We all like to believe that our loved ones will live forever, but unfortunately, that is not the reality. Discussing how to approach the end of life is a topic many people avoid and can be difficult to tackle with aging parents.
We encourage you to start the conversation with your parents about estate planning now to ensure the proper documents are in place. Estate planning allows your parents to make their wishes clear and alleviates stress for loved ones during a time that is already difficult enough.
Here are some tips for having that conversation, as well as what a completed estate plan looks like:
Don’t Wait to Have the Conversation
It may seem easier to put off a difficult conversation like this until your parents are elderly and issues begin to arise. However, the truth is that delaying the estate planning process puts them at risk of waiting until it is too late.
As your parents age, they could become physically or mentally unable to make decisions, causing headaches with medical and financial issues. Even if they aren’t elderly, an accident could cause the same issues.
If you haven’t already discussed estate planning with your parents, now is a good time. The sooner you start working together toward an effective plan for everyone involved, the better off everyone will be.
It can be a great start to begin the conversation with your parents by discussing the value of having estate planning documents. Estate planning covers much more than just monetary decisions. For example, you might ask if they became sick and unable to make medical decisions, who would they want to make those decisions on their behalf?
An important part of the conversation is to identify their goals. For example:
Do they want to leave an inheritance for their heirs?
Who do they want to make financial and medical decisions for them?
Would they rather make gifts to family or charity while they’re still around to see the impact?
Do they have specific bequests for some of their belongings?
Do they know what type of funeral arrangements they want?
Knowing their goals will help paint a clearer picture of what their estate plan should look like and what documents they may need.
Gather Important Financial Documents
To get a clear picture of your parents’ financial situation, you’ll need to gather statements for all their major financial accounts. These include bank accounts, investment accounts, retirement plans, real estate, and business interests, to name a few.
Additionally, you do not want to ignore smaller valuables, like jewelry or other heirlooms. Your parents may have specific bequests or wishes for those items.
Finally, don’t forget mortgages or other loans they’ve yet to pay off since these debts don’t disappear upon the owners’ passing.
While this step can be a sticking point for families that aren’t open about financials, you can’t build a solid estate plan without knowing what is in the estate. Consider providing your parents with a list of common assets and liabilities. This list can help them locate and organize their accounts and lessen the likelihood of missing something while drafting the estate plan.
Consult with an Experienced Estate Planning Attorney
The next step is to consult with an experienced estate planning attorney or law firm. An experienced estate planning attorney will help create a plan that fits your parents’ needs and protect their assets from taxes and probate. While an attorney may not be cheap, they can help you save money and avoid common pitfalls that will more than make up for the initial fee.
How do you find an experienced estate planning attorney? The best way is through recommendations from people you trust who have had similar experiences. You can also ask financial professionals you work with for referrals.
If that does not work, try searching the internet for firms specializing in estate planning. A site like The American College of Trust and Estate Counsel can help you find attorneys in your parents’ area specializing in various areas of estate planning. Thoroughly vet any attorney by reading through their website and having a consultation to make sure you and your parents are comfortable with their practice.
Some online options allow you to quickly draft a simple estate plan at a discount compared with an attorney. These tend to be best for younger people with fewer assets. But they can sometimes be appropriate for older people who have simple wishes and don’t need the personalized assistance of an attorney.
You should be wary of anyone offering free or discounted services. Chances are high that something’s fishy about their offer. The last thing you want is your parents’ money wasted on scams!
Draft the Appropriate Estate Planning Documents
Many people think of a will or trust when they think of estate planning. While those are important documents, there are others that everyone needs for a complete estate plan.
If you’re working with an estate planning attorney, then they should ensure you have all the necessary documents. If not, it will be up to you and your parents to make sure there are no holes in the plan.
Below are documents that everyone should have in their plan.
WilL
A will is an essential document that acts as the bedrock for estate plans because it dictates a person’s wishes for their assets after their passing.
If your parents pass away without a will, then the state in which they reside will determine how to distribute their assets according to its laws. This is known as dying intestate, and it can cause the probate process to become lengthy and expensive, which no one wants to deal with while grieving.
Probate is the legal process for settling an estate, and it occurs even if a will is in place. Assets that pass through the will are subject to probate, but beneficiary designations on certain assets can supersede the will and avoid probate. Probate is also part of the public record, so some privacy will be lost during the process.
For example, let’s say a parent has an IRA they will pass on to you and your sister. If you and your sister are named as beneficiaries, then the IRA will pass directly to the two of you and avoid probate. This means the inheritance is passed on quickly and is not part of the public record, which can help prevent bad actors.
An effective will clearly communicates how assets should be distributed, speeding up the probate process and causing fewer headaches for heirs. It also allows the designation of an executor to carry out the will’s provisions instead of relying on the state to handle it, which can ensure your parents’ wishes are more accurately followed with an understanding of family dynamics.
Trust
A simple way of thinking about trusts is that they are wills with more control and protection. A trust allows assets to be transferred into it and held via a fiduciary arrangement on behalf of a beneficiary or beneficiaries. Assets in a trust usually avoid probate, which can be a boon for some people.
There are many uses for a trust, but the most common are to reduce estate taxes and control when beneficiaries receive their inheritance. For example, a trust can be used to ensure heirs don’t have access to all their inheritance until they’re older and can be trusted to be responsible with the money. A trust can also protect the inheritance from legal issues arising from split families or creditors since the trust can own the assets instead of the heir.
There are many types of trusts. Some can be geared toward providing benefits for surviving spouses, while others can offer an efficient way to gift to charities. A distinction you should keep in mind is whether the trust is revocable or irrevocable. Revocable trusts (also called living trusts) allow the grantor to maintain control of the assets throughout their lifetime. This provides flexibility if a change in circumstances requires the trust to be modified.
Irrevocable trusts typically require that assets are transferred out of the grantor’s estate permanently, which helps protect against legal judgments and some estate taxes in exchange for flexibility.
After seeing some of the benefits of a trust, you may wonder why everyone doesn’t have one. Trusts are more expensive than wills to draft, more costly to maintain, and more complicated to administer. If your parents have simple wishes, like all their assets split among their kids, then a will and beneficiary designations can accomplish those wishes in a cheaper and less complicated manner.
Because of the complexity of trusts, it is best to talk with an estate planning attorney to determine what is best for your parents.
Durable Power of Attorney
A durable power of attorney is a legal document in which an individual (the principal) designates another person (the agent) to make decisions for them without the need for court intervention if the principal becomes incapacitated.
While wills and trusts usually have the biggest impact after death, powers of attorney have the biggest impact during life.
Two types of durable powers of attorney that everyone should have are medical and financial:
A medical durable power of attorney allows another person to make health care decisions on behalf of someone else if they become too sick or injured to make them on their own.
A financial durable power of attorney grants another person access to one’s finances so they can pay bills, manage investments, and make any other financial arrangements that may be needed.
It’s crucial that your parents have these documents in place before they’re needed to avoid headaches to ensure that the best decisions are made on your parents’ behalf.
Implement the Estate Plan
Many people pay an attorney, sign the documents, and go home with their 100-page binder, thinking they’re finished with the estate planning process. However, that is not usually the case. The biggest step that people miss is completing the process by designating beneficiaries and making sure assets are owned properly.
As mentioned, beneficiaries supersede any will that is in place. Having beneficiaries that match the will or directing assets into the trust is vital in making sure that everything operates as intended.
Your parents’ attorney should provide a list of beneficiaries for each asset. From there, you and your parents can contact their financial advisor or the organization where the assets are held to get the proper paperwork to make any needed changes.
Organize and Store Important Documents
Now that the plan is created and implemented, the next step is to make sure it is accessible when needed. At this point, you should have a list of all the assets (retirement accounts, real estate, vehicles, personal property, etc.) your parents own. This list will help you and your parents keep track of everything.
Use this list to make a notebook of accounts, passwords, and instructions for what should happen with them upon their passing. Having easy access to accounts will simplify the process and alleviate the burden for the executor and heirs when something happens.
Next, find a good place to store this list and the new estate planning documents. Some people keep important files at home in filing cabinets or boxes in closets, but that’s not always safe! These records need to be stored away from heat sources like radiators or fireplaces, as well as pets who could chew on them.
Many financial institutions offer safety deposit boxes for free, which are very secure. You could also store the documents in a safe at home so that they’re easily accessible when needed yet secure from the aforementioned risks. Consider providing your parents’ financial advisor with copies of the estate planning documents since they will have a role in moving accounts under their management when the time comes.
Finally, make sure the proper people know where the documents are. You don’t want all this hard work to go to waste if no one can find them when needed!
Keep an Ongoing and Open Dialogue
As people age, their thoughts and wishes will change. You’ll want to keep an open dialogue with your parents about what they’re thinking, feeling, and experiencing.
You never know if they’ll say something that could require revisiting their plans. They may have thoughts, feelings, and experiences that they haven’t shared with you before because they didn’t know how or felt uncomfortable doing so.
Remember that it is usually best to tell your parents what they need to hear, instead of what they want to hear. If a parent asks for your opinion, don’t hesitate to share it with them, even if it means having an awkward conversation or upsetting them temporarily.
Keeping an open dialogue can also help you identify mental declines and determine what help they may need. It’s OK if they don’t want professional help at this point in their life; however, that doesn’t mean there won’t be a day when it is needed.
Conclusion
There are a lot of different estate planning strategies that you can use to help your parents plan for the future. The more you know about these strategies, the quicker you can navigate this process and ensure everything is done correctly.
At the same time, it’s important to remember that this process should not be rushed. It will take time, but your loved ones will appreciate it when they see how much work you put into helping them prepare!
Our Bethesda, MD financial planning firm helps clients with estate planning as part of their wealth management services. To discuss how we can work together, schedule an introductory call.
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