Prudent IRA investors should have a much-needed estate planning checklist to safeguard their investments for their heirs and beneficiaries.
In this article:
- How to Make a Good Estate Planning Checklist
- Purpose of Estate Planning | Reasons Why Investors Need an Estate Planning Checklist
What Should Be in an Estate Planning Checklist and Why Is It Important?
How to Make a Good Estate Planning Checklist
1. Understand the Estate Planning Basics
Estate planning should start with an inventory, an assignment of assets, and a legal snapshot.
Having an asset inventory is a must for everyone. Assets can be categorized into either: tangible or intangible assets.
- Tangible assets refer to physical assets like real estate, antiques, vehicles, and others.
- Intangible assets refer to more abstract items like a self-directed IRA, a 401(k), stocks, bonds, savings accounts in banks, and even life insurance.
Assignment of Assets
The assignment of assets is a two-fold process:
- Designating the beneficiaries
- Allocating a portion of the assets to a beneficiary
Lastly, legal snapshots pertain to:
- Legal structure — Either a trust or will
- Execution — Through a guardianship or an executor to avoid going through a probate estate
Important legal documents like the power of attorney and guardianship form part of the legal snapshot.
Among the three basics, asset inventory is arguably the most crucial. A will or trust that doesn’t encompass all assets can lead to long probate cases for the undesignated inheritance.
Covering the basics will form a good estate planning checklist. However, estate planning becomes difficult without doing any kind of asset inventory, which makes the review of assets a crucial first step.
2. Prepare Legal Documents, Specifically Wills and Trusts
The main difference between a trust and a will lies in their effectivity. A will takes effect only upon the death of the owner while a trust can take effect while the owner is still alive.
- Wills are extremely important not only for the heirs but also for the investor. Having a clear will minimizes the risk of leaving the same asset to two heirs due to forgetfulness. The will provide the owner with a good starting framework.
- A legal trust, on the other hand, can stop a probate case in the first place, as the court can simply go with what status quo under the regime of the trust.
In the short term, setting up a trust can be a bit costlier compared to writing a will and having it notarized. However, the estate has an assurance that probate proceedings will not prosper, or at least will be extremely minimal.
3. Assign an Executor, Trustee or Power of Attorney as Soon as Possible
Most investors confuse a trustee for an executor, but they have vastly different roles.
An executor’s job ends upon the partition and distribution of the estate. On the other hand, having a trustee means having assets constantly managed for the beneficiaries rather than giving the assets to the beneficiaries directly.
A trustee works best for high net worth estates, as there are usually management fees levied by the trustee, who are typically financial experts and managers. On the other hand, most executors are typically family members or close friends whom the original owner trusts.
A power of attorney can also work wonders for estate planning, since the incapacity of the owner may lead to situations where changes must be made as soon as possible.
In a nutshell, a power of attorney, both health and financial, is immensely crucial for a smooth estate proceeding. The owner must then choose whether to appoint an executor or a trustee, depending on whether or not the owner trusts the beneficiaries to manage their inheritance well.
4. Designate the Beneficiaries
Once the owner has the legal structure (a will or trust) and the key people (executor, trustee, or power of attorney), the important issue of designating beneficiaries comes next.
For IRAs, 401(k)s and other accounts, most custodians allow the assignment of beneficiaries even at the point of sale. Beneficiaries can also be changed relatively easy, as all it takes is filling out a form.
Depending on state laws, the assets will be divided equally to all heirs in the absence of a will. However, the probate case (basically the investigation of assets and beneficiaries) becomes more complex and time-consuming without asset inventory.
To avoid a long probate process, the assignment of a guardian and executor can help shorten the process significantly by helping the courts execute the will and find out what the decedent wanted to do.
Purpose of Estate Planning | Reasons Why Investors Need an Estate Planning Checklist
1. Prevents Chaos
Using either a will or a trust will dispel any possible confusion in terms of who inherits which asset.
Of course, clarity of ownership only applies to those beneficiaries and assets written in the will or trust. That makes asset inventory immensely important for estate planning, as leaving some assets undesignated can lead to a probate proceeding.
Also, in case of a probate proceeding, a will can make the designating and distribution of assets faster since the will can show what the owner intends to do. While the state law still applies to most undesignated assets, the court may use the will as evidence to ponder for a speedy decision.
2. Possibly Minimizes Estate Taxes
If all the assets in the estate go directly to a trust, the chances of a probate proceeding decrease exponentially. This dramatic decrease happens due to the estate technically having no assets since the government considers the trust as another entity.
Other than having a will or a trust, the owner can start sending gifts in advance. The law provides a tax-exempt gift of $15,000 for 2018 and 2019, as per the IRS Gift Taxes Resource.
A more in-depth discussion about inheritance taxes can help investors plan better.
3. Safeguard the Assets and Investments
By assigning assets in a will or trust, the owner can protect the assets from both the state and other people.
A will can prevent any lawsuits from happening, provided the will is proper and legal. A trust can stop a lawsuit from happening, at least for all the assets listed under its protection.
4. Protect the Heirs and Beneficiaries
For the concerned owner and investor, a trust can be immensely helpful, especially if he or she thinks the beneficiaries are either:
- Minors or incapacitated by the time of asset distribution
- Legal adults who may not know how to manage the assets well
A will also designates a specific beneficiary, which protects the heir from being questioned.
5. Avoid a Costly and Time-Consuming Probate
Most importantly, a good estate plan can prevent or cancel any probate proceedings.
In the US, a beneficiary receives the inherited assets in four to eight months due to probate proceedings. These court proceedings can cost not just time but also money, as lawyers have to be hired, documents secured, and assets set aside before the probate case finally renders a decision.
A good estate planning checklist needs to consider asset inventory, legal structure, and assignment of key people, which can take time. The earlier you plan your estate, the better the results will be.
Which are you more inclined to have — a will or a trust? Share your thoughts with us in the comments section below.
- Top 4 Weapon Stocks To Watch | Inside Your IRA
- Reasons To Invest In Defense Stocks Inside Your IRA
- Is Investing In Marijuana Stocks Beneficial? | Inside Your IRA