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Estate Planning 101: 6 Terms To Start Your Plan Off On The Right Foot

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Chris Halverson

Chris Halverson

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Welcome to the world of estate planning! Our team is delighted to bring you a series that dives into some of the top considerations for your estate. 

We'll break this series into three parts, each getting progressively more advanced as we go along. We're excited to share our love of estate planning with you. 

Let's dive into part one—nail down top estate planning terms and documents. 

1. Will

A will is a legal document that outlines the wishes for your estate. It’s an essential roadmap for your Personal Representative (the person in charge of your estate). This roadmap lays out all the steps to fulfill your wishes after you pass away. 

It also lays out who gets your “stuff” from your real estate and investments, your valuable personal possessions, and the sentimental pieces you have saved.

A will can be as broad or detailed as you like. You can make sure your family and loved ones are taken care of, a charity is funded, or even that your beloved pet is cared for. 

You do not have to give to your descendants equally, either. For example, you may decide to leave your home to your daughter and give your son your retirement accounts.  While navigating the particulars may seem daunting, having a trusted advisor like First Dakota can make the process manageable and rewarding.

Is there anything a will can’t do? 

Wills do have several limitations, chief among them is that they do not avoid probate. Probate is a required court proceeding used to settle an estate. This process can be time-consuming and requires your personal representative to wade through local requirements to properly settle your estate. You can avoid probate by creating a trust, which we will discuss later.

Creating a comprehensive estate plan travels far beyond establishing a will. We’ll dive into more details on powers of attorney for medical and financial affairs, trusts, specific beneficiaries and titles, and other legal instruments to ensure your estate is properly represented. 

2. Trust

Like a Will, a Trust sets out specific instructions on how to handle your wealth when you pass. One of the main differences with a trust is that you can avoid the lengthy probate process. 

Under a trust, you willingly give all of your assets to the trust and create a buffer between you and your possessions. Think of it like an invisible fence for your Labrador: even though no one can see it, the fence protects them from getting loose and lost in the neighborhood.

Trusts comprise of three primary parties:

  • Grantor
  • Beneficiary
  • Trustee

When you set up your trust, you become the Grantor and, as such, you are “granting” or giving your assets away to someone else. 

When you create a trust, you name the beneficiaries. Beneficiaries are the people with who you would like to share your assets, like family and loved ones. A beneficiary can also be a charity such as your local pet rescue or church. You may decide who gets what, down to percentages or certain assets. 

The final piece of a Trust is the Trustee. This is the individual or bank who ensures your wishes are followed. A Trustee carries out the legal and financial requirements set by the trust and is bound by the fiduciary duty to do what is in your best interest. 

Trustees carry immense responsibility to care for, manage, and distribute the trust’s assets, so choose someone with care and intention. Sometimes, it’s beneficial to name a corporate trustee (bank/financial institution) to remove the legal and financial hurdles from family and loved ones.

Trusts come in several shapes and sizes. Let’s take a look at a few. 

  • Revocable trust— a trust that can be altered by the Grantor at any time. 
  • Irrevocable trust— a permanent trust that can’t be altered. Once the document is signed and assets are contributed, they can’t revert back into personal property. Irrevocable trusts are nuanced and complex, but our team can help make the process simple and efficient. 
  • Charitable remainder trust— a trust that allows you to pass assets to your family as well as a charity of your choice. Several other trusts help you accomplish this goal as well. 
  • Generation-skipping trust— a trust that skips a generation to provide for the next. 

You can also establish a trust for your spouse, pet, land, scholarship, etc.  

In South Dakota, a Trust may last forever. A Trust can not only take care of your children but can provide for their children and children’s children, so long as there are assets to do so. This is called a Dynasty Trust—a unique feature of establishing a trust in the state of South Dakota

This overview gives you a sense of the myriad of ways you can use a trust. Our team at First Dakota is well versed in these intricacies and ready to help you decide which vehicle will best suit your needs.

3. Beneficiaries

Beneficiaries are people to whom assets are bequeathed. Almost any financial document someone signs today has a beneficiary field—investment accounts, retirement savings, bank accounts, insurance policies, real estate, etc. 

Most of these documents also allow you to add a contingent beneficiary should the primary one pass away before you. Fail to do so, and the account will likely need to pass through probate. 

Beneficiary designations are a critical aspect of your estate plan as they legally dictate who will receive your assets. Naming an official beneficiary on your financial documents could supersede what’s stated in your will or trust. This makes it essential to keep beneficiaries up to date. Consider reviewing your selected beneficiaries periodically, especially after any major life event like a marriage, divorce, new child, etc. 

These designations can go by different names, but the important thing to remember is that they have a binding effect on the assets you link them to. You want to make sure you keep your beneficiaries updated in case something happens and you are not legally or physically capable of doing so.

4. Power of Attorney

There are two main types of Power of Attorney (POA). The first is a legal POA. The second is a healthcare POA.

A legal POA is a document that allows the appointed person or institution the ability to act on your behalf if you become incapacitated legally or physically. The appointed person will have access to your financial accounts to make sure bills are paid, investments are monitored, and property is maintained, to name a few.

A healthcare POA is a document that allows someone to take care of all your medical decisions if you are unable to do so yourself. This may include an end-of-life directive, deciding on treatment, or placement in a nursing home or rehabilitation facility.

One thing to remember is that these documents are only effective while you are living. They are designed to give a trusted source the ability to make decisions on your behalf when you can’t make them yourself and those benefits terminate if you pass away.

5. Titles and Designations

Remember when we talked about beneficiary designations? Titles and designations also play a major role in your estate plan. The right titles can transform your estate plan and streamline the process for heirs. Let’s take a look at four of the most common designations. 

The first is a Payable on Death (POD) designation. This is usually associated with a beneficiary designation because the account is paid out to a beneficiary of your choosing when you pass away. If you create an investment account payable to your spouse on your death, the company holding those assets is required to pay those funds over to that person.

Another designation is Transfer on Death (TOD) designation. Similar to a POD designation, an account is transferred to another owner based on your designation on your death. South Dakota also allows individuals to create a Transfer on Death Deed for real estate that will transfer ownership in real property to another person.

You may also own property as Joint Tenants. This designation gives property to another tenant or tenants upon your death. If you owned a piece of property with three others, when you pass, those three would each receive a third of your ownership. This cycle will continue until the last survivor, who will own 100% of the property.

The final common designation is tenants in common. This designation allows the holder to transfer ownership by sale, deed, will, or trust.

Several types of designations may be appropriate for your situation. Establishing designations has many legal effects, making it critical to fully discuss and understand these impacts before making a decision. Your trusted advisor and attorney will be able to help you map out a designation’s impact on your estate. 

6. Probate

Probate can be a complex behemoth to navigate. It’s the public proceeding for your estate and ensures that your estate is divided according to your documents, or if there are none, the state law. Many people wish to avoid probate as its’ time-consuming, costly, and public. 

There are ways to avoid the process by utilizing some of the planning tools we discussed. You can give your property away before you pass, put assets in a trust, use designations, and give to charity outside of your will to minimize your probate estate. Before implementing any changes make sure you discuss your options with your trusted advisor, estate planning attorney, and tax professional.

Bonus: Other People Involved In Your Estate Plan

There are many people involved in creating a successful estate plan. Each has a role and can help create a strong team to carry out your wishes. Let’s take a look at a few. 

  • Personal Representative or Executor— a person who handles your Will at your death and ensures your wishes are honored. 
  • Guardian— someone you name to look after your minor children. You should name a person you trust to care for and raise your children in a way that would make you proud. 
  • Trustee— a person or institution who carries out the wishes of your trust. Along with asset distribution to beneficiaries, the trustee also maintains the financial up-keep for the trust like paying taxes and investing assets. Trustees are legally bound by the fiduciary duty and as such are required to act in your best interests.
  • Trusted Advisor— a financial professional (trust officer, financial planner, etc.) who helps guide you on your financial journey. Your advisor can give you the tools to decide what’s best for your estate plan and provide support as you navigate challenging decisions along the way. 
  • Attorney— the person who will draft your documents and create the legal structure to support your estate plan. Alongside your advisor, they can help guide you toward the best options for you.

In estate planning, everything is connected. Some duties for each professional or family member/loved one may overlap. The most important thing is to curate a team you can trust and who has the right knowledge and expertise to guide you. 

Our trust officers at First Dakota are passionate about helping people build estate plans that truly represent their values, goals, and dreams. We are an experienced and qualified team who can help you explore all of your options and create a plan that optimizes your assets, protects your wealth, and helps you establish a legacy that lives on for generations. 

We would love to talk with you about creating a tailored estate plan. Give our team a call today

Stay tuned for part two where we will dive even deeper into the world of trusts.

Disclosure:

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.