When do you expect to die? Plan for your heirs while you can

A financial advisor I know used to ask the same question whenever a new client came to him for money advice: "When do you expect to die?"

Grim? Yes. But it was also an icebreaker, and a recognition that all financial planning starts with a sense of timing – and a realization that nothing lasts forever. So it's hard to say you've done financial planning if you haven't done estate planning.

We all want to be remembered for our wit, our intellect, our kindness and our achievements after we die. So why do so many of us jeopardize our legacies by failing to prepare an estate plan, or to even write a will, leaving financial chaos for our families as they grieve? (Research suggests that at least half of you reading this don’t have a will.) That dramatically boosts the odds that you'll be known less as the erudite scholar or intrepid entrepreneur than as the lazy relative who left his family struggling because he didn't want to confront the fact that he couldn't take his assets with him like an ancient Egyptian pharoah.

But there is that hard question: where to start?

Start with a simple will

We talked to expert Ric Edelman yesterday, who advised us that a simple will is the cornerstone of a good estate plan. It’s often pretty inexpensive and solves the most basic issues. And the consequences of dying intestate (ie without even a basic will) can be dramatic. One biggie: if you have young children and don't name a guardian in your will, you’ll be letting a court decide who raises them.

Wills and family clashes

Tempted to shrug it off, thinking it doesn’t matter what happens when you die, or that you don’t care who gets your things, because you don’t have close family or own a home? Even if you don’t have many assets or much in the way of family, you’ll still be bequeathing headaches, problems and arguments if you die without a will. If you thought your cousin or your friend would get your cherished comic book collection or Steinbeck first editions without fighting for it, forget about it. Most families have at least one tale of a lifelong rift between siblings or cousins caused by a spat over who got Great Aunt Minnie’s Crown Derby china or who was more entitled to Cousin Jed’s stamp collection. That happens even with wills, and it's usually worse without them: the probate process is rarely kind.

Ask your family what they want

However difficult it is to confront our own mortality – or wrestle with the emotional challenges that can surface when siblings and cousins start debating what they feel they’re entitled to inherit – it’s better to clear the air early.

“The truth always comes out in estate planning,” says Edelman.

Let’s admit it, we don’t always know what our nearest and dearest will prize and what they won’t if we don’t ask. That’s why asking about this stuff is the first step in planning. It turns out that neither my brother nor I covet a large and rather hideous lime-green abstract painting that my mother cherishes. Now that she knows, she has been able to find a friend to give it a good home when the day arrives.

In some cases, financial institutions ask us to make that decision up front. If you’ve got a life insurance plan from your employer, or a retirement account, the provider will ask you to identify the person you want to inherit when you die. 

And if you have a very simple planning situation – only one child, no siblings, no living parents – you can simply make some assets, such as a house, car or bank account, payable or transferable upon your death to your heir, without it having to go through probate.

Consider the alternatives

To get the discussion rolling, point out the unintended consequences of not planning. You won’t have to go far to find examples. Swedish journalist and author Stieg Larsson clearly hadn’t expected to die of a heart attack at 50 and it’s unlikely he wanted to disinherit his lifelong partner, Eva Gabrielsson. But by dying intestate, that’s just what happened. Roman Blum, a Holocaust survivor who amassed a $40m fortune, died without a will. His riches will go to the state of New York. 

Even people who should know better die without wills. Abraham Lincoln, a lawyer who drew up wills for others, died without one.

After the will, a trust

You may not be a Rothschild or a Rockefeller, but increasingly, a will is just a starting point. As family ties have become more complex and look like a knitting experiment run amok, estate planning minefields have multiplied. Edelman notes that very few people now can get away with just a simple will. Nor is treating everyone equally always the equitable solution.

The larger your estate and more complex your family situation, the more useful you’ll find some kind of trust. You can set up trusts if you want to leave money to a child who spends too much, or is battling addictions; to minimize taxes or to maximize the impact of a charitable gift. 

Let’s say you want to be sure that when your second wife dies, your biological children rather than hers from her first marriage inherit your assets. There’s a trust – the QTIP, or Qualified Terminable Interest Property Trust – that gives your wife a lifetime interest in the money it contains but passes assets in the trust on to your children on her death.

The costs of estate planning

It’s true that professional planning might not come cheap: setting up a trust can set you back a few thousand dollars. And you’ll need to update your will, trust documents and the all-important medical proxies and powers of attorney updated frequently. Making it even tougher is the fact that unlike other financial planning tasks, it won’t be you who reaps the benefit of your prudence and wisdom, but your heirs.

Don’t want to spend the money? Think about this way: by skipping the expense, you’ll at the very least ensure that your heirs spend as much or more in legal fees, unnecessary taxes and time. And even if you won’t be around to witness it, do you really want your name to be known only because your poor planning led to squabbles and litigation? That’s not the kind of legacy most of us aspire to leave behind.