Thanks for coming back to the Planning for Your Purpose blog! The purpose of the blog is to introduce financial planning concepts that I come across in my day to day work. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
Our education system completely neglects financial management. There are no universal lessons in high school about credit cards, interest rates, debt, managing your bank accounts or anything at all really. I think that’s a shame and I hope to help fill in that missing information with my blogs.
What is estate planning? Estate planning is the process of deciding who will manage, control, or inherit your assets, and who will make your financial and health decisions. It’s not common that you will delegate these controls while you’re healthy, but you may want to plan for who will make these choices if you aren’t able to make them yourself. The mortality rate is still 100% and the morbidity rate continues to climb as people are living longer.
More specifically, there are a few components that are included or should be considered in most estate plan discussions. A will, trust, power of attorney, & living will. These are not all the components and depending on your individual situation, you may or may not need to utilize some or all of these.
Because this is regarding death and illness, it’s not a pleasant discussion. The most difficult part of estate planning is thinking through these decisions and deciding who will be the responsible parties. In some cases, you may not have family or any nearby, so it’s tough to decide who is the best person to choose. In some cases, you may have a lot of family and can’t pick due to the volume of qualified individuals. The bottom line is, you are wise to power through, have the discussion with your loved ones or trusted advisors, and make the decisions.
So, let’s get into the nasty-nitty-gritty. . .
What’s a will? I’ll answer it in a roundabout fashion. . . When someone passes away, their assets pass two ways: by function of contract and by function of law.
Things that pass by function of contract is anything that has a direct beneficiary listed. Which basically can include any financial account (banks, 401k, IRA, TOD, etc) that you signed a contract to open and designated beneficiary(ies) on.
Things that pass along by function of law are anything else and are handled through the probate system. This would include cars, jewelry, clothes, furniture, knick-knacks, doo-dads, whatever things you’ve accumulated and pack-ratted away. Probate laws are at the state level so, these rules will vary state to state. Wills are executed through the probate system. A will will essentially designate who you want to get your plate collection and all those other items. The probate system is less efficient than the contract system, but for good reasons that I won’t go into in this piece.
What are powers of attorney? Powers of attorney basically appoint someone to make some or all decisions for you. You can have this set up so that person can make decisions now, at some point in the future, or contingent upon certain events (i.e. two doctors say you are a vegetable from a bad car accident). I’ve seen this most commonly used in plans as springing durable powers, where the forms are drafted, signed, etc, but the appointed individual does not take legal capacity for you unless certain events occur. Like, being in a coma or kidnapped by pirates.
Again, these are all individual to the specific documents, but the appointed person would be able to pay your mortgage, utilities, car payment, insurance, etc. Imagine the devastation and rebuilding you’d have to do after a major medical crisis. Think then, of how much worse it would be if you went home to discover your gas was shut off and pipes froze. There are a million unlikely scenarios, but some basic planning can help avoid the spiraling of these terrible situations.
What is a trust? A trust basically lets you control your assets after you pass away or lose capacity. As I mentioned earlier, if you pass away your assets are divided as you designated or as the law dictates if you didn’t make the designations. You may put or have your asset put in a trust when you pass away. I see this most frequently used with minor children, financially irresponsible heirs, or large estates. The uses and circumstances for trusts are far too many to describe, as with the other documents, but you may use a trust to distribute your assets to your kids over a period of years instead of immediately upon your passing. You can still allow them to use the funds if they wanted to use them for college, living expenses, or whatever you designate. Again, there are a lot of additional rules and hoops to jump through with this, but it can protect your heirs from themselves.
What is a living will? A living will, sometimes called medical durable powers of attorney, basically gives your wishes about what medical treatment you want or don’t want. Do you want to be put on equipment to keep you alive while unconscious with no chance of regaining consciousness? These are deep, dark, personal questions, but if you have opinions about them, you should have the documents laid out to make sure your wishes are followed. The worst-case scenario is you are in this situation and your spouse or loved ones are fighting about what your wishes were.
Four estate planning documents I see most frequently used are a will, living will, durable powers of attorney, and a trust. I strongly recommend you consider your wishes and discuss with an attorney whether these documents or others are appropriate for you and your family.
Telos Financial is a Michigan’s financial advisor for Xennials, Millennials, Generation Xers, young professionals & their families. Dennis LaVoy, CFP®, CLU® founded Telos Financial and uses his experience, knowledge, and expertise to build lifelong relationships with his clients as the financial advisor for Ann Arbor, Detroit, and across the country to achieve their goals.
FYI – this blog is not meant to be a comprehensive description of estate planning. It’s not meant to be construed as legal advice.
The views expressed are my own opinions and do not apply to every situation. Your situation may vary so make sure to consult a professional for advice prior to making any decisions.