Estate Planning for the Young, Single, and Not So Rich
October 27, 2011When we think of estate planning, we usually think of something that only older, wealthy people do. After all, how many of us think of ourselves as even having an “estate” to plan? The fact is that if you own anything at all, you’ll have an estate when you eventually pass away. The only question is what will happen to it.
But estate planning isn’t just about death. It’s also about planning for other things we don’t like to think about, like incapacitation due to an injury or illness. The point is to make decisions now for when we won’t be able to.
None of this means that your estate plan needs to be expensive or complex. As someone single, relatively young, and certainly not rich, here is how I’ve planned my “estate:”
Beneficiary Designations: Whether it’s a 401(k) or a life insurance policy, most people have someone designated as a beneficiary on something. The problem is that we often don’t give it much thought when we fill it out, and then don’t think to update it when we need to. That could be a problem because those beneficiary designations trump everything else, including a will. Next to having an ex-spouse as a beneficiary (one of our other planners actually recently discovered they had done this), the biggest mistake is leaving it blank because then the account gets dumped into your probate estate and your heirs lose some tax benefits.
Since I’m not married, the beneficiary on my retirement and health savings accounts is my brother. In the case of my Roth IRA, that’s because the beneficiary will be able to stretch the required minimum payments out over their lifetime. Since he’s so young, my brother can take better advantage of this than my parents can.
My HSA will cease to exist and will become immediately taxable to the beneficiary upon my death. Since my parents are working and my brother is a grad student, he’s definitely in the lower tax bracket. I’ll update that as soon as he starts earning more than my parents.
To try to even things out, I made my parents the beneficiaries on my bank, credit union, and brokerage accounts. If you’re wondering why you don’t have beneficiaries on those accounts, it’s probably because your financial institution didn’t take the time to tell you could do that (it costs them time but generally earns them no money). Simply ask for a Payable on Death (POD) form for a bank or credit union account, or a Transfer on Death (TOD) form for a brokerage or mutual fund account, and (depending on your state) you might be able to save your beneficiaries the time and expense of probate on those assets. At your death, all your beneficiary has to do is present proof of your death and their identity and they can walk away with whatever savings or investments you had. Unlike adding a joint owner, your beneficiaries (and their creditors) have no right to your property while you’re alive. Some states also allow you to add similar beneficiary designations to your home and vehicles.
Will: It may surprise you to learn that I purposely don’t have one. That’s because I know the state of CA will give the rest of my measly estate to my parents, and that suits me just fine. (If you’d like to know how your state will divide your estate, check out the site mystatewill.com.) The reality is that I doubt anyone really wants my personal belongings (and if they did, my parents would probably give it to them), so it just doesn’t seem to be worth even the minimal cost and effort to have a simple one drafted. Given the ability to add beneficiary designations to all the property above, I think the most important reason for many people to have a will is to choose the guardian for their children. That’s a pretty personal decision that I doubt you want the state making.
Trust: Since most of my assets are bypassing probate through beneficiary designations, and I don’t have a taxable estate (at least not yet), I see no reason to spend a few thousand dollars on a trust right now. But if you own property in multiple states, worry about your will being contested, want to preserve privacy, or have a taxable estate, you might want to talk to a lawyer about drafting one.
However, I have to admit dropping the ball on a few documents that I should have (despite talking about a couple of them in countless workshops):
Transfer on Death Vehicle Registration: In the process of writing this blog post, I actually just discovered that my home state of CA allows these.
Advance Health Care Directive: This consists of a health care proxy that designates someone to make health care decisions for you if you’re incapacitated (remember the Terry Schiavo tragedy?), and a living will that specifies what you’d like some of those decisions to be. Everyone should have one, if only because you can get one for your state for free at Caring Connections. (When you start looking at the form, you’ll see why I’ve postponed thinking about this stuff.)
Durable Power of Attorney: This empowers someone to manage your financial and legal matters while you’re incapacitated.
Docubank Emergency Card: The best estate planning documents won’t do you much good if no one has access to them when they’re needed. The Docubank service provides instant access to your medical information and health care directives for about $45 a year.
As you can see, even planners sometimes fail to plan (I took advanced courses in estate planning while in law school so this is doubly embarrassing for me). The fact is that it’s so easy to procrastinate because we feel like we’ll never need them, even though we know we eventually will. Unfortunately, that need can come at any time, so it’s something we should take care of as soon as possible. Speaking of, I need to stop writing this post. I have some pressing documents to work on…