Do You Really Need an Estate Plan?

Mark Riepe: After singer-songwriter Prince was found dead in his Paisley Park home in 2016, his closest aides went looking for his will. Five days after his death, Prince’s sister Tyka filed court documents to open a probate case, claiming no will could be found.

And then the floodgates opened.

In short order, Prince’s five half-siblings filed claims seeking their share of his $200 million estate.

Within a month over 700 people claimed to be half-siblings¹ or descendants, necessitating court-ordered genetic testing on Prince’s blood to try to settle claims of paternity.

Much of this could have been avoided if Prince had established a will and an estate plan before his death.

I’m pretty sure that you don’t have millions of dollars’ worth of purple instruments or intellectual property in your portfolio, but you probably still need an estate plan.

If you don’t have one, you’ll leave unanswered questions about how to settle your affairs after you pass, and life for those you love could be even more trying during an already difficult time. That’s why deciding to settle those questions in advance is an important step in your financial life.

I’m Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab.

It’s a show where we study the cognitive and emotional biases that can influence your financial decisions, both large and small. And we offer strategies designed to help you mitigate those biases and improve your financial life.

You’re a rare human if you haven’t procrastinated about something, but there’s nothing like estate planning to really bring out the procrastinator in all of us. Nobody likes to contemplate their own demise or that of a spouse, but that’s what’s required when it comes to effective estate planning.

And so, in addition to not having the will to get started, a great many Americans don’t have a will at all—one study² found that 38% of people died without a will. Now I’m sure a lot of those people thought they’d get around to creating a will eventually. But many never do.

The roots of procrastination stem from present bias, which we’ve covered in previous episodes. Estate planning is an excellent example of this bias in action.

Estate planning has clear benefits, but those benefits only accrue in the future. For those of us who have present bias, we don’t do the work to put a plan in place now because those future benefits seem microscopic when compared to the immediate costs of getting it done right now.

Economists have created models³ of human behavior that establish conditions under which procrastination may be especially bad.

The first condition is that more choices make procrastination worse. The second condition is that the more important the decision, the worse procrastination gets.

Estate planning meets both of these conditions.

There are many different elements to an estate plan, and many different options to consider for each element. As a result we’re forced to make a lot of decisions. When confronted with them, it’s easy to take a step back and put off tackling it to another day.

In effect, the weight of all of those decisions raise the immediate costs of dealing with this problem. And when a task becomes more costly right now, those long-term benefits don’t stand a chance.

The second condition about how important decisions are more likely to get put off also rings true to me. When the stakes are high, we especially want to make the right decision. When we start thinking about the consequences of making the wrong choice, the end result can be paralysis.

This situation describes estate planning. We know it’s important, and we want to get it right. However, the weight of that decision makes the likelihood of us undertaking it go down.

Joining me now is Colleen O’Brien. She’s a vice president and Schwab branch manager in the San Francisco Bay Area. She leads a team of financial consultants who are focused on helping individuals with their wealth management and financial planning needs. Welcome, Colleen.

Colleen: Thank you.

Mark: The financial industry, you know, is just full of difficult jargon. Let’s decode some of that when it comes to estate planning. And I guess a good place to start is, what is an estate plan?

Colleen: So an estate plan is something that you use to title your property, to pass on to beneficiaries, it can also help with guardianship of your kids, setting up a plan for that if they’re young. It’s about passing assets down, and when and how you want to do that. It’s also about covering any kind of charitable needs you might have.

Mark: The purpose of this episode is to help people make some decisions about their estate plan. And I guess the most basic decision is, who should get one?

Colleen: So if you have a family, you need one. If you have assets, you need one. So I guess almost anybody qualifies for needing an estate plan. 

Mark: Colleen, I’ve got to suspect that your answer about everyone needing an estate plan—that’s going to surprise a lot of people. So go into more detail about the components of an estate plan. If the estate plan is like the container that includes a will, perhaps a trust also, and medical documents—what’s the purpose of some of these things?

Colleen: So the basic elements of an estate plan include a will, they include how you want to title your property, they include how you want your children to be taken care of when you’re gone. They also include a health care directive, which allows you to control what happens to you if you become incapacitated.

Mark: You mentioned wills there, and I think a lot of people, when they hear the phrase “estate plan,” probably the first thing they think about is a will. And, at least from my perspective, a will doesn’t necessarily invalidate which beneficiary you’ve designated for your 401(k) plan, for example, but can you tell me what a will really is and why it’s important to have one?

Colleen: So a will is a document that you create that tells us everything you want to do with your property. It can also, as I said before, it could include guardianship, in some states, of your children—your minor children. What a will really does is, it’s a document that when you die, it immediately is triggered. And so a will is something that’s a living document, when you pass, it absolutely takes care of any of your assets that you have, but also when you use a will it immediately goes to probate and the state ends up passing your assets down on their timeline.   

Mark: So the bottom line is that a trust can keep your assets out of probate. But that implies really another question: A will versus a revocable living trust—what’s the difference between the two?

Colleen: So a will is something that, when you die, it goes into action, it’s triggered by that. A trust, on the other hand, is something that is more like a living document. It’s something that you use during your lifetime. You can amend it several times as things change in your life. It, in the beginning, can be something that you use for guardianship and financial support of your children. But as they become adults, that’s something you would amend and take out. It’s also something that people use to really pass their wishes down, not just of their property, but also what they want to do with their money, how they want to leave it, and the timing of how they want to leave it. 

Mark: Trusts and wills, some overlap between the two, so do, do you really need both?

Colleen: I think for the majority of us, we need both. When you create a trust in an estate plan for yourself, a will is typically included with it. You could put a lot of your assets, your home, a lot of other large assets, in your trust, but what happens if you acquire something else and you don’t include it in the trust for some reason? You miss that one asset. If you have it in your will as a more general component of “all of my assets go to …,” then it’s going to be taken care of. So I believe with your entire estate plan, both a will and a trust are needed.

Mark: I think also there are some—state—individual state peculiarities where certain things can only be done in a will.

Colleen: Absolutely. Sometimes that’s guardianship of your young children, in some states.

Mark: So let’s talk a little bit about revocable living trusts. My impression is those seem to be the most popular type of trust for most individuals who have one. So what is that exactly?

Colleen: So a revocable living trust is a document that you use to pass your assets down, title your accounts, so everything falls into one bucket—it’s your trust. It’s also something you can amend over time. So when you first create it, you might have young children; that would be important. But it’s something that’s always a living document, you amend it over time, your wealth increases, and you make different decisions about what you want to do. And it’s something that’s constantly something you amend and pay attention to.

Mark: There are also lots of different trusts out there that are designed for people with unique circumstances. We’re not going to get into all of that today, but if you want to learn more about those, you can go to schwab.com/insights/trusts. But Colleen, I’d like to move on, though, and talk about beneficiary designations. Practically every financial account, they all give the account holder the chance to name a beneficiary. What are some of the mistakes that you see people making when it comes to naming beneficiaries?

Colleen: There’s a lot of mistakes that people make, unfortunately. So one example is divorce. You create your IRA, which is one of your larger assets, you put your first husband on it, you get divorced, you never go back and look at these accounts—and some people open up IRAs all over the place, right? You never go back and look at that beneficiary. So when you divorce and you don’t change that beneficiary, then your new spouse, if you remarry, doesn’t have those assets, and that’s usually not your wish.  

Mark: So the issue of beneficiaries, once you name that beneficiary, it’s going to stay there no matter what unless you proactively change it. Nobody’s going to do it for you—is that really what it comes down to?

Colleen: It’s true. It’s unfortunate that unless you’re somebody who’s constantly reviewing this stuff—which I don’t know too many people that are—it’s not something that pops up to you, it’s not something you see on a statement, it’s not something you see on your online account. So you really have to be proactive or be working with a professional that can help point these things out to you.

Mark: One consequence of getting older is that health issues become a more important consideration. Whether we like it or not, many people are going to get to a point where they can’t make decisions for themselves. So what do people have to have in place in order to deal with that situation?

Colleen: So the most important thing to have in place is a health care directive. That allows you to control what may happen to you if you become incapacitated. It allows your wishes to be honored if something happens to you. That’s incredibly important, but it’s also important that the person you put in charge of this health care directive is somebody that can actually go through your wishes and feel OK about it. I think sometimes we put family members in charge of difficult situations like that, and it’s something they really don’t want to have. So sometimes a close friend might be a better option.   

Mark: We started this episode off talking a lot about procrastination and people just not wanting to get involved with this even though they know it’s important. So, how do you, as someone who’s working with real clients every day, how do you get people started?

Colleen: They don’t want to talk about what happens to them when they’re not here, they want to live in the present. So I think having meetings with people and families that allow them to look at all of the different ways that their family has built wealth over time, and how to honor that and how to not lose that—that’s a big deal, the assets that you’ve accumulated. Addressing it and being able to look at it with a professional and kind of an unbiased person can help you realize that these are really things that will make your family stronger after something happens.  

Mark: We’ve been talking about the estate plan almost exclusively from the perspective of the, kind of, owner of the estate. For those people who have children or they plan on passing their assets on to someone, at what point does it make sense to kind of bring those other people in?

Colleen: I think it’s important that they bring them into the picture before there’s a major transition. I think that part of passing assets on to your family and to your adult children is including them in the conversation. It’s about educating them on how you created your wealth and what’s important to you. It’s also about not waiting until something happens, and your entire family doesn’t know your wishes, and that’s an uncomfortable spot for any family to be in, not just you as the wealth creator, but also your children who are your ultimate beneficiaries.

Mark: Colleen, this has been a lot of great information presented here. Really appreciate you coming by.

Colleen: Thank you so much.

Mark: As we noted earlier, the biggest inhibitor to getting an estate plan in place is procrastination, which is driven by present bias. At any given point in time the cost of dealing with this topic will seem greater than the benefits, which only accrue far in the future.

To break through the procrastination log jam, consider an approach suggested to me by Katy Milkman called temptation bundling.

The idea is to pair an unpleasant, but important task with a pleasant task that provides an immediate reward. For example, go ahead and watch your favorite TV show, but only while walking on a treadmill.

Applying this to estate planning, you might, for instance, draw up a list of five blockbuster movies you want to see between now and the end of the year. Pair each movie with one of the estate planning tasks that Colleen mentioned and only watch that movie after you’ve completed its companion task.

Breaking the estate planning process into discrete pieces also makes sense for another reason. Dividing a complex task into smaller pieces or sub-goals makes it easier to achieve at least some success, and reaching the overall goal won’t seem as daunting.

That’s good advice, but there is a risk.

When people complete a few of the sub-goals, they often decide to rest on their laurels and assume what they’ve done is better than nothing and it’s OK to slack off.

So the trick, as one study⁴ shows, isn’t merely to break up the task, but to do so while staying cognizant of the big picture. You need to keep reminding yourself that the payoff comes from completing the full journey. You can’t be satisfied with going part way.

Completing all of the steps is especially true when it comes to estate planning. To see why, consider a concept known as choice bracketing.

The term “bracket” refers to how many related decisions or choices you consider at a time. If you think about choices only one at a time then you’ve created an extremely narrow or small bracket.

If you think about a handful of related decisions together as a group, then you’ve adopted a broader or larger bracket.

Various studies⁵ have shown that people will make different choices when decisions are presented separately, in a series of narrow brackets as opposed to together, as part of a larger bracket. In most cases considering related decisions together is the better strategy.

To see how this applies to estate planning think about all the decisions that Colleen outlined earlier in this episode. Each of those decisions could be made in complete isolation. For example, your health care directive could be put into the hands of one person and other affairs that require power of attorney could be put into the hands of someone else.

However, what if those two people don’t get along? Is that going to sow the seeds of conflict? Maybe or maybe not, but it is worth the thinking about.

My advice is to go through each task, but then take a step back and look at all elements of your estate plan as a whole and see if it all hangs together.

You can learn more about trusts and getting started with an estate plan at schwab.com/estateplanning.

Thanks for listening. If you’ve enjoyed this episode, consider leaving us a review on Apple Podcasts or your favorite listening app. It helps others discover the show.

For important disclosures and a transcript, see the show notes and schwab.com/financialdecoder.

¹ https://www.forbes.com/sites/markeghrari/2018/04/18/two-years-later-princes-heirs-have-still-not-received-a-penny-of-his-estate/#2c34431d3ab2

² Marco Francesconi, Robert A. Pollak, and Domenico Tabasco, “Unequal Bequests,” NBER working paper #21692, October 2015.

³ Ted O’Donoghue and Matthew Rabin, “Choice and Procrastination,” Quarterly Journal of Economics, February 2001

⁴ Ayelet Fishbach, Ravi Dhar, and Ying Zhang, “Subgoals as Substitutes or Complements: The Role of Goal Accessibility,” Journal of Personality and Social Psychology, 2006.

⁵ Daniel Read, George Lowenstein, and Matthew Rabin, “Choice Bracketing,” Journal of Risk and Uncertainty, 1999