What is Bayalis, you say? The answer is 42 in Hindi, or the age at which Mrs. BITA plans to be financially independent. Mrs. BITA and her husband are raising a family in one of the highest cost of living areas in this great nation, and are managing to get far ahead in spite of the high rent district.
They are also planning for a future beyond their FIRE timeline, as you will learn from today’s article. I had the pleasure of meeting Mrs. BITA a week ago at FinCon and sharing an Uber on the way back to the airport because that’s what FI types do.
Take it away, Mrs B!
Look Mortality in the Eye Without Flinching: Simple Estate Planning
I see you, you industrious Ant, saving and investing for a rainy day. Your asset allocation is just right, your expense ratios are lower than the inhibitions at a frat house party, and your savings rate is higher than a proverbial kite. You are prepared for Life. But are you prepared for Life’s grim twin, the Not-So-Jolly Reaper? What if, heaven forbid little Ant, the Boot of Life chooses to stomp you flat this day?
If you, like me, do not relish facing your own mortality, chances are that if you were to kick the bucket, your affairs would not quite be in order. Now, if you are going to leave behind nobody who depends on you, or if you do not give two hoots about what happens to your hard-earned cash once you are six feet under, let me save you some time. Exit this post. Do not pass Go. Do not collect $200.
For those of you who have chosen to hang around, today we are going to go toe-to-toe with our mortality and our weapon of choice will be an Estate Plan.
What is an Estate Plan?
An Estate Plan typically involves creating the following:
- A Living Trust
- Power of Attorney for Finances and
- Power of Attorney for Healthcare Decisions and Advanced Health Directives
“Whoa!” say you, “What a lot of documents!” Well, you are up against Death. Would you rather face Death with a plastic fork or an arsenal of modern weaponry?
We will go over the different components of the estate plan and see why each one is both worthy and necessary.
Preparing to Create Your Estate Plan
Before you actually work with a lawyer to set up your estate plan, you are going to have to do some homework. Here is a list of things you must figure out in order to draw up your estate plan:
This is really the hardest part of the process. It requires you to search your soul and face some unpleasant truths. If you aren’t single, it is going to require you to sit down and have heart-to-heart conversations with your better half. It isn’t an easy thing to agree on who should get custody of your children, or to find out that while you want to pull the plug and donate all your organs, your spouse wants drastic measures and plans to refuse an autopsy.
It isn’t easy, but it is the responsible, adult thing to do. Being an adult means that you can eat all the chocolate you want and binge watch Netflix. It also means that you have to do the right thing, even when that thing isn’t particularly pleasant or fun.
Now that you’ve done the hard work, let’s dive into the details of each weapon in your Mortality Arsenal.
A Revocable Living Trust
In this article we discuss revocable living trusts. The other kind are irrevocable trusts, and I’m not as well versed in those, so I shall say nothing about them.
A living trust is a legal document that contains instructions for what you want to have happen to your assets when you die. The term revocable indicates that you can revise the plan during the course of your life or even scrap it completely.
A Living Trust allows you to avoid probate. Probate is a court-supervised process for transferring a deceased person’s assets to their beneficiaries. If you die with only a will, your beneficiaries have to go through probate to gain access to your assets. Let us count the ways in which probate is detrimental to your beneficiaries:
- Lack of privacy. Probate is a public process. Your assets will be a matter of public record, as well as who gets what.
- Time consuming. The probate process can take a while. My lawyer said that it isn’t uncommon for the process to take nine months to two years. Until probate is done, your beneficiaries can’t touch any of the assets.
- Expense. Probate fees are set by law, vary based on state and can be significant. In California for example, probate fees are 4% of the first $100,000 of the gross value of the estate, 3% of the next $100,000, 2% of the next $800,000 and 1% of the next $9 million. In addition there are flat fees like the cost of filing for probate.
Sold on the need for a living trust yet? I thought you would be. Now let’s talk about some trust-related terminology and other nitty-gritty trust details.
Settlors a.k.a. Trustors a.k.a. Grantors All these terms refer to the person(s) who create the trust. In our case Mr. BITA and I are the settlors, trustors and grantors of our living trust.
This is the person(s) charged with managing the trust. While we are alive and of sound mind and health, Mr. BITA and I are the trustees of our trust. The trust document specifies one or more successor trustees. Remember those trusted folks I asked you to pick earlier on? Those will be your successor trustees. Once you shuffle off this mortal coil, your successor trustees will tend to the care and feeding of the assets in your trust until your beneficiaries inherit your assets.
Beneficiaries As the name suggests, the person(s) who benefit from the trust. This is the person who will inherit the assets placed in the trust. The trust document states at what age control of the assets pass from the successor trustee(s) to the beneficiary. Our document gives Toddler BITA control of our assets when she turns 30.
The lawyer that you work with will help you create and notarize your trust, making it nice and official. Your trust will have a name. I dearly wanted to name ours DisTrust (as opposed to Dat Trust, you know), but it ended up with a much more boring name: The BITA family Revocable Trust.
As the years go by, you may need to amend your trust (e.g. you have a new baby or one of your trustees dies or moves out of the country). You cannot amend the trust yourself. You will need to contact a lawyer to make changes to the trust.
Once you have a living trust, the trust must be made the owner of all your assets (or co-owner, depending on the asset type). I’ll talk about this some more later on, when I discuss funding your trust.
Even if you have a living trust, you still need a will. A will serves two purposes when there is also a living trust in place:
- The will serves as a catch-all for anything not explicitly owned by the trust (e.g. your cars). This kind of will is called a pour-over will and it basically states that all your property should be ‘poured’ into your trust at the time of your death and will be managed by your Trustee.
- A Living Trust deals with your assets. It cannot deal with your children. If you need to specify guardians for your minor children, this information needs to go into the will.
While the guardian will have no control over your assets (unless you choose the same person to be both guardian and trustee), they can petition your trustee for money (e.g. a monthly stipend) to cover the costs of raising your child. They are also allowed to ask the trustee to give them financial statements of the trust holdings at regular intervals. This allows them to keep an eye on your trustee and ensure that your assets are being managed in good faith until your child(ren) inherit(s).
Power of Attorney for Finances
This is a document in which you state who is authorized to make financial decisions on your behalf if you are not of sound mind. In my case, my husband will make decisions for me if he is alive and well. If he is not, next in line are our trustees.
Declaring someone incompetent to handle their own finances is not something that is taken lightly. It requires two licensed physicians not related by blood or marriage to you or your beneficiaries to declare you unfit.
Power of Attorney for Healthcare Decisions and Advanced Health Directives
These give your nominee(s) (also known as your conservator(s)) the power to make medical decisions on your behalf. It also lets you specify your desires for certain specific medical situations, and your conservator is required to honor your wishes. My document let me specify such fun things as what my conservator should do if I turned into a vegetable, whether or not I wanted to donate my organs, and if so, which ones, and how I wanted to dispose of my remains.
Funding the Trust
Think of the living trust as a container for all your assets. When a trust is created, it is an empty container. For the trust to be an effective tool you must fund your trust by moving your assets into the control of the trust.
Your Trust Must Own Your Property
The deed to your house must be modified to indicate that your trust owns the property (in addition to you and, if applicable, your spouse). This was something our lawyers handled for us. If you purchase new real estate in the future, it must be in the name of your trust.
Your Trust Must Own All Your Non-Retirement Accounts
Once you have created a living trust you have to transfer the title on all your accounts to your living trust. How exactly you do this will depend on the particular bank in question. I can tell you what our lawyers told us about some of the institutions we bank with:
- Chase and Bank of America require you to visit a local branch to perform the transfer. The banker might need to see your Trust Certificate (a document that was created by our lawyers) in order to perform the transfer.
- For Vanguard and Schwab, you can call and request Trust Account Forms, which you fill and send back to the institution.
- Capital One does not support accounts that are owned by a Living Trust. This really annoyed me, because I’ve banked with Capital One for years. Ally Bank, here I come!
When you open new accounts in the future you must do so in the name of your trust. If you are in the business of churning bank accounts for bonuses, your Living Trust could make your hobby onerous. On the other hand, those accounts will likely contain a small amount of money, and will be short lived, so I wouldn’t bother putting them into the trust.
Your Trust and Retirement Accounts
Your retirement accounts cannot be owned by the trust. So for your 401ks and IRAs you need to ensure that you have a beneficiary and contingent beneficiaries set up correctly. Retirement accounts are exempt from probate.
If you have a life insurance policy, and your spouse is your primary beneficiary, you must make the trust your contingent beneficiary.
College Savings Plans
You must make the trust the Primary Custodian of any 529 college savings plans.
Incentive Stock Accounts
If you receive stock from your employer as part of your compensation (e.g. Restricted Stock Units or Employee Stock Purchase Plans), and your employer opens an account on your behalf to hold this stock, you typically cannot transfer these accounts to your trust.
What you need to do instead is open a new ‘trust’ account with the financial institution in question, and link the trust account to the account opened by your company. Then you can set up an automatic transfer so that as soon as your stock vests, it is transferred to the linked trust account.
Operating Trust-owned Accounts
Having your accounts held in the name of the trust doesn’t change anything on a day-to-day basis. You can still sign checks in your own name, or purchase index funds in your brokerage accounts, etc. Nothing changes at tax time either – you file your taxes exactly as you did before. If you are ever asked for the the Trust ID or the Trust Tax ID, it is the social security number of any grantor (a.k.a trustee) of the trust.
How Much Does Estate Planning Cost?
The firm we used said that they charge $1,800 to put together an estate plan like the one detailed in this post. Obviously, this number will vary widely by region. My company offers a Legal Plan benefit. If you sign up during open enrollment, they deduct $9 from every paycheck, but then the Legal Plan picks up the bulk of the costs if you do consult a lawyer. So we paid $9 * 26 plus $220 out of pocket for our estate plan – a grand total of $454. If you have access to such a benefit, I would strongly recommend looking into it.
Protect Your Assets and Your Dependents
We drew up our estate plan less than a month ago. My daughter is 3 years old, so believe me when I say that I understand how not-fun this is, and how much easier it is to procrastinate than face your mortality head-on and plan for it. You’ve worked hard to build your asset base. Now (wo)man up, and put a plan in place to protect it and those that will be left behind. Let money be the least of their concerns in their time of grief.
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[PoF: Thank you for a solid overview, Mrs. BITA. Readers, do you have your ducks in a row when it comes to estate planning? Do you see a need for a trust in your estate plan? Let us know in the comment box below!]
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