Estate planning is a vital step in not only ensuring that your assets are distributed according to your wishes upon your death, but it also prevents conflict that could arise among your survivors if they are left to make decisions about your estate themselves.
If the cost of estate planning has you thinking twice, consider the possible issues that could arise without it. Young children could be left without guardians, and irreparable rifts could develop between adult children trying to split assets themselves. You would leave a lifetime of assets in the hands of others with no say in where they go next. But if you have an estate plan, your survivors will not have to worry about making decisions about your estate while they are grieving.
Here’s a breakdown of fees associated with estate planning.
Online vs. In-person
While the Internet can be a great source of information, it’s not where you want to spend your money on estate planning. You’ll find plenty of do-it-yourself estate planning kits online (for a fee) that will allow you to create a simple will online, but don’t fall for their easy approach and low costs. This type of planning may work for someone with no beneficiaries and few assets, but everyone else should hire a professional.
The best use of the Internet in estate planning? Using it to do initial research into the field and come up with smart questions for your professional estate planner.
The costs of estate planning will vary according to the professional’s fee and how complex your property is. The cost for a simple, straightforward will could be a low as $150, while a complicated estate may require thousands of dollars.
Estate planning professionals, who can include attorneys and financial planners, typically will charge flat fees or an hourly rate.
Estate planning professionals using this pricing system will charge a set price, often based on their experience and the work that they offer. If you are offered a flat fee, it’s important to ask the attorney or finance professional what that fee covers, as it may not include extras such as a notary fee, and how they expect payment. Some professionals require the entire flat fee up front, while others may ask for only part of the fee before they start on your plan.
Other professionals charge an hourly rate; this will cover all the time that the lawyer or planner spends working on your estate. In some cases, the professional also may ask for an initial retainer fee, which you will pay before work begins.
This fee schedule often applies to more complex estates that will require additional work.
Your first meeting with the professional, which can take place in-person or virtually, typically won’t include a consultation fee. During this meeting, which can last up to an hour, you’ll talk to them about your situation and figure out the extent of estate planning you will need. While this meeting may be free, expect to pay for future consultations.
As you meet with estate planning professionals to determine which one you will work with, be sure to ask each how much they charge, what fee schedule they use, and what services they provide for that cost. This information will help you choose both an affordable service and one that can handle your estate.
Can My Bill Increase?
Yes. Even if your financial professional has given you a rate and detailed list of services that rate covers, it’s still possible they will run into work outside of that scope once they delve into your estate. To offset any surprises, talk to them up front to understand when and how much they charge in extra fees.
Managing Your Estate Planning Costs
To keep your estate planning in your budget, you can take steps in advance to minimize the costs.
- Prepare your questions: Before you start shopping for an estate planner, know what you need. Read up on basic estate plans, which documents are required, and what you need to know more about.
- Shop around: Don’t work with the first person you talk to. Take time to learn about various firms, read their reviews, and compare what they offer. You also can schedule consultations with each one to gain more points of comparison.
- Ask about costs: To avoid unexpected fees and costs, talk frankly about money during your consultation. Ask questions about their fees, rates, and scope of work so that you’ll know what you’re paying for and what could become an extra cost.
- Sign a contract: This is not the time to take a business on its word. Have the firm draft a work agreement, including costs, that both of you sign.
The COVID-19 pandemic has caused many people take financial actions like postponing retirement and to re-evaluating their estate plans. When it comes to the latter, an issue many grapple with is how—and whether—to equally allocate their assets to their children.
While dividing one’s estate into equal parts seems fair, often children have made different life choices, have different characters, and aren’t in equal life circumstances. A survey conducted by Merrill Lynch Wealth Management and Age Wave in 2018 found that many Americans don’t want to distribute inheritances to their adult children equally.
For example, 25 percent of respondents said they believed an adult child with their own children should receive more of an inheritance than an adult child with no children. About two-thirds said they believed an adult child who provided care for them should get more that those who did not provide care.
“How do you define equity?” Lisa Hanks, a California-based estate planning lawyer, recently told the New York Times. “It is different for different families.” For many, equity and equally are two different things.
As you consider how you will divide your own estate, you may find that issues of equity are complex and sensitive. For example, you may have one child who you believe will always need extra help, while your other child has a high-paying job in a stable industry. Or, you may have an adult child with special needs who will need expensive care after your death.
However, even in cases where one child may clearly benefit from extra inheritance, other siblings may not always be on board. Unequal inheritances can lead to conflict between siblings when the estate is divided. Some fights become so unmanageable that siblings take each other to court. In some cases, siblings who receive less believe that siblings with a larger share of the inheritance must have manipulated or influenced the parent to leave them more. This can lead to bitterness, distrust, and broken relationships after a parent dies.
Estate planners suggest that when parents create unequal inheritances, they should have a conversation with each child to explain their reasoning. Families also can hire mediators to facilitate discussions about inheritances to help siblings understand their parents’ decisions.
For example, one mediator described to the New York Times a situation where she helped a father and two of his sons, who were financially successful, discuss the father’s desire to leave more money to his third son, who had issues with his finances and health. In the end, the two financially successful sons decided they would prefer for their brother to receive a larger inheritance because they wanted to have a good relationship with him and were concerned that they might otherwise become financially responsible for him later in life.
Navigating an Unequal Inheritance
Here are several situations a financial planner can help you work through if you are considering an unequal distribution of your estate between your children.
- Factoring in an “Early Inheritance”
Some parents provide one child with extra financial support early on, such as paying for graduate school or helping a child with a down payment on a house. To balance out their gifts, parents often want to factor in this type of “early inheritance” into their will.
Experts recommend that parents discuss the early inheritance with their children and document the gifts in their estate plan. If parents have loaned a child money, the will should include a promissory note outlining the amount and terms of the loan, how much has been repaid and whether the balance should be deducted from that child’s share of the estate.
While including past gifts may complicate your estate plan, not acknowledging them in your will can create resentment in children who did not receive substantial financial help from you while you were alive.
- Repaying a Care Provider
In some cases, one adult child served as their parents’ primary caregiver at the end of their life and parents want to reward this child. However, siblings may not be on board with the inequity it could cause in their parents’ estate.
To avoid real or perceived inequities, when the estate is drawn up to compensate a caregiving child, financial planners often advise families to create a personal caregiving agreement that defines the caregiving services and the value of their contribution in the estate, such as extra money to buy a house or more of the estate. As always, parents should also talk about these decisions with their children.
- Taking Care of Stepchildren
Blended families can create added complications when drawing up an estate, as research has found that parents with no stepchildren are much more likely to treat their children equally than families with stepchildren. To ensure assets are distributed as the deceased intended, financial planners recommend being specific in how the estate is set up.
For example, a husband with children from a previous marriage may want to create a trust that provides for his spouse and bequeaths his remaining assets to his biological children after she dies. Alternatively, the husband could specify that certain amounts of his estate should go directly to his children rather than leaving everything to his spouse or name his children beneficiaries of a life insurance policy.
Regardless of careful estate planning, however, inequities can creep in. To best preserve sibling relationships, parents should always lay out detailed estate plans in advance and talk to their adult children frankly about their estate and the reasoning behind their decisions.
Two key considerations in retirement planning are ensuring that you outlive your retirement income and that your financial plan can withstand changes in the market. Pensions used to provide this assurance, but as these types of savings plans become rarer, you may have to create your own guaranteed retirement income.
Deferred income annuities (DIAs) are a sometimes-overlooked financial tool that fortify retirement portfolios and guarantee that retirees will have a cash flow, regardless of market ups and downs. While financial advisers generally will not recommend investing the majority of your portfolio in a deferred income annuity, many do advise retirees to include them in their portfolios.
Why are these financial tools such a good idea? The main reason is they provide a guaranteed income for life, whether you live to 80 or 100. While the income they generate may not be enough to cover all your living expenses, they can provide peace of mind and a reliable source of income in your retirement years.
How Deferred Income Annuities Work
Unlike other investments that produce income, deferred income annuities guarantee income as long as you are alive—no matter how long your lifespan. This works because DIAs operate on the concept of the “mortality credit,” which means that the assets from annuities whose recipients live for shorter periods of time stay in the “mortality pool” to work for recipients who live longer. DIAs are managed by insurers, who can share risk with other clients.
To build a DIA, a buyer invests a one-time amount or makes incremental payments to an insurer, who invests the money and guarantees a regular income later on. The investor can choose when to start taking payments, although most begin at age 80 or later to ensure they have an income in the last year of life.
The key to maximizing income from DIAs, which convert part of your savings into regular income, is to invest before you retire. An early start can mean a higher stream of income after you stop working. Financial advisers generally recommend DIAs for everyone except those who can’t afford to commit their money to an investment, as DIAs are not liquid.
There are several good strategies for investing in a DIA. First, make a DIA part of a diversified portfolio, since it is not impacted by market conditions. A DIA can stabilize income projections and provide assurance that your basic bills will be covered in retirement (along with other guaranteed incomes from sources such as Social Security and work pensions). Investing in a DIA incrementally long before your retirement date also is an excellent way to build your own pension fund.
You and your spouse can each buy your own DIA, or you can buy one as a couple with a joint payout that guarantees the surviving spouse will continue receiving payments. For those concerned that they will die before they receive payouts or before payouts exceed the amount of the original deposit, ask your insurer about a return-of-premium option that will give beneficiaries the original deposit back. Be aware that this option will reduce the payout amount a little.
Why DIAs Are a Good Choice
The biggest advantage of DIAs is that you don’t use them until many years after you’ve invested. For example, if you buy a DIA when you are 50 years old, but don’t withdraw income until you are 80, you’re benefiting from annuities growth after 30 years of compounding interest.
Unlike an IRA or 401(k), which also grows over time and offers tax advantages, a DIA that’s not in a retirement plan (aka a nonqualified annuity) does not require you to begin withdrawals at age 72 to defer taxes. Additionally, DIAs do not have limits on how much you can contribute each year.
DIAs also provide more flexibility in how you distribute your retirement savings. For example, if you retire at age 70 and invest part of your savings in a DIA that you won’t use until you are 85, you can use the rest of your retirement money for income during the 15 years between 70 and 85. This will allow you more freedom with your money early in retirement, because you know you have a guaranteed income planned for your later years.
When Should You Buy a DIA?
The best time to buy a DIA is five to 10 years before you plan to retire, usually between ages 55 and 65. This will lengthen the duration of your deferral period and increase the size of your payouts.
Deferring the payout also allows you to make additional investments in your DIA over a long period of time, taking advantage of potentially lower interest rates as rates fluctuate. Investing in an asset that provides guaranteed income also reduces the need to take on riskier investments or to sell your investments in a down market to generate cash flow.
Creating a last will and testament is a key part of end-of-life planning. However, to clearly articulate your wishes for your assets and dependents upon your death, you must engage in the larger process of estate planning. A will is an excellent starting point, but it’s only one piece of managing one’s estate.
The terms will and estate plan are often (incorrectly) used interchangeably. Here’s how they’re different.
What Is a Will?
A will is a legally binding document that outlines how your property should be distributed after you die. Wills can be made quickly and easily—you simply need to put your wishes in writing or dictate them to someone else. You can include everything from who will receive your assets to who will take guardianship of your children to who will manage your business. A will also can include information about who will serve as its executor and make sure all of the instructions in your will are followed.
Wills are important because detailing your wishes can avert conflicts between family members over your property and about who should make important legal decisions following your death. Without a will, your family also would have to pay a lawyer or work with a public trustee to deal with your property.
What Is an Estate Plan? The
A broader approach, estate planning is a more involved process that ensures your beneficiaries receive the maximum benefit from your estate and that taxes and other fees and expenses are minimized. Estate planning allows you to provide input into matters that go beyond a will, such as trusts and property transfer.
Estate plans also can address issues such as power of attorney, superannuation, and transfer of financial assets. As with wills, you can appoint a guardian or trustee who will make sure that your beneficiaries are protected and your assets are transferred according to your desires. An estate plan can have numerous features, outlined below.
These designations outline who will receive what from your estate, including who will receive your retirement account, your savings, your home, and your life insurance policies. This aspect of estate planning allows you to carefully and strategically appoint who will receive which pieces of your estate. Designating beneficiaries helps prevent posthumous conflicts between family and friends over your assets and ensuring that you maximize your estate among your beneficiaries.
If someone does not leave a will or designate an executor, the estate can be turned over to a probate court, which will distribute it. This can be a lengthy and costly process that also can be made public. The easiest way to avoid probate is to move your assets into a living trust, which will distribute your assets and property in the trust to your beneficiaries upon your death.
Because your property has already been distributed to the trust, you can avoid probate altogether. Owning properly jointly (it will go to the surviving co-owner) and designating beneficiaries for major assets such as bank and retirement accounts can also can help avoid the probate process.
Powers of Attorney
This important designation allows a person or people you trust to act on your behalf—including in legal matters—if you are incapacitated or if you die. You can appoint as many people as you’d like, and you can designate different powers of attorney for different situations.
Letter of Intent
Working with a financial professional to draw up an estate plan can be a timely process in which you discuss your plans—and the motivations behind them—at length. Together, you can draft a letter of intent for the executor of your estate that outlines everything from the details of your funeral to an overview of how and why you want your estate executed.
While a letter of intent is not a legally binding document, it offers an opportunity for you to share your heart and your values with your beneficiaries. As they make significant decisions about your estate, the letter will give you a guiding voice.
Where Do I Start?
The popular stereotype that wills and estate planning are for the rich is wrong. Anyone who has assets, no matter how modest or how many, can write a will or plan their estate to ensure that their property is handled how they want after their death.
Some end-of-life documents, such as a living will, also allow you to legally establish your end-of-life wishes in the case that you are unable to make decisions yourself. Estate planning can be an involved process, but the peace of mind you will gain, for yourself and your beneficiaries, will be invaluable.
If your estate is small, you can find guidance online for making an estate plan. However, if you have a large or complicated estate, a qualified financial professional can assist with this process. They will spend time getting to know you and your wishes for your estate and then incorporate that knowledge into the plan they craft with you.
A new year is a natural time for a fresh start and a new resolve, so there’s no better time to consider new ways to approach your finances in 2021—especially in light of the unusual circumstances that 2020 wrought on our finances and lives. Instead of setting out complicated resolutions that could be hard to stick with, consider adopting some of these more straightforward approaches that still can help you create a stronger, stabler financial position.
Save More Money
This resolution is the complement of the common resolve to spend less, and experts say it’s easier to follow. Rather than solely focusing on how you budget your money, try turning your attention to saving. You’ll be surprised at how much this shift can impact your finances.
First, decide now how much of your income you’d like to save every month based on your bills and salary. You may choose a percentage, such as 15 percent of your take-home income, or a dollar amount, such as $400 each month. Then, make sure you move the money into a savings or investment account or create a savings column in your budget to avoid absorbing it elsewhere, such as overspending on your credit card to compensate for the income now going to savings.
Track Your Spending
Whether your spending goals include buying a house, paying off a car loan, or spending less on groceries, keeping track of how much you spend is a vital first step to creating a budget to help you get there. When we estimate our spending, we often underestimate, which can lead to overspending and no progress toward larger financial goals.
You can figure out exactly how much you’re spending by examining old credit card and bank statements or using budget tracking software. Then, you’ll have a realistic idea of how much you spend and can make educated decisions about budgeting and saving—including chipping away at those big spending goals.
2020 provided some unique opportunities for spending changes that you may want to make permanent. Many people saved money due to restrictions on travel, dine-in eating, and entertainment venues. If your budget benefited, you may want to consider making those spending cuts permanent.
Focus on the Future
Sadly, COVID-19 cut many lives short unexpectedly, and it often left these people isolated in hospitals and assisted living facilities unable to consult with family, friends, or planners who could help them with financial paperwork. Future financial planning, whether it’s outlining your wishes for your estate or solidifying your retirement savings plan, is vital.
One smart resolution is to create a detailed retirement plan and stay with it. Do you want to continue your current lifestyle after you retire? Downsize your home and lifestyle? A planner can help you figure out how much you need to save to achieve your retirement goals and show you how to organize your financial documents to keep your spending and savings up to date. With a retirement plan in place, make it your resolution to follow it.
Estate planning is another key factor in planning for your financial future. A financial planner can talk to you about your goals for your estate and help you put plans in place now.
Pay Off Debt
Aside from causing anxiety, debt can hold you back from living the lifestyle you’d like and reaching big goals like traveling the world or purchasing a house. If you struggle with debt, resolving to pay it down is vital.
Financial planners recommend approaching your debt strategically. That means paying off higher-interest debt, such as credit card balances, first. You could also take a wider approach and focus your payments on debts that carry a specific interest rate and above.
Whatever approach you choose, resolve to understand the amounts and interest rates of your debt and create a strategy for tackling them in 2021. And that doesn’t necessarily mean paying them off completely. If repaying 25 percent of your balances in 2021 is realistic, set that as your goal. The satisfaction of reaching it will only serve as a motivator to continue working toward debt-free finances.
Build up Your Emergency Fund
If we’ve learned anything from 2020, it’s that life can change drastically, and sometimes that comes with unexpected financial ramifications such as a job loss or hospitalization. While financial experts recommend shoring up at least six months’ pay in savings for such situations, the Financial Industry Regulatory Authority found that almost half of Americans don’t have enough in an emergency fund. Without savings set aside, you are risking financial disaster.
Savings like this doesn’t happen quickly, so plan to build it gradually by committing to a monthly contribution to your emergency fund. Additionally, set this money aside for true emergencies—don’t dip into it to pay bills or offset extra spending if you can help it.
Sometimes, we decide we’d rather not know the details of our finances. Maybe we’re worried that an in-depth look at our money would reveal spending habits we’d prefer not to acknowledge, or perhaps “ignorance is bliss” and we don’t want to think about how little money we have in the bank. Perhaps we’re embarrassed by our lack of savings and investments.
Financial planners note that these kinds of fears, whether of change or the unknown, often prevent people from seeking financial planning services. We know it’s important to save money and plan for our future, but we often don’t know how to do it, and sometimes, learning seems overwhelming. However, taking charge of your finances by working with a financial planner can help you achieve major financial goals such as buying a house or paying for your child’s college tuition.
Here are a few ways to approach your finances with confidence.
Remember: No One Is Judging You
Whether your savings are scant, you’ve taken on two large car payments, or you’ve made a poor investment, a financial advisor will not judge your decisions. Finance professionals are there to help you manage your money—they aren’t concerned with how much you earn, what your assets are, or what financial mistakes you’ve made. Their job is to help you get into a better financial situation. And remember, you will not be the first client they’ve worked with who’s made a financial mistake!
Don’t Believe It’s Only for the Wealthy
One common misconception is that financial advisors are only for the ultra-wealthy. Many people worry that their money doesn’t warrant advice or that they don’t have enough to invest. This may have been true in decades past, when most financial advisors required clients to have a minimum amount of assets, but today, financial advisors are increasingly offering services catering to people who have less money to invest. These services focus on helping people manage their money, often through online financial planning investment services. Financial advice benefits everyone, even those who haven’t accumulated a lot yet.
While the details of financial planning can be intimidating at first, once you delve in, you will likely find rewards in managing your money well. There’s a certain satisfaction that comes with paying off credit card debt, retiring student loans, and building your savings and retirement accounts. The best part is that once you get a taste of the personal benefits of financial planning, you’ll want more.
Know You Can Afford It
While the perception is that financial planning is expensive, it’s simply not the case. Working with a traditional financial planner can indeed cost thousands of dollars, but there are less-customized options for financial planning that are much more affordable. While you may have to trade in-person, personalized attention for an online financial management service, these cheaper alternatives are still excellent options for helping you invest and manage your money.
Also, these services typically don’t require cash up front. Instead, they’ll take a percentage of the money you invest through them. They usually charge around 1 percent, so if you invest $10,000, your financial advisor’s fee will be $100, which likely will be deducted directly from your investment account.
Computer-based services, also called robo-advisors, are another affordable way to manage your investments. They likely won’t require a minimum account balance (or if they do, it’s low), and their fees are based on your assets under management (AUM). The AUM fee will range from .25 percent to .5 percent, which calculates to between $12.50 and $25 for a $5,000 account balance. While you won’t get personalized financial advice for your fee, computer algorithms will create and monitor your portfolio for you.
Online financial planning services, a step up from robo-advisors, offer investment management along with personalized financial planning. Some services don’t require a minimum account balance, and their customized services can range from a dedicated Certified Financial Planner to a team of financial planners. Typical AUM fees for these services range from .30 percent to about .9 percent or a flat annual fee starting at several hundred dollars based on the level of services you need.
Take the First Step
While finance professionals have sometimes gotten a bad rap as predatory, self-serving people, that’s not reality. Financial advisors care about their clients, work with their best interests in mind, and don’t judge clients’ situations or choices. They are focused on finances and helping you make the best decisions with your money.
When you find the financial planning service that best matches your needs and goals, you’ll be glad you did. The peace of mind you’ll get from having and sticking with a financial plan will be well worth the discomfort you may feel when you first reach out to a professional for help.