In Episode 8, we get into estate planning and why it is so critical for wealth preservation. This episode is part 1 of 2 and covers big picture questions around the “who, what, when, why” of estate planning. In the next episode, we’ll cover the “how” part of estate planning.
What you’ll learn in this episode:
- What estate planning is
- Why it’s critical to think about it as part of your FIRE framework for wealth preservation
- Who needs it
- When you should do it
- What does it involve
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Links mentioned in this episode:
- 16-point estate planning checklist
- How to set up a revocable living trust (with sample trust document)
- How to write a will
- Life insurance: How to calculate exactly how much you need in 4 simple steps
- Schedule a private 1:1 consultation with me
- HYW private Facebook community
Read this episode as a post:
Okay, thanks for tuning in to this week’s episode.
I’m really excited by today’s episode because we’re going to be talking about estate planning.
And today’s topic is actually so big that I decided to actually break this into two separate episodes, just to make it more manageable.
The topic of estate planning falls under the protect part of my four by four FIRE framework which, as you may remember from Episode Two way back when, is earne, save, invest and protect.
Feel free to check out Episode Two for a refresher on that.
Okay in today’s discussion of estate planning, just to level set, I’m not going to actually deep dive into the specifics of how trusts and wills work in gory detail.
We can cover that on a later episode.
What I am going to talk about is an estate planning framework.
Why estate planning is important.
Its purpose and why you should think about it as part of your fire framework. Very important.
So first, I’m going to give an overview of estate planning basics.
I want you to have a big picture understanding of what estate planning means, why it’s important, who needs it, when you should start, what’s part of it at a high level, and that is going to actually encompass the first of these two episodes since we’re breaking this topic into two episodes.
In the next episode, I’m going to walk you through a checklist so that you have a very concrete step by step guide on how to create a comprehensive estate plan.
The questions you should be asking to make sure that you’re being very thorough in your estate plan, thinking and all the documents that are involved to actually execute to implement a strong estate plan.
And then finally, also in the next episode, we’re going to talk about the role of attorneys and CPAs when it comes to estate planning, what they do, how much they cost and how to find a good one.
Now, I want to caveat before we begin, I am NOT your attorney or accountant.
There is no attorney client or accountant client relationship formed by this episode.
You’ll have to talk to your own lawyer or accountant to get into the details of your specific situation.
Also want to mention be sure to grab the freebie for this episode, which you can get at the show notes for this episode hackyourwealth.com/8.
And today’s freebie is a juicy one.
It is an estate planning checklist and worksheet which will help guide you through the process as you think about and implement your own estate plan, so you don’t have to take any notes in this episode if you happen to be commuting or on a jog or just not in front of your computer.
Totally fine. I got you covered in the freebie for this episode, which you can get at hackyourwealth.com/8.
It’s a summary checklist of all the major topics we’re going to talk about today.
So rest assured you can get that information later by grabbing the freebie for this episode.
Okay, one last thing before we dive right in.
As always, I want to invite you to join the hack your wealth private Facebook group.
You can get there by going to hackyourwealth.com/fb. That’s a link shortcut that will direct you straight to the Facebook group page.
And it’s a forum that provides a way for us to connect directly to have a two way dialogue.
I am in there every day, answering every question and often posting questions.
And many members who join are interested in financial independence, early retirement, tax strategies, real estate, investing, side business income, online income, career transitions, and just asking questions generally about things they’re thinking about related to personal finance and so it’s a good healthy community.
Everybody’s really helpful. Definitely encourage you to check it out and join.
All right now for today’s subscriber review.
Today’s review comes from jump shot 2327, who writes: great podcast with practical advice.
Andrew does a great job giving practical advice that others can apply to grow their wealth.
He doesn’t offer get rich quick schemes, but rather disciplined, methodical strategies.
Well, thanks so much for the kind words jump shot 2327 I really do appreciate you.
And I’m so glad to hear you’re getting good value from the podcast.
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And thank you so much in advance.
All right now on with the show.
Okay, so to set the stage for today’s discussion about estate planning.
I want to start with a little story about a trip I took a few years ago to Crater Lake in Oregon.
And for those of you who haven’t been there, it’s basically this massive lake that was formed after a crater hit that area of Oregon.
And it’s like the bluest water I think I’ve seen in a national park ever and highly recommend you go check it out.
It’s a beautiful drive. And if you like the outdoors, a great place to go.
The thing is near Crater Lake, there are very few hotels and gas stations around.
If I recall correctly, when we went, there was one gas station that was about 20 miles away from the park entrance.
And then there was another gas station way on the opposite opposite side of the crater 30 miles away.
And the whole drive around the entire lake was about 30 miles.
So it was definitely well over 50 miles between the two gas stations.
And our hotel was something like 70 miles away from the park entrance because there just aren’t that many hotels around.
And the morning that we were going to actually go to Crater Lake, to spend the day driving around the lake, we had more than half of tank of gas.
And I thought that was going to be enough to drive from our hotel to the lake, spend the day driving around the lake, and then drive back and maybe get gas at the end of the day at that gas station that was 20 miles away, because I don’t tend to like get gas when there’s already a lot of gas in the tank.
Certainly not when there’s more than half a tank of gas.
I don’t like extra pit stops, because it just means I have to go to the gas station more often.
But my wife really nudged me to get gas near the hotel before we left so that we didn’t have to take the risk of for some reason not being able to make it to that gas station 20 miles outside the park.
And even though I thought it was unnecessary, and I was a little bit annoyed, eventually I just caved.
I said, fine, we’ll just get gas right next to the hotel. So we have a full tank and then you know, then we can drive to the lake.
Well, it turns out that, you know, we did pass by the gas station that was 20 miles outside the park.
And turns out, it was closed.
Because, you know, they apparently, they just go on holiday like half the time.
And so, in retrospect, it is very possible that, had we not gotten gas next to the hotel as my wife had nudged us, then we would have been SOL on our way back in trying to get gas from the gas station 20 miles outside the park because they were closed.
What’s even worse is that there isn’t much traffic on that particular road, going to the park that passes through the gas station 20 miles outside.
And there also isn’t any cell phone signal on that stretch of road as well.
And so we really could have been in a pinch had we run out of gas, with little traffic passing along that road and no cell phone signal.
Thankfully, we did get gas that morning, near the hotel before we left.
And by the time we got back in the evening, we had a little bit less than half a tank of gas left.
And I tell the story because I think it emphasizes the importance of being really well prepared for a worst case scenario, even though it might be unpleasant or annoying to think about.
And that really is the emphasis of talking about estate planning.
So even though you work and save and invest toward your ideal best outcome, you know, financial independence, retire early, it is still prudent to plan for the worst outcome.
That is the entire premise behind the PROTECT pillar of the four by four FIRE framework.
You want to have peace of mind knowing that you and your family are protected if something ever happens to you
Because the last thing your family and loved ones want to deal with when they’re already grieving and mourning should something ever happened to you is to have to then immediately deal with all the stress and complicated financial matters on top of that, whether it’s loss of income, or debt payments suddenly coming due, or lack of access to funds or money.
That’s really what estate planning is about. Being prepared.
And my Crater Lake story is meant to help you see how important it is to be prepared even when you think you might not need it.
Okay, so with that in mind, I want to first start out with an overview on estate planning in general so we have a basic big picture framework for how to think about it.
So first starting off, when we say estate, legally, your estate is just whatever property you leave behind after your death.
And so an estate plan is simply a collection of legally enforceable documents that allows you to specify in advance what will happen to your property and assets after you die or become incapacitated.
Some estate plans may include only a will, but others that are more complicated might contain a trust or some kind of business succession plan or whatever it is.
But the key point is that an estate plan lets you specify in advance what happens to your property after you die.
And a good estate plan should actually consider what happened if you die or become disabled, and it should cover not only financial matters that help ensure the financial security for your family and navigating any tax consequences that result.
But it should also have provisions for the care of your children, if they’re minors, and for medical treatment decisions if you’re not able to make them yourself.
The reason why estate planning is important, and this also dovetails into the key goals of estate planning is that it lets you do five things.
One, it lets you specify in advance who your beneficiaries should be and what they should get.
If you don’t do this, then courts are basically going to decide who gets your assets and that can take a long time, months or years, and can also be very expensive.
And those expenses are going to get paid out of your estate.
And ultimately, the court may even end up choosing beneficiaries you didn’t want anyway.
Second thing that estate planning lets you do is to prevent conflicts between potential beneficiaries before they start, especially if you have a lot of property at your death.
You don’t want a war between family members. it can get ugly. It will end up in court with expensive lawyers gobbling up fees and all sides and family members pitted against one another.
It’s just not good.
Third thing estate planning lets you do is to protect young children.
It can help ensure that your children are cared for in the way that you want because you basically can name guardians if, say, both parents die like say in a car crash or something like that, and the kids are under 18.
Without specifying that in advance, courts could be deciding who literally raises your children and may not be who you wanted.
The fourth thing estate planning lets you do is to control and reduce your taxes.
It can help minimize things like gift taxes, estate taxes, transfer taxes, income taxes, inheritance taxes.
Estate taxes tend to only apply if you’re super rich, at least at the federal level, although some states tax estates at much lower levels than the federal level. We’ll get into that later on.
But even if things like the estate tax don’t apply to your estate, because your estate’s not large enough, other taxes can definitely still eat away at your assets.
And your beneficiaries might end up having to pay taxes on the stuff they inherit.
So part of the purpose of estate planning is to minimize these taxes using different mechanisms like trusts and things like that.
And finally, the fifth thing that estate planning does for you is to reduce administrative costs, probate costs, court costs, attorney costs.
All these stakeholders and all these administrative things that have to get done, if you don’t have a proper to estate plan are going to eat away at your estate because all these stakeholders like lawyers and courts are going to get paid first before any beneficiaries can get paid anything.
And that can easily gobble up 10-20% of your entire estate before it’s all said and done.
I’ve mentioned this word probate once or twice now, so I just want to clarify when I say probate what is probate?
Probate is the court process that is used to administer the distribution of your estate when you die.
And probate can be very fast if you have all the proper docs, have a good estate plan specified in advance.
But it can also be much slower if you don’t, and it will take a lot longer the bigger your estate is because the court has to inventory everything.
Identify who all the potential claim holders are, including creditors who have to get paid back any debts they’re owed, and then figure out what’s left over to actually give to beneficiaries.
If you die without leaving an estate plan, no will, no trust no directive on what’s going to happen with your estate, that’s called intestacy.
That’s a legal term or dying intestate.
It just means that you die with no estate plan, no will, no trust or anything like that.
And even though it’s not fun to think about that, it always shocks me to know that only about half the population actually ever makes an estate plan.
This is according to a Gallup poll.
And because of that, all these states have default rules or laws called intestacy laws that specify what happens when you die intestate, who gets what if there’s no will and no trust.
And these are laws that come into effect automatically if you don’t have an estate plan in place, and your inheritors cannot receive any of their inheritances until this probate process is complete.
It’s complicated, it’s cumbersome, it’s expensive.
So many estate plans have as a key goal to focus on sidestepping the probate process as much as possible.
So for example, if you properly create and fund a living trust, you can effectively make most of the major inheritance transfers completely outside of the probate process.
You can make gifts over your lifetime to family members, and thereby progressively transfer and move your estate over from yourself to your family members tax free.
You can load up on payable at death assets like life insurance policies, which are administered outside of probate.
You can use jointly owned, jointly titled property to automatically pass ownership over to a joint owner outside of probate.
There are all these techniques, all these ways, that you can sidestep the probate process if you’re just strategic and thoughtful about it and having a good estate plan.
So that’s the focus that I want to talk about today.
So who needs an estate plan?
Well, if you have a family and any assets at all, you should have an estate plan.
At least execute a will.
If your estate is meaningful size, I’d say more than, say $100,000, then I also recommend setting up a living trust.
One of the key advantages of a trust is that it not only minimizes the probate process and expense of administering your estate, but there’s also no loss of privacy because trusts are administered completely out of public view, whereas probate is by default in the public record.
And depending on how large your estate is, it may be worth doing even more extensive estate planning, which we’ll get into more detail about in a moment.
Okay, when should you start estate planning?
Well, I recommend thinking about this problem in terms of decades.
First, your 20s.
When you turn 18, your parents no longer have authority to make health care or financial decisions for you.
So even though you may not have a lot of wealth built up yet, you may want to consider as least having a health care directive for situations where you are incapacitated.
We’ll get into what that is in a moment.
And you may want to have a power of attorney for both health care and financial decisions.
And again, we’re going to get into that in a moment.
By the time you reach your 30s, you typically by then perhaps own a home, you might have started a family, you might have started accumulating some financial assets.
And so in this situation, I would definitely recommend that you at least have a last will and testament which is basically a will, and a living trust if you have any meaningful savings.
By the time you reach your 40s, that is a good time to actually start talking to your parents about their estate plan.
Do they have a will? A trust? Beneficiary designations?
How do they want their medical decisions to be made if they become incapacitated and who can make those decisions?
Will they need long term care, like a nursing home? Where do they want to live? And how will that get paid for?
Your parents may have even a long term care insurance policies policies, so you should ask about that as well.
And then throughout your 50s, 60s, 70s, you should review and update your estate plans every few years as appropriate, such as whenever your assets change significantly, or your family situation changes.
Or even if estate planning laws change, those are all good moments where it’s worth revisiting your estate plan just to make sure it’s buttoned up, current, and still reflects all the information about your life up to that point.
Okay, so that is what I wanted to cover.
In today’s episode at a high level, we talked about what estate planning is, why it’s important, what the key goals of estate planning are, what probate is who needs estate planning and when to start thinking about estate planning.
I want to encourage you again to grab the freebie for this episode at hackyourwealth.com/8.
It’s an estate planning checklist and worksheet that will help act as a guide as you think about your own estate planning needs and what components you want to have in your estate plan.
If this episode was helpful to you, I would encourage you please hit that subscribe button to get new episodes automatically sent to you.
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It helps support this podcast and also helps other people who are interested in these kind of topics, find the podcast as well.
As always, I’ll leave a link to that in the show notes so you can just click on that and write a review quickly on your device or on your browser on iTunes, Google Play or Spotify.
And each week on the show, I call out a subscriber review and thank them personally for posting on the air to my whole audience.
So please take a minute to review the podcast. I’d love to thank you personally on the show to everyone.
All right, thanks for tuning in.
Next time, we’re going to be covering part two of the estate planning topic.
We’re going to be walking through a detailed list of exactly what you need to do to construct a comprehensive estate plan.
You don’t want to miss that because that’s going to be the heart of our estate planning lesson, so be sure to tune in for that.
Okay, see you next time.
If you want to beef up your estate plan by writing a will, be sure to check out my post on how to write a will to make sure you do it the right way.
If you’re thinking about estate planning strategies, also consider setting up a revocable living trust. Check out my post on how to set up a revocable living trust (with sample trust document).