How to cover the basics and beyond
Let's face it. Nobody wants to spend time planning for when they’re gone.
But what happens if you don't? Without a plan in place, you don't get to choose who gets everything you've worked for your whole life. If you want to be the one making those decisions, then you need an estate plan. And when there are so many factors outside of your control, it's important to spend time planning for the things we can control.
Estate planning is the process of creating legal documents to specify how and by whom your assets will be handled in the event of your passing or if you're unable to make decisions for yourself. Many people think that having a will is all that estate planning entails. But it may also involve setting up a trust, and it certainly includes selecting beneficiaries for retirement accounts and life insurance policies, as well as how you title ownership of your assets.
Here are a few potential foundational documents you might want in your estate plan:
Once you've figured out what documents you need for your estate plan, you can determine exactly what your assets are and their value. Asset ownership is one of the most important—and often one of the most overlooked—aspects of an estate plan. Take inventory of all your assets, loans, employee benefits, insurance policies, money owed to you, and contact information (Vanguard has a financial inventory worksheet that can help with this). Share it with your family and others who should know, such as attorneys or your financial advisor. It's important to transcend any short-term hesitancy for the benefit of having a clear plan in place. Taking inventory of your estate isn't a one-and-done job; it's important you do so every few years and update it for any changes that may have occurred.
Many clients already have a will, which is a set of instructions explaining how property owned in your name should be distributed after your passing. It also names an executor and a guardian if needed. This type of will only takes effect after your death.
Since not all assets are distributed through a will, be sure to review your beneficiary information on insurance policies and retirement plans periodically to make sure everything is up to date. One common mistake is when there's been a divorce and the ex-spouse is still the beneficiary of a client's retirement account. In addition, it's important to make sure any jointly owned assets are titled the way you want, because how assets are titled may take precedence over instructions in a will.
Simple and complex wills
Many clients already have a will, which is a set of instructions explaining how property owned in your name should be distributed after your passing. It also names the executor and a guardian if needed. This type of will only takes effect after your death.
Since not all assets are distributed through a will, be sure to review your beneficiary information on insurance policies and retirement plans periodically to make sure everything is up to date. One common mistake I see is when there’s a divorce and the ex-spouse continues to be the beneficiary of a client’s retirement account. In addition, it is important to review that any assets owned in joint name are titled the way you want because how assets are titled may take precedence over instructions in the will.
One often overlooked estate planning tool is a trust—they can work for a variety of different income levels. Trusts offer more control and privacy than wills, and they can help make your estate plan more flexible.
Revocable living trust
One often overlooked estate planning tool is a trust—they can work for a variety of different income levels. Trusts offer more control and privacy than wills, and they can help make your estate plan more flexible. Different types of trusts are available to suit a variety of situations like:
Different types of trusts are available to suit a variety of situations, including:
If there comes a time where you can't make decisions for yourself, it's important to have POAs in place. A POA is a legal document that grants a person you trust the authority to act on your behalf. A financial POA manages decisions surrounding your finances, while a health care POA handles decisions regarding your medical care.
Financial and health care power of attorney (POA)
If there comes a time where you can’t make decisions for yourself, it’ll be important to have POAs in place. A POA is a person you designate to manage your decisions when you can no longer do so. A financial POA manages decisions surrounding your finances, while a health care POA handles decisions regarding your medical care.
A living will outlines what your preferences are concerning medical treatment in terminal situations. Unlike a health care POA—which applies to other areas of medical care—a living will details instructions concerning end-of-life care only.
One of the most sensitive topics to discuss with clients is what will happen if they become unable to manage their own estate plan, whether temporarily or permanently. It's important to have a plan in place so your financial and medical wishes are carried out. Having honest conversations now is important for everyone and helps provide peace of mind.
In many cases, we just think about wills as estate planning. But the titling of assets, naming beneficiaries, creating trust documents, designating someone to be your representative in the event you're unable to make decisions about your health care (health care POA), and directing your physician as to your wishes if you're permanently unconscious or terminally ill (advance medical directive) are also part of estate planning. This should be done with knowledge and care.
Living will and advance medical directive
A living will outlines what your preferences are concerning medical treatment in terminal situations. Unlike a health care POA—which applies to other areas of medical care—a living will details instructions concerning end-of-life care only.
Ensure your wishes are followed if you can’t manage your own affairs
One of the most sensitive topics to discuss with clients is what will happen if they become unable to manage their own estate plan, whether temporarily or permanently. It’s important to have a plan in place so your financial and medical wishes are carried out. Honest conversations now are important for everyone and help provide peace of mind.
In many cases, we just think about wills as estate planning. But the titling of assets, naming beneficiaries, creating trust documents, designating someone to be your representative in the event you are unable to make decisions about your health care (health care POA) and directing your physician as to your wishes if you are permanently unconscious or terminally ill (advance medical directive) are also part of estate planning. This should be done with knowledge and care.
Now might be a good time to review it. An estate plan isn't something you can set and forget. Over time, you want to make sure your intentions haven't changed and you've included the right people. Has there been a marriage or divorce? A birth? A change to your financial situation? A change in domicile or residency?
When tax laws change, it's important to review your portfolio to see how it might be affected. Arming yourself with an effective tax strategy can help avoid making costly mistakes that could eat into your estate. Your strategy could include:
This chart shows which states levy state estate taxes and which states levy inheritance taxes.
State estate taxes
In addition to the federal estate tax, 12 U.S. states and the District of Columbia also levy their own estate tax. These states are Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, and Hawaii.
Inheritance tax
If you inherit property, you may have to pay a separate inheritance tax, which is imposed by the following six states: Iowa, Kentucky, Nebraska, Pennsylvania, New Jersey, and Maryland.
Maryland levies both of these taxes.
Estate plans are about more than just money and minimizing taxes. They give you the power to control what happens when you’re gone so you can live the life you want today.
Working with Vanguard Personal Advisor® gives you access to a financial strategy that's focused on your goals and built to help withstand market volatility and economic shifts.
We’re by your side to help you feel confident about your future.
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Cheryl Kirsten is a senior financial advisor with Vanguard Personal Advisor®. She's provided Vanguard clients with investment support and personalized service since 2021 and financial planning and advice since 2005. Cheryl is a Certified Financial Planner™ (CFP®) professional with a B.A. from Colgate University and a master's degree from the University of Connecticut.