Estate planning from a financial planner's perspective

By Michelle Mohammed, CFP

Ben Franklin famously said: “Nothing is certain in this world except death and taxes.” It’s a phrase that gets repeated a lot for a reason. And, while death is ultimately inevitable, with the right estate and tax planning strategies, it is possible to reduce or eliminate the estate taxes and probate fees incurred in connection with your estate plan.

Michelle Mohammed is a CERTIFIED FINANCIAL PLANNER and Director of Financial Planning at Edelman Financial Engines. Michelle's specialties include developing comprehensive financial planning and retirement strategies that enable clients to build, grow, protect and preserve their wealth. Michelle is a financial planner with over 20 years of experience who has had the privilege of helping her clients and their families achieve their financial, retirement and investment goals. Outside of work, Michelle gives back by helping women and underrepresented groups find their way into the financial services industry. — Michel Mohammed

In my 21 years as a financial planner, it amazes me how often people are confused about estate planning, even the most financially savvy.

Below I’ve collected some of the most common questions and concerns I’ve come across over the years. I hope some of these lessons help you protect yourself and your legacy.

I’m not rich, I don’t need an estate plan

I’ve heard this statement from people with $3,000, people worth $3 million, and everyone. Everything is relative. Some people compare themselves to their friends or family who have much more than they do.

There are many challenges with this statement. For example, as a retiree, if you spend less than you receive from fixed income sources (such as pensions and Social Security), your retirement accounts and other investments will have the opportunity to grow and compound over time. Therefore, even if you don’t consider yourself “wealthy,” the wealth you accumulate in these accounts may be subject to estate taxes if you don’t plan properly. If you own a business, it may exceed your expectations and you may end up being worth much more than you expected.

If you have minimal liquid assets but have heavy assets, such as hundreds of thousands of dollars in real estate, your estate may be subject to unnecessary probate costs even though you may not consider yourself wealthy.

Amazing fact. There are a number of famous and “rich” people who died without a will. Prince, Pablo Picasso, Jimi Hendrix, Kurt Cobain, Bob Marley, Amy Winehouse and James Brown to name a few. Some of them even had surprisingly little property 5-10 years before they died.

It is easy to wonder why they had no will when they had so much wealth to protect. But it’s human nature to put off the unpleasant, especially as you face your mortality, which is a necessary part of your financial preparation. It’s not a fun thing to do even in the easiest of times, so it only gets worse when you have an illness or some other difficult time in your life. That’s why it’s so important to address estate planning when you’re healthy and thinking your best.

After all, it’s not just about the money. Other important decisions, such as those related to your health care, are at risk if you are unable to make decisions for yourself. Who do you want to lead? A power of attorney and a health power of attorney are wise to have in case this becomes an issue. Talk to your financial planner about options. There are institutions that can act as trustees if you really don’t have individuals you can trust. If you don’t, the court will appoint a guardian or conservator to make decisions for you, which is usually not what most people really want.

I have a will from 20 years ago. Why should I spend money to update it?

Has anything changed in your life in the last five, 10, 15, 20 or more years? For many, I’ll bet the answer is yes. People you were close to a few years ago may be gone or no longer that important to you. Regularly reviewing your estate plan every three to five years is wise, even if you think not much has changed. Many of my clients are surprised to see what they wrote years ago and realize it no longer applies.

Why do I need an estate plan? When I die, the money will go to my husband or children.

I know of a situation where someone went into the hospital after they drafted the estate plan. This person was a lawyer and planned to review the draft documents when he returned from the hospital. Unfortunately, he never came home.

Since they lived in Texas, her husband paid several thousand dollars in contract costs. Yes, the money may go to your loved ones, but they may receive less than intended. Don’t waste time. Get your estate planning done now while you’re healthy.

Also, even if your main asset is your 401(k) where you have a named beneficiary, there are many other considerations, such as property and personal effects, that you need to take into account in your will and estate planning.

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I put my children, who are minors, as beneficiaries in my estate plan because I want them to be taken care of if I die before they reach adulthood.

Despite good intentions, this can have adverse consequences. Most likely, a court-appointed conservator will manage and distribute the children’s money. This can be expensive and damage the value of funds. It also may not be the person or entity you would choose to make financial decisions for your children.

Estate planning vehicles such as trusts can be a more cost-effective way to ensure that your children receive the money for the purposes you intended (health, education, maintenance, and eventually purchases like a home).

I am single, no children. Why should I worry about what happens to my money after I die?

I find that many of my clients, whether they have children or not, have lifelong friends, a house of worship, a charity, or a cause they are passionate about. If that’s the case, it makes sense to do some estate planning to ensure your money goes where you want it to go. Your money can have a positive impact even when you’re gone.

I can get a will from the internet and that’s fine.

This can be penny wise and pound foolish. While these DIY wills seem easy, the reality is that many people have no idea what they want or need. Once you become familiar with the intricacies of family dynamics and your condition and situation, DIY estate planning can be more challenging than working with a team of professionals. I recommend using an estate planning attorney who specializes in this topic.

So what should be your next steps to help you ensure your bases are covered? I recommend the following seven steps to help you protect your inheritance:

Talk to a financial advisor and your estate planning attorney
Discover the differences between wills, trusts and beneficiary designations and the pros and cons of each to help protect your finances
At least create a will for your minor children and appoint a guardian (if applicable)
Create an advance medical directive and name a medical and financial power of attorney
Talk to your family and heirs about your estate plan
Periodically review your estate plan every three to five years and after major life events
For some high-net-worth families, a market downturn may be an opportunity to explore certain estate planning options, such as:

Making large gifts (either directly to family members or in irrevocable trusts) of assets that have lost value but may return in the future
Gifts with reduced values can reduce the gift tax consequences associated with making such gifts.

About the Author: Michelle Mohammed

Michelle Mohamed, CFP®, is the Director of Financial Planning at Edelman Financial Engines. Michelle’s specialties include developing comprehensive financial planning and retirement strategies that enable clients to build, grow, protect and preserve their wealth. Michelle is a financial planner with over 20 years of experience who has had the privilege of helping her clients and their families achieve their financial, retirement and investment goals. Outside of work, Michelle gives back by helping women and underrepresented groups find their way into the financial services industry.

Neither Financial Engines Advisors LLC nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.

All advisory services provided by Financial Engines Advisors LLC, a federally registered investment advisor. Results are not guaranteed. See EdelmanFinancialEngines.com/patent-information for patent information.