In this episode: After the business estate plan comes the personal one. Jon Peyton covers the core documents every entrepreneur and executive should know: powers of attorney, the advance medical directive, wills, trusts and a letter of intent. He also explains how different assets pass to heirs and how trusts can keep an estate private.
Key insights
- A financial power of attorney and a healthcare power of attorney let trusted people act for you if you can’t.
- An advance medical directive spells out your end-of-life wishes so loved ones don’t have to guess.
- A will generally goes through probate, which is public. Assets held in a trust generally don’t.
- Assets pass to heirs differently: many get a stepped-up basis, while traditional IRA and 401(k) money is taxed as income when withdrawn.
- A letter of intent isn’t a legal document, but it tells your family what you want and is easy to update.
Episode timeline
- 0:36 Wrapping up the wealth-creation series
- 2:00 The five documents to know
- 2:35 The personal power of attorney
- 3:24 Immediate versus springing powers
- 6:47 The advance medical directive
- 9:25 Keeping your wishes and your proxy aligned
- 9:36 Wills and probate
- 11:40 The pour-over will
- 12:45 Revocable and irrevocable trusts
- 14:30 Credit shelter and marital trusts
- 17:36 Why trusts keep your estate private
- 19:39 How inherited IRAs and 401(k)s are taxed
- 21:21 Life insurance and the irrevocable life insurance trust
- 23:32 The letter of intent
The episode in brief
Powers of attorney. Just as your business needs someone who can act for you, so do your personal finances: paying bills, managing accounts, keeping the household running. Some powers of attorney take effect as soon as they’re signed. A springing power takes effect only when conditions you set are met, such as being incapacitated for a certain period. Many people use separate financial and healthcare powers, with the healthcare one designed to act quickly. A “durable” power of attorney stays in effect if you become incapacitated. The rules vary by state, so your estate attorney will guide the details.
The advance medical directive. This document states how you want end-of-life care handled: how long to continue life support, whether to donate organs and similar choices. It spares loved ones from making painful decisions without guidance. Jon points to a long, highly public court battle over one woman’s care as an example of what can happen when wishes aren’t written down. Make sure your healthcare agent knows and supports your directive.
Wills. A standard will lists your assets and who receives them, and your executor takes it through probate. Probate is public, and creditors can come forward with claims. People with larger estates often pair a pour-over will with a trust: anything left outside the trust at death is moved into it, though those assets still go through probate.
Trusts. A revocable trust can be changed during your life. An irrevocable trust generally can’t. A revocable trust usually becomes irrevocable at death, but you can also create an irrevocable trust during life to move assets out of your estate. A credit shelter or marital trust can provide income to a surviving spouse or children while protecting the principal and, depending on the estate’s size and state, reducing estate tax. Assets owned by a trust generally avoid probate, which keeps them private.
How assets pass. Real estate and brokerage accounts generally receive a stepped-up basis, so heirs owe capital gains tax only on growth after the date of death. Traditional and rollover IRAs and 401(k)s don’t: withdrawals are taxed as ordinary income, and taking a large balance at once can push an heir into a high bracket. Rules govern how quickly heirs must withdraw, so get advice. Roth IRAs are generally income-tax-free to heirs but can still count toward estate tax. Life insurance death benefits are generally income-tax-free, but a policy you own can be included in your taxable estate. Holding it in an irrevocable life insurance trust (ILIT) can keep the proceeds out of your estate.
The letter of intent. Write down how you want your final years to look and what matters to you, and keep it on top of your other documents. It isn’t binding, but it guides your family, and you can update it anytime without an attorney. Your legal documents should be reviewed as laws and circumstances change, and coordinated with your business estate plan.
Key action items
- Inventory your documents. Check whether you have a current will, financial and healthcare powers of attorney, and an advance medical directive.
- Review beneficiary designations. Confirm that retirement accounts and life insurance name the right people, and ask how each will be taxed.
- Ask about trusts. Talk with an estate attorney about whether a revocable trust or an ILIT fits your situation.
- Write your letter of intent. Draft it this month and keep it with your other documents.
- Coordinate your plans. Make sure your personal estate plan and your business succession plan work together.
Listen next: Episode 35: The Entrepreneur’s Retirement Fallacy
Value Creation Consultancy™ has since merged into Founder’s Accounting™.
Tax rules, rates and limits mentioned reflect the law at the time of recording in 2022 and may have changed since.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.