How to build a solid estate planning strategy 

You do not have to be wealthy to start considering an estate planning strategy.  

Most people have something of value that they want to pass along to loved ones. Passing along something of value to a favorite charity can even be part of an estate planning strategy.  

No matter what your client decides, there are definite steps to estate planning. There are also common mistakes that people make and rules that you can take advantage of. 

In this article, we will break down how to create a sound estate planning strategy. This can serve as an introduction for new financial planners and a refresher for seasoned professionals. You’re also welcome to share this more widely as a client education piece. 

What are the 7 steps in the estate planning process? 

Estate planning does not have to be a daunting task especially if you follow certain steps. These 7 steps are geared toward simplifying asset-planning. Meeting with a personal estate planning attorney will make it easier to finalize your plan and move forward.  

Let’s look at the 7 basic steps in the estate planning process.  

1. Take inventory of your estate 

The first step in your estate planning strategy should be to narrow down what belongs to you. Why? Because your estate is important. The more aware you are of what you own, the easier it will be to create a detail-oriented plan. 

2. Set a will 

After you have taken inventory of your estate, gathering everything you own, you can set a will, ie a list who gets what. Your beneficiaries can either be your close friends or your family members. Your will can also state who will take guardianship of your children, if you have children. After major life events such as marriage, the birth of a child, or retirement, be sure to update your will.  

3. Form a trust 

The goal of forming a trust is to avoid the arduous process of trust administration, or probate. If there is an unexpected death or illness, for example, the trust will guarantee that the estate will be handled properly, according to your stated terms.  

4. Review your healthcare options 

Depending on when you may need special housing arrangements, healthcare programs can offer the financing of nursing homes and assisted living. If this situation arises, you will want to have a healthcare plan in place. 

5. Consider life insurance 

If you own a house and/or have younger children, you should opt for life insurance. Buying a life insurance policy will benefit those family members you leave behind after passing away. 

6. Store your important documents 

Not only should you store all your important documents, but they should all be kept in the same place. There can be quite a bit of paperwork. Keeping the documents in one specific place will help you stay organized. Your attorney will be grateful you did. 

7. Hire an attorney

Hiring an attorney to guide you will help you every step of the way. They will aid you in fine-tuning your estate plan and maximizing its benefits for both you and your loved ones.  

What is the 5 by 5 rule in estate planning? 

The 5 by 5 rule in estate planning, or 5 by 5 power in trust, is a common clause in most trusts that allows the beneficiary to make certain withdrawals. The 5 by 5 rule enables the beneficiary to withdraw the greater of the following: 

• 5% of the trust’s fair market value, or FMV, every year 
• $5,000 

The fair market value is essentially the price that the securities or the property would sell for on the open market.  

Estate planning strategy: how the 5 by 5 rule works 

As mentioned, the 5 by 5 rule allows the beneficiary to make withdrawals from the trust on a yearly basis. The beneficiary can cash out either 5% of the trust’s fair market value every year or $5,000, whichever is the higher amount. 

The 5 by 5 rule also states that the person establishing the trust sets the guidelines. These can include what the beneficiary can use the funds for or when the beneficiary can access the money.  

If the beneficiary doesn’t exercise the 5 by 5 rule for income tax purposes, the beneficiary may become liable for taxes on the trust’s capital gains, deductions, and income.  

If wealthy individuals are concerned with leaving large sums of money to beneficiaries deemed irresponsible, the 5 by 5 rule allows for more flexibility. For instance, a trust owner can establish the rule that the beneficiary can only access the money to pay for graduate school or other forms of education. Other popular categories include first home purchases, healthcare needs, or emergencies.  

What are the most common estate planning mistakes? 

When creating an estate planning strategy, there is a lot to keep track of. That’s why it is important to remind yourself of common mistakes made by others. This will help you enter the process considering all the angles. 

With that in mind, let’s look at the 4 most common estate planning mistakes. 

1. Not having a plan at all 

2. Not naming contingent beneficiaries 

3. Procrastinating 

4. Not updating your plan regularly 

Here is a breakdown of each of the common mistakes.  

1. Not having a plan at all 

Those who are closest to you will be left to take care of your affairs, whether you have an estate planning strategy in place or not. This is all at a time when family members are working through shock and grief, and business partners are scrambling. For these people, the most serious and common estate planning mistake is having no plan at all.  

Having a legally valid trust or will in place gives those you care about clear guidance for managing your affairs. At a time of uncertainty, estate planning brings peace of mind.  

2. Not naming contingent beneficiaries 

Another name for contingent beneficiary is a secondary beneficiary. This is the person or entity who gets an asset in your trust or will when the primary beneficiary passes away first.  

Naming contingent beneficiaries for every asset is critical. Why? If the primary beneficiary dies and there is no contingent beneficiary, the asset returns to the estate. That leaves your loved ones potentially facing a long, expensive battle in probate court.  

To avoid this, you should name at least two contingent beneficiaries on every asset in your trust or will.  

3. Procrastinating 

Avoid procrastinating. Start thinking about the goals that an estate planning strategy can accomplish.  

For instance, a business owner who is heading on an overseas trip might want to give temporary power of attorney to someone who can make business/financial decisions during that time.  

That’s just one example. It shows the importance of drafting estate planning documents that fit your specific needs right now.  

4. Not updating your plan regularly

Drafting an initial estate planning strategy is a big first step. Failing to review and update your plan, however, is one of the worst, and most common, mistakes you can make.  

A lot can happen in your life between your initial plan and the present. Here are significant life changes that you should consider: 

• birth of a child 
• death of a primary/secondary beneficiary 

• death of your minor child’s guardian 
• marriage or divorce 
• purchasing a new property 
• starting a new business 

You should ask yourself, after any one of these life events, if your initial will still works the way you wanted. To avoid any negative consequences for you or your loved ones, update your estate plan regularly.  

What are the 3 main priorities you want to ensure with your estate plan? 

The three main priorities you want to ensure with your real estate plan are: 

• that your assets are distributed in the way you prefer 
• that someone else has the authority to make decisions on your behalf if you are unable to do so 
• that your beneficiaries are clearly defined 

These three priorities will ensure that the management of your estate can run smoothly, when the time comes. This will help minimize any family or legal disputes.  

What makes a good estate plan? 

Most people think that having an estate plan simply means drafting a trust or a will. But there is much more to include in your estate planning. After all, you want to be certain that all of your assets are transferred seamlessly to your heirs when you pass away.  

There are specific estate planning documents that you will want to include, such as the trust or will and healthcare power of attorney. Good real estate plans also include provisions that enable your family members to control or access your assets, in the event you are unable to do so.  

The following is a checklist of a good real estate plan: 

• beneficiary designations 
• durable power of attorney 
• guardianship designations 
• healthcare power of attorney 
• letter of intent 
• will or trust 

Now you’re ready to create a solid estate planning strategy 

Remember: you do not need to be wealthy to create an estate planning strategy. Whatever you have to pass along, there are definite steps you can take to simplify the process for your loved ones. If it applies to you, the 5 by 5 rule may be useful. It is also important to make yourself aware of common mistakes when it comes to estate planning so that you can avoid them.  

To find out more about making an estate planning strategy, get in touch with one of the financial advisors that we highlight in our 40 Under 40 section. Here you will find the top-performing financial advisors across the USA.   

Did you find this information on building an estate planning strategy useful? Let us know in the comment section below.