When Pablo Picasso died at the age of 91, he left behind a fortune in assets, including far more than artwork. He also left five homes, cash, gold and bonds. But what he didn't leave behind was a will, leaving his estate in the same disarray as some of his images. Ultimately, it cost $30 million and took six years to settle his estate and divide the assets among his heirs.
While you may not have a fortune to bequeath, most people have at least some assets to leave behind, meaning some advance planning can tremendously ease the burden for your loved ones when you depart.
While one might be tempted to think of estate planning as merely having your will in place, it's really about much more. It's like a puzzle, where you need to be certain all the pieces fit together.
To begin, every person needs to have three basic documents, including a will, a healthcare power of attorney and a durable power of attorney. The healthcare power of attorney authorizes someone else to make medical decisions for you if you can't make them for yourself, and a durable power of attorney authorizes someone to handle your finances should you become incapacitated. Both of those documents automatically terminate at death, and that's where the will comes in.
Simply stated, a will specifies what is to happen with your property when you die and names an executor to carry out your wishes. If you have minor children, you can also use a will to designate a guardian.
One challenge with wills, however, is that all property handled by a will must go through probate, which can delay the distribution of your assets. That's why many people opt for a combination of a will and a revocable (living) trust. A living trust allows you to circumvent probate by designating someone (a trustee) to administer trust property for a beneficiary.
There are many other kinds of trusts to help you achieve your objectives, some of which can help with estate taxes.
Parents often prefer trusts instead of directly transferring assets to children. Through trusts, you can structure the distribution of assets to occur at certain times and stages of their lives, whereas if you merely name them as beneficiaries, they automatically receive control when they turn 18.
A common misconception about wills (and trusts) is that they cover all your property. But in reality, beneficiary designations on life insurance and retirement accounts "trump" wills and trusts. If in your will, for example, you say you want 10 percent of your estate to go to your church and the remainder to be divided among your children but you name only your children as beneficiaries on your insurance policy, all of the life insurance proceeds will be distributed directly to your children.
If you want the terms of your will to control the disposition of life insurance proceeds, your estate could be listed as beneficiary on the policies. Beneficiary designations on retirement accounts can be tricky, so it is important to talk to a financial planner or attorney before listing a beneficiary so that the tax and other implications are fully discussed.
However you decide to structure your estate, it's critical to update your documents regularly. If something major happens in your family, such as a birth, divorce or financial windfall, that's always a good time to update your plan. Otherwise, a good rule of thumb is to review everything every five years.
Estate planning is really about providing for the people and causes you care about when you leave this world. A well-planned, comprehensive plan can reduce headache as well as heartache for your family.