Estate Planning in Retirement

Estate Planning in Retirement

Welcome to Retired-ish. A podcast produced for those exploring retirement and those currently in retirement. I'm your host, Cameron Valadez, and in today's show, I want to go over the most underappreciated topic in the realm of financial planning, which in my opinion, is estate planning.

Now, I think the main reason that estate planning doesn't get much TLC is simply due to its name. I mean, what does estate even mean? It also sounds like it's only for really rich people because don't they pay things like estate taxes and stuff? Now, while that may be true for some people, there's much more to estate planning than that, as you'll learn today.
Another rather obvious reason is that most people don't want to plan for post-death lives because death is a scary topic to even think about, and estate planning seems like perpetuating death and denial. Now, this is true both on a financial level, but also probably more importantly on an emotional and spiritual level as well.

Because estate planning is so commonly passed over, I want to be sure that you, a Retired-ish listener, are educated on some estate planning essentials and why it is so important for everyone. The fact is that you don't need to be worth tens of millions of dollars for estate planning to pertain to you. And even those who are worth tens of millions, they skip this step in their financial planning or lack thereof, I should say, all the time.

Let's take James Gandolfini, for example. So, you may remember him as Tony Soprano, the mafia crime boss and lead character in the HBO hit series, The Sopranos. He died suddenly at the early age of 51 while on a trip to Italy, I think it was. It was shocking, to say the least. Of course, no one saw that coming. Unfortunately, however, he hadn't done a thorough enough job planning his affairs. What happened was that he left around 80% of his estate to his sisters and daughter in such a way that it triggered a painful 30 million dollar tax bill.
Now that's a lot of money, even for someone like him on a relative basis. Now, James didn't get to play a role in writing his final legacy, so to speak. Instead, his ending had a strong resemblance actually to the last scene of The Sopranos. If you were a fan, you may remember it. Tony, his character, arranges to meet his family for dinner at a local diner. First, his wife Carmella arrives, then his son AJ. Tony orders an appetizer for the table while they're waiting for his daughter Meadow to arrive. Tony keeps looking at the door, checking for his daughter's arrival. The camera cuts to the daughter outside, where she's trying to park her car, and then back to Tony. The tension builds, he keeps looking up, and we are all wondering who's gonna come into that door. Is it going to be Meadow, his daughter, or a mafia hitman? And then the screen just goes black. The finale to the six-season series ends the storyline left unresolved. No deathbed scene, no final words, just a cut to black. Just as James Gandolfini’s real life ended too, which is very ironic.

Now, I know this sounds morbid, but bear with me here. The point is that you never know how much time you have left, and therefore it's never too soon to prepare your loved ones in case something happens to you sooner than expected. That's what estate planning is all about. If you have made any other financial decision, such as buying life insurance, for example, or taking a pension with a survivorship option, you have effectively done some estate planning and proved that you care about your loved one's financial situation should something happen to you.

Today I'm gonna cover some of the other not-so-obvious stuff that commonly gets skipped over when creating an estate plan and the different components that make up a comprehensive estate plan. Some of it is far simpler than you would've guessed, and other parts take a little time to get in place. But it can be well worth it to your family.
So, let's start with what the heck does estate planning even mean. Estate planning is essentially the process of anticipating and arranging for the disposal of an estate during a person's life. Your estate is basically all of your financial assets, your intangible assets, and physical belongings. The planning process, while you’re alive is about making sure that your assets are distributed according to your wishes and that your loved ones are taken care of in the event of your sudden incapacity or death.

Now, most parents are uncomfortable discussing money with their children, even if they are adult children, and perhaps it's because we fear that such talks will reveal our children's greed or that by talking about any inheritance, the kids will be less motivated to strive later in life. And while your financial advisor or estate planning attorney might use various tools to achieve your wealth transfer goals to that next generation, the real purpose of talking with your spouse or other heirs ahead of time is to express the impact you hope the assets will have on your family and community, both now and after you're gone.

We call this your legacy. How do you want to be remembered? Did you know most people, regardless of age, will generally spend through a financial windfall in around 18 months? That's just a year and a half. If heirs don't know that money is coming to them or how much money is coming to them, it puts them in the same mental frame of mind as a lottery winner, and we've all heard those horror stories.

Pointed communication of what you would like to accomplish with your hard-earned money can help your legacy endure for generations. The consequences of having no estate plan can be tragic. Your spouse, children, or any other potential heirs you may have can be subject to numerous costly obstacles, such as creditors, lawsuits, legal fees, and probate, to name a few. All of these will eat into the value of your financial legacy and leave less to the people the money is actually for, and I would bet that you don't have any creditors or your local attorney currently listed as beneficiaries on your accounts.

Then there's the big non-financial consequence, which is family tension. This is usually caused because decisions are not communicated to the next generation while you're alive, or details are not revealed until after your death. Family tension, fighting, and arguing typically arise after something like a will or trust is read, which ruins families no matter how strong a bond. Believe me, I've personally seen this play out numerous times.

Take this common scenario, for example. The parents pass away and leave the family home to the children. Joe, Bill, and Mary let's call them. Joe wants to keep the house and live in it to preserve the homestead for generations. Bill is fine with that as long as Joe can buy out Bill's share, and Mary insists that they sell the home because the market is hot and there's a good profit to be made, and so the fighting begins. Certainly, no family likes to think that the parent's legacy will turn into a tussle over assets, yet it happens all too often. I think we can agree that this is not a good picture, and it's best to avoid it while you are alive and in control.

So, here are some tips and thoughts on what a well-thought-out legacy or estate plan might look like. One is that if you're married, you'll want to make sure that your spouse has enough resources to live comfortably. Try not to put any more strain on them financially. Them living alone without your support in life is already going to be more than they want to emotionally bear. You want to make sure that they can carry on managing the finances by themselves.

For example, we see many cases where the husband makes the investment decisions, and the wife pays the bills or vice versa, and this is a natural division of labor in a marriage, and they're each doing what they do best. Then one of them dies, and the other one must take over without ever having been “trained to do so.” So whether that's making sure they know exactly what to do or having a professional in place to take that burden off of their shoulders, you'll want that taken care of before something happens to you, meaning sooner than later.

Tip number two, are your children or other heirs prepared for their inheritance? It's not the lottery. Your money has more meaning to it. A story of hard work and good decisions behind it. In fact, you may be the adult child in this situation right now. So, look at this in the context of your own life as well as your own children's lives. Do the children understand how to invest money and how to avoid other unnecessary costs, taxes, and fees? Do they plan to invest any potential inheritance rather than spend it right away? In other words, have they already spent the money in their minds? Most end up spending it like we mentioned it before, simply because they don't understand the power of that money and what it could do for them if they made alternative decisions.

A little financial education on the power of compound interest may change their minds. Inheritance planning starts with an understanding of the basic values upon which the inheritance was built. These values need to be passed on to the next generation.

Tip number three, think about grandchildren and future generations. Will they understand how you lived and what you lived for? Not just financially, but what does your family value? What skills does your family possess? For example, do you want to make sure that your grandchildren know how to work on cars or some other special trade?

Tip number four. Then there's the world at large. Are your affairs set up so that the people and organizations you believe in can use your contributions to carry on good work? Should you contribute to those causes now or after your death? These are just some reasons why you should start estate planning sooner than later, but more importantly, I chose these because these are the little things that get skipped over all the time by people just like you and me. Do these little things, and your family will appreciate the love, care, and attention to detail that you dedicated to their wellbeing.

Now let's get into the main components of a basic estate plan. We will start with the relatively easy and straightforward pieces, beginning with the Advanced Healthcare Directive. The Advanced Healthcare Directive is a legal document that specifies the types of medical treatment you would like to receive in the event that you become incapacitated and unable to make medical decisions. It also allows you to name someone, known as a healthcare proxy, to make medical decisions and interact with your doctors on your behalf. This may be your spouse or one of your children, or even a close friend, for example.

All you have to do, for the most part, is state a few simple wishes about how you would want to be cared for. This document is critical because it addresses issues that can arise while you are alive, not dead. You can become incapacitated for any length of time and at any age. This will make things easier and clearer in a time of intense stress for your loved ones.
Now, typically these can be drafted by an estate planning attorney, of course, but I will provide you with a free resource in the episode show notes of where to find fillable templates specific to the state that you live in. It also provides specific instructions on how to properly execute the healthcare directive and how to put it on file with your state's registry. But again, it's usually best to consult an attorney.

The second basic necessity of estate planning is creating a durable power of attorney, or POA for short. A durable power of attorney is a legal document that allows you to name someone to handle your financial affairs in the event that you become incapacitated. Again, this is a document that helps handle your affairs while you are still alive, but this time it's for finances, not your health. And please note that there are also different versions of powers of attorney that can be created depending on your specific needs. A vanilla, durable power of attorney is not the one and only type of power of attorney.

The person you choose to handle your financial affairs, known as your attorney in fact, can pay bills, manage your investments, and make decisions on your behalf.
Without a durable power of attorney, a court would have to appoint a guardian to manage your affairs, which can be time-consuming and costly. Again, it can be a spouse, an adult child, a close friend, or even a trusted professional, for example.

One reason why these are so critical for today's retirees is because many of you will have retirement accounts such as 401(k)s or IRAs. These accounts are owned by individuals. You can't move them necessarily into a trust or have a co-signer or anything like that on 'em, like you can a bank account or even something like a joint owner.
This means that if you become incapacitated for any reason and funds in these accounts need to be accessed, your family, including your spouse, will not be able to act on these accounts without a POA that goes into effect. Even if you have a trust and they are listed as a trustee, for example, they still cannot access those accounts and act on them. So be sure to have these powers of attorney on file with the firms that custody your investments, for example, or with your trusted advisors.

Now the next document we're going to discuss is one of the most common necessities of estate planning, and most of you are aware of them or at least have heard of them, and that is a will. A will is a legal document that specifies how your assets will be distributed upon your death. More importantly, if you have any minor children, it also allows you to name a legal guardian for them as well as an executor to handle the distribution of your assets in the estate. In addition, you can name a custodian to manage any potential assets you may have left on behalf of your minor children.

Without a will, the state will determine how your assets are distributed, which may not align with your wishes. A will can be created by you and typically needs to be signed by you in addition to one or two witnesses or maybe even notarized. Each state has different requirements. To be on the safe side and to make sure your will is drafted properly, it's best to consult an estate planning attorney in your resident state.

Now, even if you did sign a will, at some point, it may begin to conflict with, let's say, your beneficiary designations on your financial accounts. This happens all the time. People update their will when they get remarried, for instance, but forget to update their IRA and other investment beneficiary designations, which still list the ex-spouse, for example. This is a problem because, as you may or may not know, those beneficiary designations will end up superseding your will if you pass away. Don't make this mistake. Consistently check your beneficiary designations and update them as needed.

In addition, a will, will not keep you out of probate, which is the state's public process of appointing an executor and distributing the estate to the people or organizations mentioned in your will if you have one. Then probate fees are deducted from your estate, leaving less of what you worked hard for to your heirs. And guess what? The appointed executor, which might be your brother or sister you don't get along with anymore, is entitled to the same probate fee as the attorney, which again will come out of the assets of the estate.
So simply put, a will essentially serve as a set of instructions for the probate judge. Wills can also be contested by other beneficiaries. A common argument might be that you were not of sound mind when the will was created, for example. And oftentimes, family members start arguing over what you would have wanted, whether they really knew what you wanted or not.
Granted, you are not around to see the turmoil, but I'm asking you to imagine it now. Without clear instructions from you, what would your family members say to one another? Would there be arguments over what you would have wanted?

So obviously, a key concept to understand about a will is that it doesn't solve everything. So, what can you do? Well, for starters, the common type of will that we see in practice nowadays is known as a pour-over will. A pour-over will is one that is created to work in tandem with a trust. What this does is it essentially serves as a backup or catch-all if you forget to put or title an asset into your trust. It “pours over” the assets that were unintentionally left out into the trust. So, think about the fine chinaware sitting in storage or an old collector muscle car that was never put into the trust because it was just covered sitting in the backyard. These are some basic examples of things that aren't usually so straightforward to put into a trust, or they're just forgotten about during the initial creation process.

Okay, so what is a trust? Well, in general, a trust is a legal arrangement where a trustee or multiple trustees hold assets for the benefit of another person known as the beneficiary or beneficiaries. There can be many, as many as you want. Trusts are useful for keeping your affairs private, avoiding probate, and for managing assets for minor children or for individuals with special needs.

Most people create what are called revocable or living trusts, which are essentially trusts created while you're alive, in which you can move assets into or out of as you please. There are no immediate tax benefits or anything like that associated with living trusts. They're primarily for asset protection purposes like I just mentioned.
In addition, you can add specific language as to how and when the assets are distributed and whether or not there are any contingencies for the beneficiaries to access the assets. These are known as spendthrift provisions, and they essentially allow you to maintain some level of control from the grave.

For example, your adult child may be able to access his or her share of the inheritance upon your passing and spend it on whatever they want. There's no restrictions to it. But then your other two minor children may not be able to access their funds until they are, let's say, 25. Or the money can only be used for things like health and educational purposes, et cetera.
Please note that there are many different types of trusts that can be created for many different reasons, such as those with blended families or for mitigating potential estate taxes on very large estates, like I mentioned at the beginning of today's show. We will save those nuances for another episode.

The key with all of these documents is that you must be competent to sign these forms and get them in place, which is why you should start at least some of this estate planning sooner than later. By creating a will, durable power of attorney, advanced healthcare directive, and a trust, you can ensure that your assets are distributed according to your wishes and that your loved ones are taken care of in the event of your incapacity or death. Now, please remember that estate planning should be reviewed and updated periodically as your needs and circumstances change, especially when you have a large life-changing event.

Other than going to an attorney and getting all of these documents in place, I also want to give you some tips on even more basic things that you can do that can supplement your estate planning and potentially save your family money and heartache. These are some of the little things that can make a huge impact.

So, my first tip is to make things easy on your spouse or children. Make it so they have access to your important papers, accounts, and passwords. I can't stress this enough. Almost everything we do now is online and requires some sort of username or password. Now I will caveat that logging into accounts because you know someone else's username and password is actually illegal. However, there are proper channels you can go through.

For example, if you have an Apple device, did you know you can actually assign someone as your legacy contact? This is a way to legally give someone access to your device and data should something happen to you. They don't even need to have an Apple device, either. There are similar programs for other companies as well, and each state will ultimately have its own laws on digital assets, data, and information. So be sure to check your state's specific laws.
My second tip is to help them know what to do first. It can be something as simple as how to take care of your pets or how to get access to your mail. In a non-legal letter to your survivors, you can say anything you want. You can give funeral instructions, tell them what you want done with your Facebook account, tell them where the key to your home safe is. Literally anything.

For me personally, I literally have a little book that my wife already knows about and has access to. It explains in detail what to do for everything. The different assets we have, liabilities, processes, et cetera. And most importantly, what to do about all of the stuff that I deal with on a daily basis that she doesn't currently deal with. Or maybe, it’s instructions on how to actually sell the extra vehicle that may be lying around that your surviving spouse would have and then have to sell to a private party, or how to deal with the DMV, et cetera, anything.

My third tip is to consistently revisit your beneficiary designations on your various accounts. Life goes on, things change, and you likely won't remember to change beneficiaries on all of the different assets or policies you own. Believe it or not, a lot of people even forget they have certain policies or accounts. These would include things like retirement accounts, brokerage accounts, bank accounts, digital assets, 529 education savings accounts, life insurance policies, the list goes on.

Tip number four is to have contingent beneficiaries on all of your accounts and policies. This is a secondary beneficiary for if something happens to you and your primary beneficiary at the same time, or your primary beneficiary, then you if you forgot to update the account or policy after the primary passed. So, if your spouse is your primary beneficiary, what happens if, God forbid, you both get in a fatal car accident? This is crucial to have in place.

Tip number five is proper titling of assets. This is where something is better than nothing, at least until you can get to an attorney. I cannot tell you how many times we see titling mistakes in practice, almost daily. Ownership transfers due to titling supersede a will.

For example, in the case of bank and investment accounts, even a personal residence, if these are owned as joint tenants with rights of survivorship, and one owner dies, the surviving joint owner assumes full ownership. Or if the accounts are titled as payable on death, otherwise known as POD, or transfer on death, known as TOD, the assets go directly to the named beneficiary at your death.

There is what is also called a TOD Deed in certain states and counties for real property. Each county typically has their own. This is where you can name one or more beneficiaries for your real property, like your home. At your death, it can pass directly to them and avoid probate. No will or trust technically needed. This shouldn't be thought of as a replacement for something like a trust but rather something to do, at least until you can develop a comprehensive estate plan.

Let's say you change the title of your bank account to payable on death or a POD listing the name of your daughter as the beneficiary. When you die, all your daughter has to do is contact the bank and present evidence of your death via a death certificate, and the account will be retitled in her name. Not that the bank won't give her a hard time at all, but fairly simple either way. Note that these titling methods may not be enough if you have a complicated family situation, a second marriage, or multiple different types of beneficiaries you want to leave assets to, such as individuals in charities, for example.

Now, my final tip is to not make a gift unintentionally to those other than your spouse while you're alive. To help illustrate what I mean, let's start by understanding what cost basis is and the step-up rules. Individuals inheriting assets, subject to capital gains and losses, have the fortunate opportunity to enjoy a step-up in cost basis upon the original owner's death.
And please note that this does not apply to retirement accounts. Cost basis is simply what you paid for an asset, plus any fees or expenses. And for real estate, it also includes any improvements you've made to the property. So not repairs, but improvements.

So, theoretically, if you bought a rental property 35 years ago for $150,000 and it is worth $550,000 today, that property has a basis of $150,000, and you would currently have a $400,000 taxable capital gain. If you sold that property, you would be subject to capital gains taxes on that gain. Now, a step-up in basis is when that cost basis gets increased or stepped up to a higher value, resulting in a decrease in the taxable gain, which is good. If you pass away with the asset in your name 100% and someone inherits it, they can get a stepped-up basis at your death to the fair market value as of the date of your death, which can be a huge tax savings for the beneficiary. This rule works out even better tax-wise for spouses in community property states.

The reason I bring this up is because far too many families rush to change titling of property simply because it's easy to do. Even though they don't realize the ramifications of doing so. For example, for whatever reason may be, some people want to give assets to their kids while they're alive, maybe so they can see them enjoy it. But when you give a gift while you're alive, the person receiving the gift is essentially transferred your original cost basis. So in my previous example, if instead, you put a child on the title while you were alive, they would take on your low basis of $150,000 on the property, and therefore they would theoretically pay tax if they sold the property on $400,000 in gains, again, if they sold it during their lifetime, whether you are alive or not.

How easy is it to make this mistake? Let's continue with my example. Let's say as you got older, you felt it more comfortable to have a trusted child listed on the title of your home in case anything happens. You then go and simply add them as a joint tenant with rights of survivorship with you on the deed to your rental property or even your home. You have now made a gift to that child, and they and other possible beneficiaries have lost the ability to get a full step-up in cost basis. They will now only get a limited step-up. This can dramatically affect what is inherited as the IRS has now infiltrated your estate beneficiary list. Also, the parent may not sell the property without all of the joint owners and the joint owner's spouses, if any, signing the deed to convey the property.

The parent also may not refinance an existing mortgage on the property or otherwise establish a home equity line of credit without all of the joint owners and their potential spouses also signing the mortgage or home equity line of credit. And finally, if a joint owner, such as a child, were to run into financial difficulties, that child's share of the property may be subject to the claims of that child's creditors. Not only that, but in my common example, the person making the gift now has to file a gift tax return since the value of that gift would be over the annual exclusion of $17,000 currently in 2023. And we call that a PITA. You can Google that one.

There are some exceptions for bank accounts, in particular, when it comes to adding joint owners, and I'm sure there's a few other pitfalls that I'm forgetting, but hopefully, you get the point by now. Ultimately, the county recorder is not going to say, ‘Hey, you may not wanna do it that way,’ and your professional advisors won't know to warn you if you haven't talked with them about it beforehand.

You'll be surprised that when you start actively doing some estate planning, you'll find actual meaning as to what is truly important about money to you and your family.
So, in an effort to help you do that, I want you to ask yourself two important questions. You should write your answers to these questions down and make them known to your spouse and heirs, and they are; number one. If there was a book to be written about your life so far, what would you like it to say? Number two, if there was a second edition written 20 years after your passing, what would you like it to say about you and your family?

I really want you to think hard about these questions because your answers will provide you with the ultimate purpose of your wealth. And to have wealth isn't necessarily to be rich. Rich is just simply to have more. I would define wealth as funded contentment. It is the ability to underwrite a meaningful life however you choose to define that. For everyone, it's different.

Now, that's it for today's show. If you have a minute and find this information actionable and insightful, and you want to stay up to date on the latest and useful retirement planning content, please subscribe to or follow the show on your podcast app. If you'd like to learn more about the rules and strategies discussed in today's show, you can find the links to the resources we have provided in the show notes on your podcast app, or you can visit us at Retiredishpodcast.com/11.
To help you plan for the new year, see today’s show notes as we are including our newest 2023 quick reference guide that includes the important numbers to know for 2023, such as retirement plan contribution limits, IRMA Medicare surcharge brackets, tax brackets, and more, so you can start planning for the new year.

For those of you serious about retirement, it’s not too late to sign up for our online retirement planning classes next month in February. The links and details to sign up are located in the show notes. You can also sign up for the monthly Retired-ish newsletter there as well, where each month, we discuss money and emotions, investing, tax, estate tips, Medicare and Social Security, and even a brief discussion about the current markets in layman's terms.

We always include something actionable in our newsletters so that you can implement something right away, such as how-to guides and other simplified strategies. Again, this can all be found at Retiredishpodcast.com/11. Thank you for tuning in and following along. As always, see you next time on Retired-ish.

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