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.
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.
While the end of the calendar year often elicits tax and estate planning questions, the political uncertainty in 2020 has led to an increase in inquiries on the subject. One real estate appraiser in Manhattan told a news outlet before the Nov. 3 U.S. presidential election that he had fielded three times as many calls about estate planning than usual, and other financial advisors reported a similar increase in questions.
Now, with the Democratic Party poised to control the U.S. House of Representatives and the presidency in January, it’s possible that estate planning rules could change. Here’s a look what you need to know:
Tax Cuts and Jobs Act
Signed into law in late December 2017, the Tax Cuts and Jobs Act represented the largest revision to the federal tax code in 30 years. Many viewed the overhaul as favorable to wealthy individuals and corporations, as it reduced the top corporate tax rate to 21% and doubled the amount of assets that an individual could transfer before federal estate and gift taxes take effect to approximately $11.6 million in 2020 for individuals and about $23 million for married couples. Any assets transferred over those amounts can be taxed at a rate as high as 40%.
While Joe Biden, the winner of the 2020 presidential election, has not yet taken office, he has given some indications as to changes to the estate tax rules that he will support. The 2017 exemptions will expire in 2025, and they will decrease to an individual maximum transfer amount of around $5 million, although it appears that under Biden they could end sooner.
According to the Tax Policy Center, Biden’s plan will reduce the amount of assets an individual can transfer tax-free when they pass away to $3.5 million and cap individual gifts at $1 million. Estate taxes on gifts and estates also could increase to 45%.
Biden also has suggested he is interested in eliminating a tax code provision known as “step-up basis” that would exempt heirs from paying taxes on gains accumulated before the estate holder’s death. This means that an heir could sell an asset immediately after the estate holder dies and likely pay no or few capital gains taxes on it.
Overall, Biden’s potential changes would mean that people could transfer fewer assets without paying estate taxes.
How to Respond
Tax advisors and financial planners are providing plans and advice for maximizing an estate during these uncertain times.
Take advantage of current rates—For clients concerned about potential changes to estate tax provisions in 2021, one option is to transfer assets now before the high exemption rate potentially drops. One drawback to early gifting, however, is that your own net worth will decrease as you begin transferring large amounts to your heirs. For example, if you’re worth $16 million, then transferring $10 million now to avoid estate taxes could have an adverse effect on your own finances. Financial experts advise considering whether you can actually afford the gift now, and if you do transfer the assets, how that will impact your life. It may be worthwhile for your heirs to pay more in estate taxes in order to maintain your current financial situation. “Giving these assets away could leave you financially vulnerable, and this is so important to consider—especially now, in the time of COVID, when there is so much uncertainty,” Stacy Francis, a financial planner based in New York City, recently told Kiplinger. “While saving on taxes is extremely important, it’s not the sole reason to give money away to charity or family members.”
Worry less about step-up basis changes—While eliminating step-up basis could help to fund Biden’s initiatives and proposals, in actuality it could prove to be a logistical nightmare. Financial experts say that while the idea has been circulating in Washington for several years, changes to the tax law have never been enacted because of the amount of paperwork that it would require and its potential impact on taxpayers. Easier and more traditional changes that also could increase revenue include expanding capital gains taxes and reducing the estate tax exemption.
Be patient—While the fate of the current estate tax exemptions is uncertain, you can begin distributing your estate tax-free to your heirs through smaller gifts. The current rules allow individuals to give away $15,000 tax-free each year to individuals. This means that you could gift each of your children and grandchildren that amount with no tax penalty, and your spouse could do so, as well. You may also opt to move your estate to a trust, which could provide greater stability for your assets. Regardless of how you manage estate planning, financial advisors recommend choosing a strategy that fits your needs and long-term plans. Most importantly, they say, people should work with a financial advisor on estate planning and avoid panicking when times become difficult.
President-elect Biden will need the support of Congress to enact major changes to the federal tax code. That means that he’ll likely need a Democrat-controlled Senate, and that hangs in the balance right now. Both of Georgia’s Senate seats will be decided in run-off elections in early January, and the outcome will determine the balance of power in the Senate. If both of the Democratic candidates win, the Senate will be evenly split, and Vice President-elect Kamala Harris would break the tie.
Investing your money, whether in the stock market or a retirement account, is a good way to take advantage of compounding interest and secure your financial future. However, understanding risk levels and investment products can take time, and many new investors fall into the same trap as they navigate financial markets and make decisions about their money.
Here are some of the most common mistakes that first-time investors make—and how to avoid them.
Mistake #1: Not Selecting the Right Advisor
Financial advisors can teach you about financial markets and products and provide helpful input as you make decisions about your money. However, your parents’ or friend’s financial advisor might not be the best advisor for you.
Rather than choosing someone you know works with, do some research yourself. You’ll want to ask what type of clients these potential advisors typically work with, what they could do for you, what their investment philosophy is, and what services and products they offer.
Mistake #2: Making Trendy Investments
Likewise, don’t make investment choices based only on the recommendations of others. Be particularly wary of celebrity endorsements. Companies may be using celebrities’ fame to try to get you to invest. In some cases, celebrity-endorsed investment products are scams.
A better practice is to research the investment product. Does it fit your financial goals? In choosing this product, are you just going along with a trend or will the product truly be a good addition to your portfolio?
Mistake #3: Making Your Own Market Predictions
It makes sense to buy stocks when the market is low and sell them when it’s high. But the real art comes in figuring out the timing. Is the market at its highest point now, or should you wait one more week to sell? Is this really rock bottom for this company, or could you wait one month and get it for even better deal?
Rather than putting energy into predicting a stock’s ups and downs, financial advisors recommend taking a long-term, measured approach to investing. That means buying shares on a regular schedule rather than basing purchases on market predictions.
Mistake #4: Being Overconfident
Some first-time investors enter the market with an abundance of confidence, sure that they will get big returns on their well-timed stock purchases and sales. However, overconfidence can lead to major rookie mistakes, according to financial planners.
Most importantly, don’t misinterpret the market’s movements as confirmation that you made good decisions about the timing of your investment. Trading often to “beat the market” typically doesn’t work, even for investors who read the news and keep up with trends.
A better approach is to slow down on trading decisions and focus on creating a diverse array of investments. When you take a realistic viewpoint about your investment decisions and returns, you’ll make better decisions that will get you closer to your financial goals.
Mistake #5: Overvaluing Cost
In the stock market, the sticker price isn’t always an indicator of value. For example, a $6 stock may not be a bargain if the company is new and unproven. Likewise, a $3,000 price tag is not necessarily an indicator that the stock is valuable.
Rather than drawing assumptions about stocks based on their price, new investors are advised to research each stock’s value by looking at factors such as their past performance, growth potential, and leadership.
Mistake #6: Panic Selling
When the stock market tanks, it can be hard to resist the urge to dump your stocks in fear that the market will drop even lower in coming days. However, more than 90 percent of investors identify this emotional reaction as a top mistake that investors make. Unfortunately, panic selling typically ends in financial loss.
That’s because selling stocks at a low price locks in your losses and eliminates any chance you have to benefit from the almost certain recovery that will follow. For example, in March of 2020, S&P losses totaled 34 percent, and in the US, investors sold out of more than $325 billion in mutual fund positions, according to Strategic Insight. Those investors then couldn’t take advantage of the market’s 20 percent rebound a month later.
Financial advisers recommend laying low when the market turns downward. Stick with a long-term investment strategy instead of short-term decisions and wait for the inevitable market correction that will erase those losses.
Mistake #7: Holding on to Returns
While it may be tempting to spend your returns, or earnings, from the market, a better strategy is to invest them back in the market. This practice, which is called compounding, will help your money grow faster. With a commitment to savings and compounding, over time your investments should flourish.