Estate planning isn't a fun topic, but it's a vital one to tackle in order to take care of your loved ones.
Continue Reading Below
On this Halloween edition of Industry Focus: Financials, Fool analyst Gaby Lapera and Dan Caplinger, the Fool's director of investment planning, talk about this scary subject, breaking it down into manageable bits you can plan for. You'll learn what documents you need, whether a will or a trust is better for you, various types of trusts, the taxes some estates have to pay, and how you can tell your loved ones what they'll need to know after your death. Make it your Halloween resolution (that's a thing, right?) to tackle your estate planning and put a plan in place that will protect your family from financial harm.
A full transcript follows the video.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here.
This podcast was recorded on Sept. 22, 2016.
Continue Reading Below
Gaby Lapera:Hello, everyone! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. You'relistening to the Financials edition, taped on Thursday, September 22nd, 2016, but you're listening to this on Monday, October 31st, at the earliest. I am in Hong Kong or San Francisco, hence the pre-tape, but I should be back in two days. My name is Gaby Lapera, and joining me onSkypeis Dan Caplinger, personal finance guruextraordinaire at The Motley Fool. How's it going, Dan?
Dan Caplinger:I'm doing good, Gaby. You ready for vacation?
Lapera:I'm so ready! Today, we're going to channel the spirit of Halloween, so I'm going to tell you happy Halloween, Dan! Pretend it's Halloween.
Caplinger:[SPOOKY GHOST NOISES]
Lapera:That's a great spooky voice. I loveHalloween. I don't know if you know what you're going to be for Halloween this year, but I totally do.
Caplinger:I don't. I haven't figured it out. It's not today in my world right now, I still have a month to figure it out.
Lapera:Fair enough. I was Ruth Bader Ginsburg last year.
Lapera:ButI accidentally got mixed up and realized I had another greatcostume idea for this year, which is Ruth Gator Ginsburg. Next year,I'm going to be Ruth Darth Vader Ginsburg. [laughs]
Lapera: I'mjust going to iterate on my theme for the next two years. Plus, she's a lovely lady. Since today is Halloween in a month,we decided that what we we're going to do was talk about something that isa little ghoulish,but very important, and that is estate planning. Estate planning is things you need to do before you die. I think most people have in their heads, "Ireally need to get a will."I don't think they even think about other stuff thatcould be attached to that. So, to get us started, Dan, what documentsdo you need to prepare before death?
Caplinger: There area bunch of documents that are really helpful to have in a number of situations,not just in preparation for death, but also in case youactually manage to keep living. Having a full set of these estate planning documents can help you and your family in awide range of situations.
First, you mentioned the will. Very basic, it's definitely a good idea to have, because it's the primary instrument forfiguring out where your stuff goes after you die. But it's not the only documentthat does that. A lot of people get confused about this. One thing youhave to be absolutely sure that you do iscomplete what are known as the beneficiary designations. These forms are used foraccounts that you have at financial institutions that require them --it's like an IRA, forinstance. If you have a retirement account,whether it's an IRA or 401(k), they will have you fill out abeneficiary designation. On that, you'll say, "Who'sgoing to take this account after I pass away?" Alot of people mistakenly think that their will says where their IRA or 401(k) orother types of these accounts, where these will goafter they die. Your will does not control that; it's yourbeneficiary designation that controls that. It's important onnot only retirement accounts, but also life insurancepolicies. Check with your financial institution -- a number ofplaces will have these forms available onother types of accounts as well on what's called "payable on death" accounts. So,make sure, if you have one of those, you'vefilled out that necessary paperwork.
Theother major class of documents you should have arewhat's known as powers of attorney. Those fall into two categories. One covers financial elements, so it lets you namesomeone else who can take care of things likewriting checks on your bank account,paying your bills,making trades in your investment account. Thishappens if you're incapacitated -- so, you'restill living, but something's happened to you, you'vehad a major accident or a major illness, and you're unable to take care of those affairs on your own, thisperson can step in and handle that. So, that's the financial side.
Then,you have another power of attorney on the healthcare side. That's the person who can make medical decisions on your behalf. Going with that power ofattorneyalso what is sometimes known as anadvanced medical directive -- some people call it a living will. That's where you set out what your wishes are for whether you want life-savingtechniques used, life support systems, or other measures taken to extend your life, or whether you don't want those -- it's an opportunity to express that. It's a wide rangeof documents, but they covera bunch of different situations.
Lapera: Andsuffice to say thatfor all of these things,you should choose, for your power of attorney,both medical and financial,you should choose people that you really trust. And you can change that over time,that's not a problem. But you alsowant to make sure that this is legally binding,so you want to find a lawyer to helpyou do these things. There's lawyers that specialize in this.
Caplinger: It's not just that you should pick people you trust, butyou should pick people who knowthe gravity of the situation,who are prepared to deal with thehard decisions they might be asked to make. It's important that you be able to trust them,but they also have to have a comfort level thatif they're called upon to act, they feel comfortable,they know what you want, they know what you would do. It'sso much easier to do thatwhen everything is great, upfront, well before any of those documents are needed, so that if that crisis happens,the person you name will be ready to handle it.
Lapera: Yeah,you definitely want to be prepared. I do have a question for you, though. Wetalked about wills, but I also know that trusts aresomething that is commonly recommended to peoplewho are doing estate planning. Can yougo over what the difference is between a will and a trust?
Caplinger: Basically, what a will does is, it's adocument that sits there, but it doesn't really take effectuntil the time of your death. Then, at that point,that's when the will kicks in and youfollow the instructions that are given in it. A trust, on the other hand, issomething that you can set upduring your lifetime,it has the same instructions thatyou would find in a willto handle what happens to your assets after your death,but it can also make provisions forwhat happens to your assets during your lifetime.
For instance, a lot of the time, the way that a trust gets drafted,the person who's the trusteeafter the person who's created the trustessentially takes onthe same role inmanaging that trust asset as someone who's given thepower of attorney over your financial matters would be given to the assets that aren't in a trust setup. It's that same level of trust that you areestablishing with the person that you name to take over if you'reunable to do so. Now, the big advantage of having a trust over a will is, having a trustgenerally prevents you from havingto go to a probate courtto have your matters dealt withafter your death. A trustdoesn't have to be a public document. A trustee has the power after your death to take action as specified in its instructions. So, it doesn'tgenerally need to have any court oversight to follow those instructions.
On the other hand, a will, in general,needs to be adjudicated before a court judge, and your will becomes a publicdocument. In those situations,it's something that a lot of people are less comfortable with,having those documents be out there in the public eye. It'snot like everybody's looking at them, necessarily, but they are availablein case anyone is curious. For many people who are interested inmaintaining their privacy, that's really not something that they need to have in everybody's business. They prefer theconfidentiality that a trust setup allows you to maintain.
Lapera: So, with the wills, do they all have to be sent to probate?
Caplinger: The processes for dealing with wills differ from state to state. Some states havewhat are known as simplified proceedingsin order to handle the vast majority of situationswhere there aren't that many assets, where you'reonly talking about transfers ofa minimal amount of money, or a minimumnumber of pieces of property. But, a lot of time, thethresholds for those simplifiedprocedures arepretty low. If you have more than just a minimal amount of assetsthat you're trying to pass on to your heirs, thosesimplified processes aren't available, and you do have to do a full-blown probate proceeding thatinvolves hiring an attorney,getting thenecessary court documents written up, and figuring out how to navigate that probate process,which could take months, or even years, and be extremely costly,especially if there are any complicated situations that arise.
Lapera: Can people challenge your will,if it ends up in probate court?
Lapera: So,that would be another advantage of having a trust --no one is going to be able to go to court, or, they'rea lot less likely to be able to go to court and challenge it in court, right?
Caplinger: Yeah. Again, that becomesone of the elements of the confidentiality aspect of it. A trust document doesn't have to be public. Thatdoesn't mean that it's invisible. For instance,in order for a trust to work, you have to actuallyput your property into the trust. For instance,if you own a house, you're going to want to do a deed transfer out of your ownindividual name into the name of the trust. So, anybody who looks upreal estate property records, which are public documents, will know that your house is owned in the name of a trust. So, they'll know it exists. That opens the door to potential challenges. Butit's not quite as simple of a process as it is when you have a will that's just out in the open.
Lapera: OK. So,what I'm hearing is that trusts are potentially abetter vehicle for a lot of people. And I knowthere's different types of trusts. The ones that we've been talking about have been living trusts, and of those living trusts, there's bothrevocable and irrevocable trusts.
Caplinger: Yeah, a living trust,when you hear somebody talking about a living trust, they're generally talking aboutrevocable living trusts,because that's the kind of trust that you can make changes toduring your lifetime. As you pointed out,irrevocable trusts are things that, once you create that trust, you can't change the aspects of it,you can't change the instructions. For the most part, there are morespecific, specialized reasons to useirrevocable trusts during your lifetime, but in the vast majority of cases, when you're talking about basic estate planning, you're talking aboutsetting up a revocable trust.
Lapera: I know -- or,I think I know, because I'm not 100% clear on trusts -- the irrevocable trust, while you can't make changes to it, I was under the impression that theappreciated assets aren't going to be subject to estate trust,which might be one of the reasons why you might be interested in opening anirrevocable one versus a revocable living trust. Of course, you can have multiple trusts set up, right?
Caplinger: That's true. You can havemultiple trusts set up. And you're right that,when you're talking about gift and estate tax, by setting up an irrevocable trust that vested the time of theinitial formation of the trust, thevaluation of that trust at its formation is the value that will be used fordetermining the gift and estate tax valuethat is charged against your unified gift and state tax credit at your death. That's very complicated.
Lapera: It's so complicated. [laughs]
Caplinger: But as you say, the net result of that is, if you give property that's worth $10,000, you put that into anirrevocable trust now,over the next 30 or 40 years, it climbs up to $100,000, the value that will be treated as the appropriate value for gift and estate tax purposes will be that $10,000 value at the time that youmade the gift, not the $100,000 that's theappreciated in value at the time of your death. That's assuming you made an irrevocabletrust that's not subject to being clawed back into your estate. Those rules areprobably more technical than we want to get intoat this point. In general, you can --with the help of your attorney -- set up an irrevocable trust to achieve those ends and get the estate tax relief that you want.
Lapera: I have a series of questions for you about trusts, and then I want to get into the estate tax. Rapid-fire. Where can I get a trust?
Caplinger: Anestate planning attorney is probably the best way tostructure a trust. An estate planning attorney will know what questions to askin order to figure out exactly what you want to have under what circumstances, and to get thedocument set up the way that you want.
Lapera: How much does it cost to set up a trust?
Caplinger: It usually costs...legal fees from place to place vary greatly, but what I will say is this: It usually costs more up-front to set up a trust than it does to draft a simple will. But,when you consider the additional costlater on of a will, the cost ofhiring an attorney to go through the probate process, the total costs that you'll spend on estate planningthroughout your lifetime and after your death in the case of a will and the probate proceeding are often roughlycomparable. So, it's more a matter of timing than it is a matter of how much you'll spend. You might save more up-front on a will, but if it's costly to administer in probate after your death, thenthat's when the costs will catch up to the total amount you would have paid to the trust.
Lapera: So,it's kind of whether or not you want your kids to have to deal with it, or you.
Lapera: Shouldyou update a trust? If so, how oftenshould you update a trust?
Caplinger: Whether you have a will or a trust,it makes sense to have it taken a look atregularly in a number of situations. In general,every three to five years is a good idea just to make sure that there aren't any major legal changes that would affect thesituation. However, you should have it looked at morefrequently than that if there are major changeseither to your financial situationor to your family situation.
For instance, if you get married,if you get divorced, if you have a child, these things aregenerally going to change the way that you want your assets to pass after you die. So, it makes sense to have your estate planning documents taken a look at to make sure that they still do what you want to do. Andthat goes not just for the will and for the trust, but it also goes for thosebeneficiary designations thatwe were talking about earlier. You definitely don't want anaccount that you set up when you were married to go to your ex-spouseafter you get divorced. And yet,there are a huge number of beneficiary designations out there that do that, just because the person forgets that thatbeneficiary designation was out there in the first place.
Lapera: AndI want to listeners know that your estateattorney will probably charge you a fee to update your trust and/or will,but it's a lot less than it was to set it up in the first place.
Caplinger: Often, yes. Moreimportantly, it avoids somemajor problems that canoccur if you have an out-of-date document thatmight not actually meet the needs and wishes that you have because of thesechanges that can occur.
Lapera: Definitely. Let's move on toestate taxes. This is something thathappens after you die, obviously, and your estate gets passed on to someone.I think most people have this conception thateveryone gets charged an estate tax, andyou're going to lose half the value of whatever gets passed on to you. That'snot true at the federal level. Estate taxes only apply on the part of the estate that exceeds $5.45 million, which is, for most people, a lot of money.
Caplinger: That's right. Alot of people pay a lot of attention to the 40% rate,which is very high. It's higher than any of the income tax bracketsthat are out there. But you're right, you have what's known as thelifetime exemption amount that coversnot just what's in your state when you pass away but also taxable gifts that you make during your lifetime. You can give up to a total of $5.45 million to heirs, either during yourlifetime or in your estate when you pass away,without having to pay any estate taxesat all. And that doesn't even includea lot of the exemptions that are available for estate tax. Forinstance, you can give an unlimited amount to your spouse, andyou won't have to pay any estate taxes on that. There are other exemptions. If you make a gift of money that goes toward someone'seducational expenses, as long as that gift is madedirectly to the educational institution, thatqualifies for an exemption. There are all kinds of these exemptions that can add up. Even if you do have a large enough estate that you have to worry about that amount,there are still techniques that you can use either to reduce your estate tax or eliminate it entirely at the federal level.
Lapera: Andthe other thing to think about is that,although this probably won't apply to you from the federal level -- though it might -- some states have not increased their estate tax level in the same way the federal government has. Currently, there are 14 states that have estate taxes, plus D.C., and most have farlower thresholds than the federal estate tax.New Jersey is the lowest, at $675,000. But then, there'sother states like Maryland and New York thatcurrently have estate taxes thresholds that are lower than the federal government, but they're working to raise theirs until it's on par with the federal government. So,if you live in one of those 14 states,you might want to take that into account when you're crafting your post-death what-to-do documents.
This brings us up on the lastportion of our show. We talked about all these things that you need to think about before you die. This isalso something you need to think about before you die, but it's something that will make whoever you leave behind's life a lot easier. This is something that another podcast voiceyou might be familiar with wrote, this is Robert Brokamp, "Letter From Your Dead Husband." I can send you guys that PDF if you want. It has all sorts of things. There'sfrequently -- I know when my parents' relationship,my father handles a lot of thefinancial stuff, and my momdoesn't really think about it too much,in terms of actually managing accounts and stuff like that. So,I think it would be really helpful for her, when my father passes away, if she had a letter that listed, for example, what all accounts they have, do they have any storage units, who should you call when he dies, whatattorney should be called that can be trustedthat has all of their information, who their broker is, who their accountant is. These arethings that people don't really think about, but when you die, you'renot alive to tell peoplewhere all this stuff is. So, having it all written down in one central location is really important forthe people that you leave behind.
Caplinger: That'sabsolutely correct. It's something thata lot of people never really think to do. But, at least giving yourloved ones some sense of what's out there, what they need to be paying attention to,like you say, even if it's justpointing them in the right direction of, "Do I call our accountant? Do we have an attorney? How do Iget in touch with our attorney? Is it justgoing down to the bank down the street that I know really well?" Justgetting a sense of the lay of the landas far as how you manage your financial affairs is important. Oneaspect that a lot of people don't think about now is justhow much of their financial lives are online or on mobile devices. So,having some way of giving people the password access that they'll need is important so that things can run smoothly.
A lot of financial institutions are a little bit behind when it comes to this. I know I've heard stories of peoplebeing able to log into deceased people'saccounts and even conduct transactionsafter someone's death. From a family member's perspective,that might be exactly what you want to be able to do. But technically, it's something thatfinancial institutions are going to have very different policies governing. So,it's important to understand that in an after-death situation, family members are going to have to navigate very different situations, even across similar types of things. You have a bank account at one bank,you might end up having to do something completely different from a bank account at another bankjust because of the policies and procedures that eachinstitution happens to have in place.
Lapera: So, I think if you take one thing away from this podcast, it should be, you should prepare,before you die, a lot of stuff. I think a lot of people think, "I'll be dead and gone, what does it matter?" Itmatters to the people you're leaving behind. Even if you'renot leaving anyone behind, you should still be prepared, you should still be organized. I know that sometimes it'sreally hard to think about these things. People don't really want to think about dying. For example, my parents and I had a couple chats about what they want to do with their estate when they die. And I'm like, "That's great,but I have no power to enforce that. I really need you guys to go to a lawyer and write all this stuff down,because otherwise I'm going to have to go to court." And I thinkmentally, they have accepted that, but emotionallythey're not quite ready to do it yet. This is just an ongoingconversation that I thinkpeople need to continue to have with their spouses and parents, whoever it is, so you guys can be prepared when thateventuality happens. Death and taxes.
Caplinger: That'sa very difficult conversation to have, but it is a very important one to have, just making sure, as a child or grandchild, you don'tnecessarily need to know the specifics. You just need to know that the people you care for have taken care of things, that they're seeing the right people to get stuff in place to make everything easier down the road.
Lapera: Yeah. So, Mom and Dad,if you're listening, please visit that estate lawyer. I know I keep nagging you about it. Hopefully it will have more weightcoming over the airwavesrather than in person.
Caplinger: Do it, Laperas!
Lapera:[laughs] Thank you so much, Dan Caplinger, for joining us.I hope you think of a totally radHalloween costumebetween here and October 31st.
Caplinger: I guarantee it.
Lapera: Listeners,if you want to send me pictures of your Halloween costumes,I will think that's hilariouswhen I'm super sleep deprivedwhen I get back here on November 2nd.
As usual, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. Contact us at firstname.lastname@example.org, or by tweeting us @MFIndustryFocus. Thank you again to Austin Morgan.I hope that we've made you think about your deatha little bit more today [laughs]. And thank you to y'all for joining us. Everyone, have a great week!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.