It's an unfortunate reality that one of the key concerns we all need to address at some point in our lives is also the issue we most want to avoid — estate planning — because we are asked to think about our own mortality. Adding to the burden is tackling all the details and infinite possibilities of what should happen to our money and belongings once we've passed.
It's often difficult to formulate an estate plan when you need to be in absolute agreement with another person.
Suddenly you and your spouse's differing opinions on things like spending, investments and how good your kids are at managing money can become huge road blocks in preparing a balanced, cohesive and smoothly implemented estate plan.
Making matters even more complicated is that creating an estate plan or trust for even the most well-adjusted couple can be an emotional minefield.
“Talking about estate planning can be emotionally fraught because it forces individuals and couples to, on some level, deal with their own mortality," said Joline Godfrey, a financial educator, author and CEO of The Unexpected Table.
“And as you approach the subject, you're so anxious personally that it can trigger other issues that you have as a couple, issues that have until now been internalized. So suddenly the couple gets to an estate lawyer and the lawyer now has two well-accomplished people who seem to be completely together in every part of their lives, but who are filled with anxiety over estate planning."
Thankfully, with some open conversations and a little give-and-take, many of the pitfalls of the estate planning process can be avoided by ensuring that you and your spouse are aware of, as well as aligned on, these five main components of a will.
People often have the impression that they can essentially craft a estate plan or trust in virtually any way they want. After all, should it not be up to an individual or couple to decide what happens to their assets after they've gone?
The answer: Not necessarily.
Many couples don't realize that where they live can play a fundamental role in their estate plan.
“The first thing couples need to consider when contemplating their estate plan is what state they reside in," said Alma D. Banuelos, CTFA, National Head of Trust and Estate Services at City National Bank. “The state you live in determines whether your assets are community property or, separate property or tenancy-by-the-entirety."
"For example, California is a community property state, meaning that everything my husband owns and everything I own is half mine, half his," she said. "Each spouse has equal control over the assets, so it's vital for a married couple to understand that. There's no way around state law, so when planning a couples need to consider which state laws apply to their combined assets."
No matter where you reside, one of the other meaningful issues that can complicate estate planning for even the closest of couples is unresolved or complicated family dynamics.
When crafting an estate plan or trust, it's vital to consider the interplay of a couple's children from prior marriages (first marriage with joint children or is it a second or third marriage with children from different partners)? Prior marriages and children could lead to additional concerns and expectations, said Banuelos.
“In my experience, it's never the tax issues that are of utmost importance with planning — it's the family issues. Experienced trust and estate lawyers know all the pertinent tax benefits and strategies available to grantors; what they don't know, however, are a couple's specific family issues. That's why it's essential to inform your attorney about family concerns so they can customize every governing document to a specific client's unique needs, ensuring all potential family dynamics are addressed."
Because legal and emotional issues can be so complicated when prior marriages and children from those unions are involved, it's essential to speak with a skilled estate attorney to ensure your testamentary document can withstand any potential extended-family legal challenges.
Both members of a marriage have to be willing to speak freely with each other and their estate attorney about any possible family complications.
It can be tempting to skip over a detailed discussion of your assets when planning your estate. Assets are obvious, right? They're things like homes, bank accounts and stock portfolios - and hence may seem not worthy of a lengthy discussion. But that would be a mistake.
Property and financial resources are the most obvious form of wealth, but there's a wide spectrum of items that may constitute an asset that one member of a couple may not be aware of.
For example, a spouse could have been an avid stamp collector in their youth and have a valuable collection sitting in a safe deposit box that their partner knows nothing about, said Banuelos.
The same may be true for a collection of designer purses, wine or jewelry. What is valuable (in monetary or emotional terms) to one spouse may not be obvious to the other. That's why it is critical that both partners know about all assets, in order to ensure that a prized item isn't mistakenly discarded or given away after death.
Liabilities are often an even more difficult topic to broach. If one member of a couple has secretly run up a hefty credit card bill or has student loans they never paid off, it can be hard to be frank.
Honesty, however, it is imperative to ensure that your beneficiaries aren't surprised or overwhelmed by any liabilities and know how to handle the debt.
Remember, the aim of having an estate plan is not only to provide for your loved ones, but also to grant those left behind some peace of mind and in some small way, lessen the trauma that arises when a person dies.
The main objective of an estate plan or trust is to divide and seamlessly transfer your assets to those you love. While the concept may seem simple, matters can get very complicated if you and your spouse are not aligned about who gets what.
For example, one partner may want all the couple's assets to be divided equally among the children or, if there are no children, among other family members. The other spouse, however, may envision distributing some assets outside of the family such as long-time care givers, employees or family friends.
“It's crucial to speak openly about beneficiaries. And no matter what you decide, speak to loved ones about what they will be receiving so as to minimize hurt feelings and there won't be any surprises."
Even when a couple is in complete agreement over who the beneficiaries of their estate will be, they may not be of the same mind regarding when those beneficiaries should receive assets and/or funds.
“Another important conversation couples need to have is about distribution," said Banuelos. “If your beneficiaries are your children, they may expect to get everything immediately. But mom and dad might have different ideas. They may want to create a trust for the child for asset protection reasons, or because their children may be too young to receive all the money immediately."
For example, parents who know their child wishes to pursue a master's or doctorate degree may put the money in trust so that before inheriting, the child can apply for grants.
If parents do put funds into a trust for their heirs, then they need to also decide when and under what conditions or purpose their children are to receive the income or ask for principle distributions.
For instance, they may want to make the money available only for things like health, education, support or maintenance or perhaps there are unique reasons for distributions, such as the purchase of a first home.
With any major financial decisions, the sooner you start the conversation, the better.
Given the complexity and number of considerations of creating an estate plan, it's important to consult with professionals to evaluate your situation to ensure you've weighed all of your options.
City National Bank's wealth planners can help navigate the decisions that will make the biggest impact on your family. To learn more, contact us.
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