Many of you probably took some time last week to celebrate love and your closest relationships. Celebrating the past and present should also lead to planning for the future. Who do you want to care for you if you aren't able to care for yourself? How do you want those most dear to you to be provided for in the future? These decisions are made through a process called estate planning, and it involves more than simply having a will. Estate planning is not just about what happens when you die. What if you are paralyzed in an accident, have a stroke or develop dementia? Who will make healthcare decisions for you and who will pay your bills and manage your finances? To complicate matters, many people are in second marriages that include children from previous marriages, so let's make that more complicated scenario the focus of this article.
First, you need to plan for what will happen both during your lifetime and after you are gone. During your lifetime, you need a financial power of attorney, healthcare power of attorney and a living will. A financial power of attorney, as the name implies, authorizes someone else to make financial decisions for you and execute financial transactions if you are not able to do so yourself. There can be broad or limited powers. You should designate one person and at least one alternate. A healthcare power of attorney and living will designate someone to make healthcare decisions for you and allow you to state your intentions if you are terminally ill. Again, designate one person and at least one alternate. For second marriage situations, picking the right people can add a layer of complexity. These documents are governed by state law and prototypes are typically available via an Internet search.
Three elements warrant your attention in planning for distribution of your assets after your death: Asset ownership titles, beneficiary designations, and last will and testament or revocable living trusts. In poker language, the first two trump the third: account ownership titles and beneficiary designation precede or supersede a will or trust. If your bank accounts and mutual fund or brokerage accounts are joint with right of survivorship, the assets will automatically pass outright to the surviving joint owner. Your life insurance policies and IRAs will be distributed according to your beneficiary designation regardless of what your last will and testament says.
A revocable living trust agreement is practically an essential document to control the "who and when" of asset distribution for a couple in a second marriage with children from previous marriages. A trust can hold assets for a surviving spouse's remaining lifetime and then distribute them to children from previous marriages in the proportions you determine. A trust for "him" and a trust for "her" can ensure that "his" assets go to "his" kids and "her" assets go to "her" kids. Asset accounts and real estate can be owned by "his" trust or "her" trust during one's lifetime and life insurance and retirement plans can be payable to the trust at death to provide for survivors. Selection of the trustee is critical; it can be an individual or a corporate trustee (like a bank or private trust company). An experienced attorney specializing in estate planning matters is highly recommended for the estate plans of a second marriage couple.
Life is never as simple as we wish it could be, but planning ahead will provide peace of mind for you and reduce the risk of family squabbles in the years ahead.
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.