An Estate Plan for Different Stages in Life
Adult life constantly reimagines our responsibilities. Our lives evolve, and we learn and grow along the way. An estate plan needs to undergo a similar evolution.
There are four areas of focus in an estate planning discussion.
- Family needs and goals: What are your important relationships, and how can we leverage your estate plan to reflect that, care for those relationships, and nurture and support them?
- Where you live: Your residence greatly impacts your plan, the recommendations that a state planning attorney might make for you, or the considerations you might want to consider.
- Assets you own: To give something away, you have to own it and know how you own it. We like to understand a client’s balance sheet and assets so we know how to use their plan to leverage those assets.
- State and federal taxes: Many people like to prioritize taxes. We want to ensure your plan is tax-efficient, accomplishes your other goals, and reflects your relationships.
An estate plan is very personal, but there are common concerns based on where you are in life. A young adult is starting to think about estate planning. One individual may be supporting a spouse; another may be thinking about legacy planning and transitioning generational wealth.
Let’s look at each stage and unpack our recommendations.
Foundational estate planning
Meet Jane. She’s relatively junior, relatively young, and generally in her mid-twenties. She has student loans and a car payment and is in the wealth-building phase of her life. Jane, and everyone else at her stage in life, should:
#1 Have a durable medical and financial power of attorney
A medical power of attorney ensures someone can step into your shoes for medical decision-making purposes and to communicate with your care team if you are incapacitated or unable to express your wishes. A financial power of attorney provides the same cover for finances as a medical power of attorney provides for medical decisions. On the financial side, you must ensure that your accounts are in good standing if you become incapacitated or can’t access mobile banking to make a payment or cover a bank overdraft. These documents are important because they take effect during your life and can help during incapacitation.
#2 Assign beneficiary designations
At this age, retirement accounts are often your biggest asset. Retirement accounts are non-probate assets: they pass by operation of law according to the beneficiary designation. Whatever is on the beneficiary designation, what will happen to those assets? You do not need an attorney to accomplish this. You can enter names and adjust the percentages yourself. Open enrollment is a great time to revisit designations. If retirement accounts are your biggest asset, a significant part of your estate plan will cost less.
#3 Create a last will and testament
If you have a burgeoning brokerage account, are a diligent saver and investor, or are saving for a home, a last will and testament may make sense. If you already have powers of attorney and beneficiary designations, fewer assets in a last will and testament may exist. If you pass away without a last will and testament, and you don’t have a spouse or children, assets will essentially pass to your parents. If your parents aren’t alive, that would pass to siblings, or possibly nieces and nephews, and then on through the family tree. A last will and testament can prioritize those relationships for people individuating from their family of origin or leaning into a chosen family.
#4 Clarify property ownership
To give something away at your death, you have to own it during your life and know how you own it. Many young adults are still figuring out how their relationships—marriage, cohabiting, and being happily single—impact property ownership. In community property states (e.g., Washington, California, and Texas), each spouse can dispose of 50% of the community-shared property and 100% of their separate property. In equitable distribution states, spouses can dispose of assets in their name and portion of shared property.
Some states have an additional component for unmarried partners. In some states, including Washington, non-married partners who meet certain factors have property rights in their proper partner’s property. To outline expectations around these relationships, partners can create cohabitation agreements similar to a prenuptial or a postnuptial agreement for unmarried partners. These agreements help people who share a life and want to set expectations on shared expenses, assets, and home equity allocation.
READ: Financial Planning for Unmarried Partners in Washington
Supportive estate planning
Meet Andrew and Venessa. They have established careers, are married, and are considering starting a family. Andrew and Venessa, and everyone and everyone else at their stage in life, need to:
#1 Review or create core estate planning documents
Ensure the distributions are still assigned to the right people (i.e., who gets what and when) every 3 to 5 years or when a major life event occurs. The last will and testament (“will”) is the center of what people think of estate planning. Sometimes, the revocable living trust can be considered a will substitute. If you move to a new state, consider updating your will or revocable living trust. This life event encourages you to seek counsel in that new state you’ve just moved to, as the actual administrative and probate provisions depend on state laws. The state you move to will help you decide if a will or a revocable trust is the right instrument. The probate process of administering the last will and testament primarily defines that.
For some clients, privacy is very important. The probate process administers the will and requires it to be “proved” by the appropriate court. A revocable living trust is a structure where everything is distributed in accordance with its terms. Because the trust outlines its fiduciary (the trustee), it is not considered probate property. This means that a revocable trust is not subject to the requirements and timelines of the probate process.
After the trust is created, it is crucial to fund the trust. At your passing, the assets transferred into the trust avoid probate. Should there be an instance of incapacity during your lifetime, a successor trustee can step in to manage and administer your assets.
READ: Why and How to Avoid Probate in California
#2 Assign guardianship provisions in a will
Supportive estate planning includes planning for what happens upon the first spouse’s passing. Should a trust be created for the surviving spouse’s benefit upon the first spouse’s passing? Many factors play into that decision. Suppose there are children of the deceased spouse from a previous marriage. In that case, an irrevocable trust can ensure that assets ultimately flow to the deceased spouse’s issue if they desire, rather than leaving it to the surviving spouse to update their estate plan, make any provision, or rely on that.
An irrevocable trust structure also provides creditor protection for the surviving spouse.
Planning for the passing of the second spouse switches attention to supporting surviving children. Documents aren’t crystal balls. They can’t predict what the future holds 5, 10, 30, 40 years from now. A helpful approach is to balance rigid provisions with flexibility in the document.
#3 Determine trust provisions for children
Several types of trusts can be established to support children, each with unique features and purposes.
Parents or guardians typically create trusts to ensure their children’s financial needs are met and their assets protected. Some common types of trust for children include those in both a revocable living trust and a testamentary one.
Transitional estate planning
Sarah is in her mid-forties to fifties, and retirement is on the horizon in the next 10 to 15 years. In the near future, she will need to help care for or support her parents or maybe her spouse or partner’s parents in some capacity. Sarah, and everyone else looking for a transitional estate plan, need to:
#1 Review core estate planning documents
Revisit core estate planning documents to ensure a solid set reflecting your priorities. Continue to revisit it every 3 to 5 years, or if there is a major life event (whichever comes sooner) to ensure that the people involved in your plan reflect your current preferences and priorities. It’s mostly minor tailoring at this phase.
#2 Provide for the “right” people
Those in the transitional estate planning stage are often part of the “sandwich generation.” They are receiving upward pressure from adult children who are launched or are mid-flight and downward pressure from aging parents who need more care and support. Often, that means looking to provide for parents or adult children in an estate plan while taking appropriate steps to support your balance sheet.
#3 Ensure parents have effective estate planning documents
There’s a high possibility that you will have to interact with your parent’s estate plan in some way, whether it’s being named in the documents and needing to take an active role as a fiduciary or at their passing.
Additionally, you might be part of the cleanup crew if your parents either don’t have an estate plan appropriate for their current situation.
#4 Consider lifetime wealth transfer strategies
Many people have goals of transferring wealth during their lifetime—many do so by dispersing significant gifts, some into the millions of dollars. But along with the gratitude you get from those you gift to, you may also receive a tax bill from the IRS for exceeding lifetime gift tax exclusions. Utilize the annual exclusion to transfer assets to multiple individuals without dipping into your lifetime exclusion.
Read: Unwrapping the Gift Tax: The Essential Guide to Annual and Lifetime Giving
Whether you hope to support charitable organizations, loved ones, or a combination of both, a thoughtful lifetime giving strategy allows you to be more efficient with your gifting while maximizing gifts relative to the gift tax consequences. Assets can be gifted outright or in trust in a variety of ways. Incorporating lifetime giving strategies can be a helpful way to support loved ones or causes before you pass away.
Appropriately crafted estate plans provide individuals and families with clarity, protection, and support for loved ones, ensuring a smooth transition into the next chapter of their lives with confidence.
