There is a common misperception that estate planning is only important for very wealthy people, or that it’s only necessary later in life. Perhaps this is because the word “estate” conjures up mansions, priceless pieces of art, and other expensive holdings.
But, your “estate” refers to any money and property you own when you pass away that will be divided up. It also considers who will care for your children or even a pet.
So, almost everyone needs basic estate planning. As soon as you have acquired any wealth or property, gotten married, or had children, you would be well-served to prepare your estate.
If you are lucky enough to have significant resources, estate planning can give you tools to leave a legacy to your heirs in a tax-efficient manner or avoid contests over your will.
Where do you start? An estate lawyer is likely your best source of advice and information on the legal aspects of your estate plan. And a financial planner can help you assess your wealth and plan a legacy. Finally, you may want to include a tax professional as part of your team to plan for the most tax-efficient transfer of wealth.
Estate planning involves thinking through what happens to your wealth, possessions, and children should you die or become incapacitated, making a plan with full knowledge of tax and inheritance laws, then creating legal documents to ensure your wishes come to pass.
Many people think a Last Will and Testament is all they need, but it typically only covers your property if you die. What happens if you have an accident, become incapacitated, and cannot make decisions—but remain alive? Or, what happens to your underage kids should you and your spouse pass away at the same time? Neither of these situations is covered in a typical will.
Estate planning ensures your wishes—for yourself and your loved ones—are carried out under a more complete set of circumstances than what a Will covers.
A basic plan usually includes at least these six documents, and sometimes more:
Money and property that are not directed straight to account beneficiaries (or put in living trusts) will go into your estate if you die.
If you have a will, most decisions regarding your property will be made quickly by the person you name as the executor, provided the will is not contested (typically by a creditor or relative). Certain actions like transferring property titles that are solely in your name must still be carried out by the Probate Court, but they happen quickly with a will. Jointly held assets, assets with a beneficiary, and assets in trusts never go to probate. Their destinations are predetermined and indisputable.
If you die without a will, your estate is in the hands of the Probate Court. There, a judge will name an executor to decide how to divide your wealth according to local laws, which can vary by locality and state. Probate usually gives priority to a surviving spouse first, followed by children, then other close relatives. The probate process can take months to resolve, and, as mentioned, will incur costs.
Unfortunately, the probate result is often not as you wish. Since your voice is not heard, it opens the chance that other people can claim or sue for a share and in some cases get it. This can lead to infighting and bitterness.
Many married people think, “If I die, my spouse will get everything and make all the right decisions.” Two things can go wrong with this strategy. First, your spouse could pass at the same time as you, such as in a car accident. Or he/she could pass away after you, without having a will in place.
Furthermore, spouses often remarry. This may allow an unknown person to spend your money in a way you don’t approve of, or in drastic cases, leave nothing to your kids. A will may partially help avoid this.
But a more secure way to avoid this is to set up a trust.
A trust is an account used to securely pass money to another person, such as a child.
Parents and grandparents often want to ensure their children’s security in case they die when the children are underage. Naming a guardian may not be sufficient, since money left to children in the will is still controlled by a Probate Court until the child reaches majority age. And even if the child’s name is on the title of inherited assets, they cannot make financial decisions until they reach the age of majority, so the Probate Court stays involved.
Setting up a custodial account, such as a Uniform Transfer to Minors Act (UTMA) account, or Uniform Gift to Minors Act (UGMA) account, can be useful because the person you name as custodian will manage it for the child until they reach the age of majority. But it does not ensure the court will not get involved if the assets are large.
A better way to manage this is by setting up a trust, and naming someone to manage it if you die or become incapacitated (a successor Trustee). This keeps it out of the hands of the court and lets you decide at what age the children will inherit the money, as well as if you choose, what they can spend it for.
Given that a will can be contested, and a surviving spouse can remarry and change his/her mind about how your money should be spent, a trust is a way to ensure your money goes exactly to the person you want it to go to, avoids probate, and is private.
If you want to retain the ability to change the parameters of the trust later, set up a revocable Living Trust. This means you, the Trustee, can revoke the terms and change them at any time. But a revocable trust is not completely protected from creditors, lawsuits, or Probate Court when you die. (Nor does it provide any protection from estate taxes, if that is an issue.) The only way to protect it from these possible concerns is to set up an irrevocable trust. This ensures that no part of the contract can change (even by you) and the money will be managed exactly as you set it up.
What if you become mentally incapacitated? For example, if you are in an accident and suffer a traumatic brain injury or get dementia. While no one likes to think that these situations can happen to them, being unprepared if it does make it even harder for your loved ones. And in these unfortunate situations, your will cannot help.
To prevent problems that can arise regarding your affairs if you are unable to make sound decisions, estate planners suggest you appoint someone to have Durable Power of Attorney (DPOA) for you. This is often a spouse or a relative but could be anyone.
You can also assign someone (the same or different person) as your durable POA to specifically handle your health care decisions should you become incapacitated. This is important if you are unconscious from an accident and need someone to make medical decisions for you. For example, should doctors conduct a risky operation to try to save your life, or see if you can recover without it? Or should they halt special medical machines that keep you alive if your quality of life is no longer what you would want?
For situations where your health and life are threatened, a Living Will is also helpful, but it is not the same. A Living Will is a document you create in advance (also called an Advance Directive) stating what kinds of treatment you want if you can’t make the decision. It helps doctors make decisions regarding your life according to your wishes. A Living Will gives these directives in advance. For situations not covered by a Living Will, a medical POA gives the decision to someone you trust.
If you have underage children, who will become their guardians if something were to happen to you and your spouse? This is often accidentally left out of a Will.
Designating a Guardian is the best way to handle this. Be sure to check with the person(s) you designate to make sure they want and are able to take your children if you die. Remember, even if you assign a Guardian, the money you leave in a will for your children may be controlled by the Court. To keep the Court out of it, you need a Living Trust. These Trusts become irrevocable when you die.
Sometimes a Will can be contested and even ruled invalid. Should this happen to you, a Letter of Intent can be influential in your favor, should part or all of your estate go to Probate Court.
A Letter of Intent states what you want to happen to your estate, often in broad terms, rather than specific terms, like a Will. It is not a legally binding document, but it can give important guidance to a probate judge if your will is contested and ruled invalid.
Did the above discussion overwhelm you? Start with an easy first step to get your feet wet: Assign beneficiaries to your investment and insurance accounts. With just a little effort, this gives you big results.
When you assign a beneficiary to an investment account, you state that the money in that account will transfer on death (TOD) to another person(s), without ever going into your estate. This means these funds go directly to the beneficiaries, bypassing your will or Probate Court. And once you complete your will, you may want to make sure that it agrees with your beneficiary designations!
Assigning beneficiaries has two advantages. First, it avoids conflicts that can arise if someone disputes your will. Second, it’s an easy first step with a significant impact on you and your heirs. Plus, you can always change them later if you change your mind.
No one likes to think about their mortality or loss of cognitive function. But to ignore it is just placing an undue burden on loved ones, especially at a time when they’ll be coping with the situation. The best thing you could do for your family is to be prepared for the unknown. So next time you sit around the table for a family dinner—look around and think about how having your affairs in order could be one of the greatest gifts you could ever give them.