Simple Money: A No-Nonsense Guide to Personal Finance - Tim Maurer (2016)

Part III. PLANNING FOR THE INEVITABLE

Chapter 13. ESTATE AND LEGACY: Cheating Death

WHY do I need to read this chapter?

Without an ounce of exaggeration, I can confidently write that estate planning is the most important element of all financial planning. Yet, reportedly 80 percent of Americans don’t even have the most basic estate planning documents.

“I’m too young to worry about that” or “I don’t have enough money to be concerned about an ‘estate’” are the types of reasons I hear from people who haven’t checked off this whopper of a to-do. But I think it goes deeper than that.

In this chapter, I’ll be addressing the real reasons people avoid estate planning and how to overcome these potent de-motivators. We’ll discuss the three estate planning documents that every adult should understand and have drafted.

But first, here’s why estate planning is so vitally important: Although the probability of a premature death is extremely low, the damage it can do to one’s plans for life and money without an estate plan can be catastrophic.

For example, if you have minor children, it is your will that stipulates who should parent your kids if both spouses go down with the ship. If you don’t decide, your state of residence will be happy to do that for you. The stakes are high.

The most important provisions in your estate planning documents have nothing to do with your money, or even your estate. When you get past the legalese—an unfortunate necessity—these are simply the most important love letters you’ll ever write, an articulation of what you hope to be your legacy.

The Real Reasons People Avoid Estate Planning

Here are the real reasons people avoid estate planning:

1. They’d rather avoid the topic. They fear that discussing death might somehow hasten it. However irrational, this is a common and powerful de-motivator.

2. They see the probability of actually employing their estate plans “anytime soon” as exceedingly low. Although quite rational, this can be a fatal flaw (pun intended).

Responsibility for the first reason to avoid estate planning falls entirely on the shoulders of the Elephant (chap. 3). It’s driven primarily by emotion and caring little for rationale. The rational Rider, however, is the one overthinking things in reason number two.

We can appeal to the Elephant by getting past the instinctive self-preservative response—the fear of death—and instead considering the compounded emotional destruction of inaction. Kids being shuttled in and out of court, potentially getting matched up with the wrong guardian. Default appointees doing their best to intuit a decedent’s wishes but who are unqualified to do so. Even the most stubborn pachyderm can be motivated when asked to consider the worst-case scenarios of not completing an estate plan.

The Rider, focused on the overwhelming number of life’s other obligations, has understandably underestimated the importance of estate planning because so many other tasks outrank it in apparent urgency. But as Stephen Covey has taught us, we must see through the seemingly urgent trees to behold the vitally important field beyond. It doesn’t take much convincing to see that estate planning is so important that it becomes urgent. The Rider is quickly wooed into the estate planning process by the prospect of preserving an element of control in life even after death. Riders love asking and answering “What if?” questions, and that is the essence of estate planning.

After properly motivating the Rider and Elephant, they become a productive pair as we jump into the tangible output of estate planning.

Three Documents

There are three primary documents that make up a suite of necessities: a will, durable power of attorney, and an advance directive.

Will

Your last will and testament is the most important estate document and also requires the most effort. Done properly, it entails some avenues of thought you’d prefer to avoid, but its import can be seen immediately. This is especially true in determining the three offices commonly appointed in the document:

PERSONAL REPRESENTATIVE

The office that will apply in every circumstance is the Personal Representative (PR), still known as the Executor or Executrix in some states. The PR’s job is to walk your estate through the probate process, which of course begs the question, “What is probate?”

When you’re living, you own your assets. The moment you kick the proverbial bucket, your estate is the new owner of said assets. Probate is the state-specific process of transferring the assets in your estate to wherever your will stipulates they should go—your heirs, any trusts, or other entities. It’s the PR’s job to ensure that process happens.

Because of the legal complexity, many personal representatives will hire an estate attorney to aid them in the completion of their duties. Some future decedents, therefore, name an attorney for this office in the first place. If you choose a friend or family member, consider someone who is proactive and detail-oriented, if not verifiably anal retentive.

GUARDIAN

The most important office for parents of minor children to fill is the Guardian, the legal equivalent of the religious office of godparent. The guardian effectively becomes the child’s parent if both biological parents are deceased.

This is a huge responsibility that shouldn’t be taken lightly by the person bestowing, or receiving, the nomination. It’s especially important that you avoid letting this decision devolve into a popularity contest. Many people think their parents are a natural choice. Natural though it appears, it may not be wise. Your parents like being grandparents, and while they’d be honored (and would almost surely accept this responsibility), it likely isn’t in your kids’—or your parents’—best interest. (See the “Don’t leave us with the babies!” commercial.1)

This decision is too important to worry about what other candidates for the job may think about not being asked. And while it is an imperative to seek permission of your designee(s), please remember that you don’t actually have to tell people they weren’t chosen. It’ll likely never come up.

Instead, consider these questions: Who shares your values and has similar goals? This is a great starting point, but also consider practicality. Who is in close enough proximity that the kids wouldn’t have to be uprooted? Who isn’t already overwhelmed with several young children of their own? And most importantly, who would do a great stinking job?

TRUSTEE

The final office created in a will that we’ll explore is that of Trustee. The trustee has the duty of watching over funds set aside for your minor children in trust. A trust is a non-person entity—a piece of paper given legal standing. You are able to specify an array of rules stipulating how the trust is to be managed, and it’s the trustee’s job to ensure that the beneficiaries of your trust(s) abide by those rules.

If I’ve lost you here because I mentioned the word trust—evoking notions of “trust funds” for which you’re sure you don’t qualify financially—please read on. This tool is valuable for and available to most families.

While there certainly are cases where a trust may exist during your life—for example, a Revocable Living Trust (RLT) or an Irrevocable Life Insurance Trust (ILIT)—the trust that has the broadest appeal in estate planning is the Testamentary Trust. A testamentary trust isn’t created until you cease to exist. Only then is it funded, by the assets in your estate or via beneficiary designations.

While a guardian has only legal responsibility over a child without special needs until he or she reaches the age of majority, a trustee’s responsibility extends as long as the trust exists, which is sometimes into perpetuity. But allow me to give you an example of a well-known family to help make more sense of this.

Ward and June have a testamentary trust created in their wills designed to receive all assets that are not in retirement accounts—most notably, the proceeds of their life insurance—for the benefit of their children, Wally and Theodore. If, heaven forbid, Wally and Theo lose both of their parents, Aunt Martha will assume the role of guardian and Uncle Billy will become the trustee of the newly created trust.

As most are, Wally and Theo’s testamentary trust was written with broad powers to provide funding for their health, education, maintenance, and support at the trustee’s discretion. Then, after the boys are fully independent, when Theo reaches age 25, the pooled trust is split into two. One-half for each of the boys. Finally, the trusts will be fully distributed. One-third at age 30, half at age 35, and the remainder at age 40.

This is just one example, but in any case, the point is to protect the funds both for and from the children. It doesn’t take much of an imagination to guess what many eighteen- or twenty-one-year-olds would do with a huge payday. So, by spreading out distributions, the impact of the money is lessened. Some parents choose to keep the money in trust indefinitely, preserving its contents against the unseen, like a failed marriage. The more money, the more care that goes into crafting the trust language.

I’m a big fan of Warren Buffett’s strategy: Leave the kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.”2

You likely noticed that the ideal traits for a personal representative (detail oriented) may be different from those for a guardian (character shaping). The same is true for the trustee. This designee should obviously be good with money, but also wise enough to separate legitimate expenses from the foolhardy, and confident enough to express his or her wisdom in the face of a challenge from a persistent youngster (or adult).

While there may well be cases in which one person best fits all of these roles, in many scenarios, there will be different people in each position. Indeed, some recommend it as a matter of necessity to avoid conflicts of interest.

Further complicating matters, there should likely be second and even third designees for each office in case any of your primary appointees are unwilling or unable to serve.

These are challenging decisions for many reasons, but ultimately, drafting a will can be a heartening exercise as we remember times past and envision the future. Consider easing the inherent tension by scheduling a relaxing date night to follow your meeting with the attorney.

DPOA

But it’s not time for dinner just yet. There are two other documents that should accompany your will, including a Durable Power of Attorney (DPOA). This document is designed to give someone else the ability to act on your behalf in financial matters if you are unable or unavailable to do so.

You’re traveling for work while in the middle of a house purchase? Your agent can act on your behalf with a properly drafted DPOA. What makes this particular power “durable” is that it can be used even—if not especially—in the case that you are incapacitated, allowing your attorney-in-fact to move needed funds between bank accounts, for example, in the case of a disabling injury.

One of the past difficulties with power of attorney is that institutions fearful of being sued—banks, in particular—would not accept all documents upon presentation. There are a couple ways to ensure that the people you select will actually be empowered: First, you can register your documents with the institutions you deal with most often—your bank and investment manager, for example. The approval process may take a few weeks, but then your attorney-in-fact will have the ability to act on your behalf without hindrance. Second, the problem of delayed approval has become widespread enough that many states have created statutory power of attorney language. Therefore, ensure that your documents conform to the statutory language giving them the strength you intend.

Please note that a DPOA properly drafted and utilized is a very powerful document, and only to be put in trusted hands.

Advance Directives

So you can see how anyone with children or property would want a will, and how anyone with financial responsibilities would want a durable power of attorney. But this third document completes the trio of essential estate planning documents imperative for anyone over the age of majority—the Advance Directive.

This is a dual-purpose document with singular intent—to designate a person to make healthcare decisions on your behalf in the event you are unable to do so. Do you remember the story about my accident from chapter 4? When I was lying in the hospital unconscious, important medical decisions were being made that ended up impacting my very survival—but I wasn’t able to make them.

“Once your child reaches the age of majority, your personal rights are terminated and you may not be able to make healthcare … decisions on your child’s behalf,” says Maryland estate planning attorney Jane Frankel Sims. Sims counsels that every parent should get their kids to sign an advance directive—along with a financial power of attorney—before they head off to college. But they’re equally, if not increasingly, important for you.

An advance directive comprises two documents—a healthcare power of attorney and a living will. The healthcare power of attorney designates an agent to make healthcare decisions when you’re unable. The living will, then, instructs your designee on how you would like end-of-life decisions to be made.

Sadly, you may have heard of the Terri Schiavo case. After suffering brain damage resulting from a massive heart attack in 1990, Schiavo was medically deemed to be in a “persistent vegetative state” from which there would be no recovery. Her husband said Terri’s expressed desire was not to be kept on life support in such a situation, but he was opposed by her parents, who insisted she be kept alive. As a result, this most private of decisions was made increasingly public until a judge ordered the removal of Schiavo’s feeding tube—in 2005.

Even in resurfacing that story for this explanation, it’s heart-wrenching. I can put myself in the husband and the father’s shoes and sympathize with both of them. But the advance directive helps ensure that there will be no sides taken, that you will be the sole arbiter of this decision.

If you are meeting with an attorney to draft your will, consider having them also draft your durable power of attorney and advance directive. But if your recent high school grad is headed out the door to college, you should be able to print an advance directive from your state’s attorney general’s website, or find it at www.caringinfo.org.

The Most Important Love Letters You’ll Ever Write

When you think of the investment of time and money required to draft these documents optimally, it starts to add up. But when you consider them as they are—the most important love letters you’ll ever write—you realize that the investment is well worth it.

Writing your final wishes on a napkin might work in the movies, but it’s not a real-life option to be considered. Yes, you can pay $29.99 for will-making software or $69 for an online will service, but I invite you to consider that the output may be worth precisely what you put in.

Many employers offer prepaid legal services as a company benefit. This option introduces a vital element in the creation of estate documents—the human element. But be careful, because most of these programs are designed to provide cookie-cutter services. If you choose this path, use what you’ve learned in this chapter to ensure that your documents are customized to you.

The preferable option for preparing estate documents, however, is retaining the services of an attorney who specializes in estate planning. The cost and quality of such services ranges widely, so consider interviewing a few attorneys who come highly recommended by people you trust. Most attorneys bill on an hourly basis, but a flat-fee service, including the preparation of a will, durable power of attorney, and advance directives, will help ensure that you won’t be afraid to ask questions. And be sure to demand answers in terms that you understand—not the language of legalese.

The Most Powerful Estate “Document”

After all the expenditure of time, effort, and money to get those essential estate planning documents drafted, signed, and notarized, you can sleep through the night—right? Well, not quite.

All that work could be for naught, unless you address a simple form: the beneficiary designation. It is associated with any retirement accounts, annuities, or life insurance policies. Believe it or not, these forms will trump the wishes in your will if they differ.

I learned of one such precedent, and it’s brimming with karmic irony. Bill, we’ll call him, left his wife of many years for his secretary. After reluctantly ceding the requisite 50 percent of his assets in the divorce, he immediately updated his estate planning documents to ensure that his new squeeze would get the remainder. Then, in the middle of his backswing at Pebble Beach, he was struck dead.

Unfortunately—depending on your perspective, I suppose—Bill had forgotten to change the beneficiary designations on his retirement accounts and life insurance. That’s right—100 percent of the proceeds from these went to his now ex-wife.

A more wholesome example, and one that I see regularly, involves young married couples who still have Mom and Dad listed as their beneficiaries. The moral of these stories is to check your beneficiaries at least annually. This is especially important in the financial services realm, where mergers and acquisitions are changing the sign on the door regularly. It’s important to make sure this powerful estate planning form is accurate and up-to-date.

Estate versus Legacy

Our estate is not to be confused with our legacy. Estate is a legal term defined as “the degree, quantity, nature, and extent of interest that a person has in real and personal property.”3 In other words, it’s your accumulated stuff. Our legacy, however, is the intangible, collective impact we have on the world around us.

On the way to the church for a funeral, I wasn’t optimistic. I was hunting for a silver lining and couldn’t find one. Melanie’s husband—Natalie and Gabe’s father—was only thirty-six when he died.

Nick Selvi was thirty-four years old when he was diagnosed with stage 4 rectal cancer. A longtime musician, he was teaching elementary school music and leading the fifth-grade jazz band, a creation that sprung from his passion for improvisation.

When he received his diagnosis, he and Mel had just finished engineering a life that allowed her to stay home with their youngest of two children. Gabe had recently been diagnosed with autism, and Melanie couldn’t make sense of working full-time to just barely cover their childcare expenses.

It certainly was a sacrifice to live solely off Nick’s teacher’s salary, but they made it work. Nick also taught private lessons, played gigs whenever he could, and led their church’s music for extra cash and inspiration.

Stage 4 cancer is generally thought to be a terminal diagnosis. But Nick had enough drive and optimism to fuel hope for a recovery. A hope now deferred. A recovery that never came.

Walking into the church, I confess I just couldn’t find the redemptive story.

Nick’s funeral was unique, a reflection of him. It was quirky, filled with music and humor. At Nick and Melanie’s insistence, the funeral was dubbed a “Celebration of Nick’s Life,” but I was skeptical it could live up to such a billing.

Then came the testimonial section of the service, where friends, family, bandmates, students, and even members of a local motorcycle gang (it’s a long story) waited in an endless line to share Nick’s impact on their lives in the standing-room-only sanctuary.

Nick Selvi didn’t leave much of an estate, but as I left his funeral, I couldn’t help but think that he left more of a legacy in thirty-six years than most would leave in two lifetimes.

Legacy

I’m reminded of the three questions in chapter 2. Do you see them differently through the lens of legacy? And I invite you to consider three subsequent questions I’m asking myself at the end of this chapter:

1. If today was my last day, what would my legacy be?

2. How would I like it to be different?

3. How would my goals (chap. 3) change if I viewed them as legacy-building opportunities?

Estate planning feels like a chore. It can be uncomfortable, time consuming, and expensive. I can certainly make the case that it is worth every discomfort, every moment and dollar spent, to draft the most important documents we may ever write. But when considering the opportunity it provides to pause—and consider our legacy—estate planning begins to feel more like a priceless gift.

1. Estate planning is the most important element of all financial planning because the damage done to one’s plans for life and money without it can be catastrophic.

2. We don’t like to do it, primarily because we’d rather avoid the topic (fear of death) and don’t see it as urgent (because, really, what are the chances?).

3. The three essential estate planning documents, appropriate for most adults, are a will, durable power of attorney, and advance directives.

4. Watch out, because the wishes expressed in the beneficiary forms for your retirement accounts, annuities, and life insurance will trump the wishes in your will. Be sure they are in sync.

5. Your estate—the tangible stuff you collect throughout life—is important, but not as important as your legacy—the intangible, collective impact that you have on the world around you.