By Lucy Carmel
Why it’s never too late for an estate plan
Life insurance bills itself as “peace of mind.” But don’t get too cozy just because you own a policy.
“True peace of mind comes from having a plan in place,” says Cathy Pareto, MBA, CFP, and President of Cathy Pareto and Associates, a Miami, Fla.-based financial planning firm.
That plan may not only include insurance, but other legal documents that help ensure a smooth transition of assets at your death, as well as protective measures in place while you are alive.
Despite their stereotype, estate plans aren’t just for the affluent. Making sure your loved ones have access to your hard-earned money for the things you deem necessary isn’t a goal limited to rich people, but to everyday people.
“Your assets are going to go somewhere,” says Barry E. Haimo, Esq., President of Haimo Law in Fort Lauderdale, Fla. “Either you determine it or the state will determine it.”
The time to execute an estate plan is now
As you start to accumulate assets, or as you start a family, getting your financial house in order is a must. This means addressing estate planning.
If you missed that memo in your 20s and 30s, then it’s something you need to take care of now, before it’s too late.
The consequences you and your family could face without an estate plan are more than just financial.
“You don’t want your family to sit at your funeral thinking, ‘You left me with a mess,’” says Haimo. “You want them to be able and grieve and move on with their lives.”
Consider your privacy, too. Do you want your financial information to be made public? Without a validly executed estate plan, you’ll have to go through probate, a legal process of administering your estate that doesn’t keep your financial documents confidential.
Probate is also expensive, time-consuming and unpredictable. An estate plan makes it completely avoidable.
Even when you’re still around, estate plans offer living benefits. Medical directives can help your family avoid unnecessary heartache should you become mentally incapacitated by illness or injury.
“One simple document can prevent a long legal battle over whether to pull the plug while you remain connected to the machine,” adds Haimo.
Estate plans most notably provide financial advantages. A properly executed estate plan provides tax reduction and assurance that your assets will be protected and preserved the way you intended.
Many people designate beneficiaries on insurance policies and retirement accounts such as IRAs and 401(k)s and assume that’s a suitable substitute for an estate plan.
But this doesn’t address special circumstances that a detailed plan could tackle.
Pareto points out that you can’t leave your IRA to a minor under the age of 18. The minor’s assets would be held in a guardianship account, implying that the courts would have to get involved in money you wanted your child to have.
“Another example would be mixed marriages,” Pareto says. “Let’s say you leave your IRA to your second wife. A spouse can change IRA beneficiaries and disinherit your kids, even if your intention was to leave the remainder of the IRA assets to your children from a previous marriage.”
It’s impossible to conceive every possible scenario you and your heirs will contend with. But estate plans mitigate financial uncertainty. Say, for example, you designate your child as your life insurance beneficiary, and your child later winds up unable to pay back student loans.
“An estate plan can protect beneficiaries’ interests from themselves if financially irresponsible, as well as their existing and future creditors.” says Haimo.
How to set up an estate plan
As online legal sites abound, out-of-the-box estate-planning documents are easy to come by.
But do-it-yourself estate plans are a risky bet.
“Online programs treat people like algorithms. People aren’t algorithms,” says Haimo. “They need a human being to understand their circumstances and goals.”
What’s more, “DIY” legal documents often end up invalidated in court. States have stringent rules detailing how to validly execute documents. Without documents deemed as valid, you’ll go through probate as if you didn’t have proper paperwork in the first place.
Pareto recommends visiting with a competent attorney to structure your estate plan properly.