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Your Financial To-Do List for August

Slow summer days are an ideal time to review, or create, your estate plans.

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar. Morningstar's director of personal finance, Christine Benz has a few financial to-dos that you can cross off your list, even as you're savoring the last full month of summer. She's here today to discuss them with us.

Hi, Christine. Nice to see you.

Christine Benz: Hi, Susan. Great to be here.

Dziubinski: So at the start of the new year, you came up with a list of month-by-month financial to-dos for 2021. And on the list for August is to tackle estate planning, which doesn't sound like a fun way to spend the last day of summer. Why should that be top of mind for investors now?

Benz: Well, the brutally honest answer is that it's a long year. And there are some months where there's not some natural task that lends itself to that particular month. But another consideration, Susan, is that this pandemic has really highlighted how quickly things can change for people and for families. A lot of people have experienced a lot of very sad losses in their lives over the past year and a half. And so I do think that it's a reminder to make sure that we are leaving things in good shape for our loved ones. And this is important no matter our life stage--for younger folks as well as older adults. So that's another reason to take a look at it.

Dziubinski: Now a lot of people might associate estate planning with the very wealthy, that only wealthy people need to have an estate plan. But you say that that's not really the case, that there's a good reason for most people to have some sort of estate plan. Can you explain that a little bit?

Benz: Absolutely. I think a lot of people do latch on to that estate tax, and the exclusion amount is very high. Today it's almost $12 million per person. So you could be a married couple and die with upwards of $20 million, and not have that subject to estate tax. So a lot of people assume well, if I'm not in that zone, and most of us aren't, then I don't need to worry about this. But estate planning is so much broader than that. And basically the idea is you're leaving a plan so that your wishes could be carried out for your own wealth, for the welfare of your children, for your health. And so you're leaving in place a plan to have your wishes executed in accordance with what you want them to be. So that's really the main idea of having an estate plan.

Dziubinski: So what are some of the elements that people should be thinking about including in an estate plan?

Benz: Well, the key ingredients would be beneficiary designations at the top of the list. A lot of people don't think that these fall under estate planning, but they absolutely do. And most assets pass through beneficiary designations. So if you have IRA assets, if you have company retirement plans, if you have taxable accounts, you can make beneficiary designations for those accounts, so see to those. Powers of attorney--naming powers of attorney for healthcare and financial matters--that's also under the estate planning umbrella. Wills, certainly and obviously, living wills sometimes called “advance directives,” where you leave some detail about how you would want your healthcare handled if you were unable to make decisions for yourself. And finally, guardianships of minor children are also a big category under the heading of estate planning. So you'll want to be thoughtful about who you would want to entrust with the care of your children if you were unable to do that.

Dziubinski: And you suggest that you know, people think beyond just the legal documents that are associated with an estate plan. And think more in terms of things that you should be thinking about to sort of smooth the process of passing things along. What are some of those things?

Benz: Right. So one thing I've long been enthusiastic about is this idea of having a master directory, just a simple document of what assets you have, where you have them, maybe approximate dollar value, but not something you're having to keep up-to-the-minute fresh, but keeping a master directory like that, letting your executor know of its existence, know how to gain access to it. If you have sensitive information on that master directory, you'd want to keep it safe. So that's one thing.

I think it's also really worth writing out just kind of a declaration of what approach you want your loved ones to take to handling your stuff. So I thought about for my husband and me writing some sort of a statement saying that we just don't want this to cause agony for our family. We don't want them to try to get the highest possible dollar for our items. Do whatever brings you peace and is easy for you. That's our wish for our loved ones. But kind of think that through when you're thinking about your own personal assets, there are also articles of, sort of personal articles that that may fall outside of your will. Maybe there are things that aren't important enough to go within your will, they might not have a lot of monetary value but have a lot of value to you personally.

Your attorney if you have an estate plan can create what's called a “memorandum of personal articles” that will document some of those assets who you want to go to. In doing an estate plan, my husband and I found a lot of comfort in creating this--and you don't want to have every last item on that memorandum. But I think just sort of a basic articulation of some of your favorite things going to some of your favorite people. That to me is a great extension of an estate plan and something you can easily do on your own. You don't necessarily have to get an attorney involved.

Dziubinski: Another thing you say that sort of relates to this is now is a good time to sort of examine your digital documentation, what sort of things should be a part of that process?

Benz: Right. This is a complicated topic. I've written an article about this topic. The laws are changing fast in this space, digital assets are changing quickly, especially with the uptake of cryptocurrency. But I think the key thing to keep in mind is to make sure that you’re inventorying your digital assets, especially if you have valuable digital assets. But even if you have social media accounts, for example, keep an inventory of where you have some sort of a profile. You may want to keep some documentation or use a password manager that allows access to those accounts. And also loop your executor in on what's going on with these digital assets. But this is a space to keep a close eye on if you have an estate plan and estate-planning attorney, ask the attorney about how best to approach those digital assets because they're increasingly important for all of us.

Dziubinski: And lastly, we've been hearing about some potential changes to the tax code. Can you summarize those kind of quickly for us and then talk about what implications there might be for estate planning?

Benz: Sure. There are two biggies on the table right now. One would be a higher capital gains rate than is in place today. That would apply to taxable assets, so assets held outside of company retirement plans and IRAs. So that's one potential change on the table. The other relates to what's called the “step-up in cost basis” that heirs receive upon someone's death. So the perspective change would put a cap on how many assets can be eligible for that step-up in cost basis. None of this is a done deal. And that's, I guess, one major caution here, that this has to get through a divided Congress, a deeply divided Congress. So I wouldn't make any preemptive changes, but nor would I necessarily drag my feet assuming that big changes might be coming. So I don't want to get into drafting an estate plan. I'd go ahead and draft those documents. Most estate-planning attorneys are mindful that there could be some changes, and ideally would create a plan that could adjust if there were in fact some changes to the estate laws. So watch this space, but don't necessarily put off or accelerate any changes to an estate plan just because you worry that these changes might be coming.

Dziubinski: Well, Christine, thank you for your time today and for giving us some to-dos for August that could have far-ranging consequences for ourselves and for our heirs. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.