement plan.
Committed Relationship: Once you’re in a committed relationship, engaged, or newly married, draft a will or trust to ensure that your life partner inherits your possessions. Otherwise, your assets may be split among your partner and closest relatives according to your state’s intestate laws. Also review your powers of attorney, living will, and HIPAA authorization and revise if needed to appoint your partner as agent.
Shared Property: If you own property with another person, you each may want to purchase or increase your life insurance coverage to pay off the mortgage if one of you were to die.
New Parents: Once you become parents, be sure to execute an emergency guardianship proxy to nominate someone to care for your child if both parents become incapacitated or if, for example, you take a vacation and your child needs emergency medical treatment. Update your will or trust to appoint a guardian or trustee of your minor children and their inheritance. Each time you add another child to your family, review your life insurance coverage and consider increasing it. If you have a special needs child, set up a special needs trust which will allow you to provide for your child without jeopardizing their eligibility for government benefits.
Parents of Older, Independent Children: After your kids move out and are independent, review your life insurance policies. If your need for coverage is reduced or eliminated, you can make a tax-free 1035 exchange from a cash-value life insurance policy to a traditional long-term-care policy or a policy that combines life insurance and long-term-care benefits. You can also transfer money tax-free from an annuity to cover premiums for a traditional long-term-care policy or to pay for another annuity that also provides long-term-care benefits.
Divorce or Death of Spouse: Should you become single as a result of divorce or death of your spouse, update any beneficiary designations and powers of attorney that name your former or deceased spouse. Review your will or trust and consider appointing new or additional representatives to act on your behalf while you’re living and after you’re gone.
Retirement Years: During your retirement years, revisit your estate plan to be sure that the people you’ve named are still living and able to serve in their appointed role. If you’re raising your grandchildren, review your documents with the same perspective as when you were parents with your own children. Consider the tax ramifications to non-spouse beneficiaries of your IRA since the passage of the SECURE Act effective January 1, 2020, which now requires such heirs to deplete the account within 10 years of the death of the original account holder rather than spread disbursements over their lifetime. The SECURE Act also raises the required minimum distribution (RMD) age from 70½ to 72 for those retirees born on or after July 1, 1949. Thus, if you turned 70½ in 2019, the new age 72 provision does not apply to you. If you’re charitably inclined and are at least age 70½, you may want to donate directly to charity from your IRA, bypassing any federal tax liability.
In General: Regardless of your age, review your estate plan as life changes occur. Examples include death of a beneficiary, change in employment, or increase in net worth due to an inheritance or other windfall.
Estate planning can be complex. As Your Personal CFO at Agili, we conduct a thorough estate review during our comprehensive financial planning process and biennially thereafter or as circumstances warrant. Contact your financial strategist if your estate plan requires an update. If you are new to Agili, we invite you to get started with us!
* In Alabama and Nebraska, that age is 19. In Mississippi, that age is 21.