Here’s Why the Role of a Financial Advisor in Estate Planning Is Critical

Some people believe that estate planning is for the rich. Others are under the misconception that you do not need comprehensive estate planning if your estate is worth $11.7 million in 2021, which is the federal estate tax exemption limit for 2021. However, every adult, and every family, needs an estate plan. Attending this essential task is a healthy step in your financial planning process. Also, a failproof estate plan ensures that you and your loved ones are secure from an unforeseen financial tragedy. Both estate planning and financial planning are a means to a happy and safe future. Despite its necessity, more than half of the U.S. adults have not organized their estate plans, and even those who have an estate plan have several loopholes, increasing the chances of probate.

According to a survey by Caring.com, the number of people (in the age group 35-54) with a will has gone down from 37% in 2019 to 22.5% in 2021. Only 44% of people above 55 have a will in 2021, which is a reduction of 16% from 2019. The survey also specified that despite the COVID-19 pandemic, the estate planning numbers have not improved. Even though people understand the importance of estate planning, they have not taken any productive steps in this direction. One of every three participants said COVID-19 made them realize the importance of estate planning, but 31% of these people did not undertake any estate planning measures.

To ensure your financial and estate planning is failsafe, it is advisable to consult a financial advisor who can offer expert guidance in financial planning matters. Financial advisors have expertise in managing estate plans, ensuring your and your family’s financial future is secure and that your assets are optimally distributed per your wishes. Working with a financial advisor on financial and estate planning matters minimizes planning mistakes, which can otherwise be a common occurrence.

Here are some estate planning mistakes you can easily avoid by working with a financial advisor:

• Taking wrong inventory of your assets: The first step in any financial and estate planning process is to take inventory of your assets. To ensure your assets are designated to the right person in case of your death or incapacitation, it is important to take note of assets (tangible and intangible). The tangible assets may include homes, real estate properties, vehicles, collectibles, and other personal possessions. Alternatively, intangible assets will comprise all your retirement saving accounts (401(k), IRA (Individual Retirement Account, etc.), stock market investments (stocks, bonds, and mutual funds), life insurance policies, bank accounts, certificates of deposit (CDs), fixed deposits, health savings account (HSA), business stakes, and more. Your financial advisor can work with you to ensure all your assets are counted in their realistic value, considering vital aspects like depreciation, penalties, withdrawal taxes, etc. The advisor will use external reports like a recent home appraisal, bank account statements, etc., to quantify the total value of your assets. This can be a complicated process, and you could likely make significant errors without the support of an experienced financial advisor. Financial advisors will use their expertise to ensure a fair accounting and distribution of your assets.

• Ignoring your financial needs: Most people make the mistake of thinking that estate planning is helpful only after their demise. However, a holistic estate plan is critical even when you are alive. It is a means to an end. Estate planning is crucial to make sure your assets are passed on effectively to your heirs and you are financially secure in case of physical or mental incapacitation. You cannot control the events in your life, but you can be prepared to face the worst situations with a well-drafted estate plan that primarily accounts for your needs and then aims at a fair asset distribution. Your financial advisor will place your needs as a priority, and create an estate plan that financially secures you against future adversities, such as disability, mental incapacitation, etc. Your advisor will ensure that you retain control over your assets in the present and even guide asset distribution after your demise. In addition, they will compile your legal documents and work with you to list your estate directives. The expert will also help you create a living trust to place your assets and receive benefits during your lifetime. You can later transfer them as per your directions to the designated beneficiaries after your demise. The advisor can also help you select a trustee or create a power of attorney for the individual who will take over the trust, and be responsible for making financial and legal decisions on your behalf in case of your incapacitation or death. Establishing a trust can also help avoid probate, which is a must in general estate-related matters. Most often, people forget to lay down their medical instructions. A financial advisor takes care of all such loopholes and ensures your needs are met. You can have a separate power of attorney or leave a healthcare proxy or a living will regarding medical care instructions.

• Not designating the right beneficiaries: One of the prime reasons estate planning is so pivotal is because it assures adequate and desirable estate passing and division. However, most often, this is an erroneous area in the estate planning process. Most people list different beneficiaries in their will and retirement accounts, which often creates a legal issue. For instance, you could still have your ex-spouse as your IRA beneficiary, but the will lists your current spouse as the beneficiary. Moreover, not clearly specifying the beneficiary names or not mentioning the precise share of each beneficiary can also cause family feuds. However, a financial advisor ensures such mistakes are rectified, and your estate plan is the final word on matters related to your estate and assets. Your advisor will help you review your various retirement accounts and insurance plans and assess their beneficiaries. In case you want to change the nominees, your advisor will guide you through the process. The ultimate objective is to align your estate beneficiaries with your desires and avoid family or legal disputes. If your beneficiaries on the will are different from the retirement or insurance account nominations, the latter will receive preference over the former. This could defeat the purpose of the entire estate plan. That said, apart from reviewing and updating your beneficiaries, your financial advisor will help you avoid simple mistakes like mentioning incorrect or incomplete beneficiary names, not explicitly specifying the actual beneficiary estate share, and more.

• Overlooking your family’s financial needs: An estate plan that does not adequately account for your family’s needs is not complete. This is even more critical if you have minor children or a child that requires special attention. Your financial advisor can make an estate plan that takes care of your children and other family members. This includes naming a caretaker or guardian who will be responsible for your children after your demise. Your advisor can help you explicitly document your wishes regarding the care and future of your children. If you have a minor child or a special needs child, you can assign someone to handle the financial affairs on their behalf. Your advisor can also guide you regarding creating a trust, limiting the power of the guardian/caretaker, listing advance medical directives, specifying the most desirable use of assets, as well as be the final decision maker in case of disagreement between the child and legal guardian, and more. You can also set aside a specific share of your estate for the legal guardian and mention their right against the estate.

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Talking about your estate plan with your family and loved ones can be an emotional and difficult conversation. However, having this conversation is vital for not only you but also their financial security. Failure to educate and communicate the estate plan to the family is one of the prime reasons for its failures. Educating the next generation about the estate and succession plans will help them minimize wastage or mismanagement of assets. Moreover, communicating your estate needs and goals can minimize future complications and family disputes. Work with your financial advisor to teach your children or potential beneficiaries how to manage your estate. You can consult your financial advisor to create a plan on teaching the younger generation about the importance of estate planning, building financial literacy, accustoming them to the estate assets, making them understand estate taxes, and more. Further, communicate with your family about your estate assets, retirement accounts, insurance plans, medical directives, and more. If you have any pending financial liabilities or debts to pay off, the future generation should be made aware of the brunt. You could choose to talk to your children yourself or ask your financial advisor to handle the conversation in detail. Open and honest communication and education regarding your estate plan and desires will potentially lower the risk of family disputes, helping to preserve the estate.

• Drafting an improper will: A will is one of the most vital estate documents. As per financial experts, everyone above 18 should have a will that clearly states their wishes and distribution of assets. An estate plan without a comprehensive will is incomplete. If you fail to draft a complete and clear will, there is a high chance a family feud may arise even between the closest of family members concerning the distribution of estate assets. Moreover, if you die without creating a will, your estate will be subject to probate, and the court will decide the distribution of your estate assets. The process of probate involves extensive paperwork at high costs and is significantly time-consuming. Also, the proceedings can go on for years, causing a lot of trouble for your family. The court could also allow the creditors to make the first claim on your assets, which could reduce the estate share of your heirs. Hence, it is best to consult your financial advisor and create a foolproof will as a part of your estate plan. The advisor will help you take proper inventory of your assets, complete all required formalities, file necessary paperwork, and more. The financial advisor can also offer advice regarding the distribution of your estate among beneficiaries, the appointment of guardians and trustees, etc. The advisor will also ask you to nominate an executor who would ensure the safekeeping of your will, its execution and see to it that it is read in the future in your absence. You can choose your bank, attorney, family member, or friend as the executor of your will. Remember to sign and date your will in front of two witnesses. It is also important to draft your will in the best of health and a sound mind.

• Missing estate taxes: One of the most common mistakes that a lot of people make in estate planning and financial planning is ignoring their taxes or not precisely accounting for them. If done well, financial planning and estate planning can reduce tax liabilities for you and your heirs. While efficient financial planning will help you minimize your tax burden when you are alive, competent estate planning can assure your heirs pay a minimum sum towards estate taxes and duties on their inheritance. For 2021, estates worth up to Rs. $11.7 million are exempt from federal taxes. Even though some states levy taxes on lower estate values, it is possible to minimize the overall estate tax burden by working with a financial advisor. The financial advisor will use estate planning strategies to lower your tax liability. Some of these strategies include creating a joint trust for married couples to lower estate taxes (also known as A-B trust), sponsoring the education of your children or grandchildren, offering lifetime gifts, donating to registered tax-advantaged charitable organizations, making conditional wealth transfers to custodians of minor children, creating an irrevocable trust, and more. Your advisor can also suggest investing in private annuities or locking the present value of your estate to reduce the future taxes for your beneficiaries. In the estate freezing method, you can freeze the current value of your estate and the corresponding tax liability. The estate freezing strategy helps you know your estate taxes in advance and pay the income tax accordingly.

• Failure to revisit your estate plan: Life changes, and so should your estate plan. A sound estate plan should ideally align with your current wishes at all times. However, most people forget to update their estate plans with advances in their life stages. A financial advisor will offer much-needed guidance in this sphere. The advisor will help you update or recreate your estate plan in case of significant life-altering events, such as marriage, divorce, children, grandchildren, retirement, disability, old age, loss of a loved one, etc. You can also revisit your estate plan even when your life stages do not change, but your estate wishes differ from before. The objective is to ensure that your estate plan is allied with your preferences. Your financial advisor can create a disciplined review process where you revisit your estate plan at predefined intervals.

To conclude

Financial and estate planning are intricate and complex processes where you could make several mistakes without proper guidance. A fallible estate plan can be a landmine for tax and legal consequences. It can also hamper the distribution of assets per your desires. Moreover, since the estate laws and rules are complicated and ever-changing, it is beneficial to consult a professional financial advisor to help you create an infallible estate plan. A well-drafted, all-inclusive estate plan assures your financial safety when you are alive and acts as a reliable financial shield for your family after your demise. If you are in the process of planning for a secure and comfortable financial future – as every adult ideally should, do not hesitate to reach out to a professional financial advisor. A wise step today can financially protect you and your family for a lifetime.

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