Estate Planning Basics

Estate planning is the process of creating a plan to care for you and your loved ones and to distribute your possessions as you wish both during your lifetime and upon your death. It’s about giving what you want, to whom you want, when you want and in the manner you want. Equally important, however, estate planning includes planning for the financial support of you and your loved ones, along with planning for your children’s school and/or college, child care, medical expenses, and more, if you become disabled. In addition, estate planning encompasses retirement planning, gift and income tax planning and creditor protection planning. Estate plans enable you to reduce your tax liability, professional fees and court costs. Finally, your estate plan may enable you to transfer your wisdom along with your possessions.

If you have minor children, children with special needs, a house, other investments, or life insurance, it is the right time for you to start.

Probate is a legal process in which probate court transfers ownership of assets from you to your heirs. The term “probate” actually means proving the validity of a will. A will is not valid until proved so in court. Once the validity of the will is proved, the probate court administers the will under its jurisdiction. If there is no will, or the will is invalid, the court transfers title of your assets according to state law, called intestate succession. In addition to this death probate, there is also living probate, also known as guardianship, conducted when a person becomes incapacitated. So a more complete definition of probate is that it is the process in which a court takes control of your assets if you are no longer able to manage them yourself, either because of death or because of mental disabilities. Probate costs vary greatly among the states; nonetheless, probate is time-consuming and potentially expensive. For these reasons, avoiding probate should certainly be incorporated into the goals of an estate plan.

Joint tenancy with the right of survivorship is probably the most common form of estate planning and, to a certain extent, the simplest and easiest form. When the first co-tenant dies, the jointly owned assets are, by operation of law, distributed to the other co-tenant; thus, the assets avoid probate when the first co-tenant dies. But, compared with alternative forms of planning, joint tenancy may be, for many estates, the worst estate planning method of all. For most people, the primary reason for titling assets jointly to to avoid probate. The truth, however, is that joint tenancy merely postpones probate; it does not totally avoid it. For example, Mike and Mary own a home in joint tenancy. If Mike dies first, Mary will become the sole owner without the need for probate or other court action. However, when Mary dies, a probate proceeding will be necessary to transfer ownership of the home to her heirs. Please see more on joint ownership under the Joint Property section of this FAQs and the Joint Property link on the left for additional information regarding issues related to jointly held property.

Life is constantly changing, and so should your plan if it is to serve you properly. It is a good idea to review your plan every year to make sure it is still appropriate for you. If you aren’t sure how your plan works or what it means, it is a good idea to seek professional assistance in reviewing your plan. In doing so, it is important to make sure you choose a professional that is able to put complex principles into plain language. If you don’t understand your plan, you cannot be sure it serves your needs.

Typical basic estate planning documents include a will and a revocable living trust document, along with a number other documents regarding funding powers and healthcare powers, but much more can be included to ensure that your wishes are provided for.

A will is a document that designates whom you want to give which of your possessions upon your death. Basically, it states how to retitle your assets in the names of the people you designate in the will. It cannot, however, change the beneficiaries you have designated in your insurance policies, retirement accounts or annuities. Also, any property you own jointly with right of survivorship is not included in the assets you may designate in your will. See the Joint Property section of the website for more information about joint property. Finally, a will also typically designates your choice of guardian for your minor children.

A Revocable Living Trust (RLT) is a set of instructions for how to take care of and/or distribute your assets during life, in case of temporary or permanent disability, and after your death. It is a mechanism that allows you to direct how your assets are managed and distributed, to whom, when you want. Upon proper designation in your insurance policies, retirement plans, and annuities, an RLT also can direct how those assets are handled. It is called a revocable living trust because you may revoke it or change it at any time during your life. Essentially, you may be the trustee of the trust throughout your life, manage the assets exactly as you want, and receive the benefits from the trust during your lifetime. Then the person or institution you name as your successor trustee manages the assets and distributions of the trust according to your instructions in the trust document.

A power of attorney is a document that gives permission to someone else to act on your behalf. Powers of attorney generally are separated into two categories, property and healthcare, and can be effective immediately or “spring” into action upon your disability.

In choosing a will-centered estate plan or a living trust-centered estate plan, examine your goals and compare the key advantages and disadvantages of each type.

A will:

  • + Is Simpler
  • – Can be easily contested
  • – Guarantees probate and the attendant expenses, time delays, and publicity, as well as potential ancillary probates in other state probate courts if you own property in more than one state
  • – Can provide instructions only for the care of your spouse and/or your family after your death; it cannot provide for your care and your family’s care during your disability or incompetence

A properly drafted, fully funded living trust:

  • + Avoids both guardianship and probate
  • + Is private and not a matter of public record
  • + Is a legal contract that can cross state lines and control your property in multiple states
  • + Takes care of you and your family in case of disability
  • + Provides for the care of your spouse and/or family after your death
  • – May cost more up front
    An experienced attorney, CPA, or financial professional can assist you in additional comparisons specifically pertinent to your case

The benefit of taking the extra step to create and fund a trust now is that it can provide instructions for the care of you and your loved ones and the management of your assets and other affairs if you should become temporarily or permanently disabled (when you are mentally incapable of managing your affairs), it significantly reduces the probate process (and fees) upon your death, and it enables you to control the manner and timing of payments to your beneficiaries after your death. Finally, an RLT provides a mechanism for you to avoid a public court proceeding to determine need of and appoint a guardian in case of your mental incapacity, avoid a public court proceeding to distribute your assets upon death, and may provide your beneficiaries some degree of protection from creditors and predators.

Some people see expense and funding as drawbacks to trusts.
EXPENSE. One objection to a revocable living trust is that it is more expensive than a will. True enough. Wills have been priced very low for years by attorneys who count on reaping the probate fees in years to come. Executors of wills do not have to retain the attorneys who drafted the wills as the probate attorneys, but most do. A living trust-centered plan is only initially more expensive than a will. The cost of a will and its after-death probate administration almost always exceeds, by a large amount, the cost of a funded living trust and its private after-death administration.
FUNDING. Some people find it annoying to have to change ownership of their property to their living trusts. It can be time-consuming to have to determine what they own, how they own it, and how to fund each of the assets properly to the trust. But this process has to be done only once and, with the help of professional advisors, can be easily accomplished. If people think it is annoying for them while they are alive and well, think of what a problem it will be for their loved ones if they become disabled or die. The choice is this: People can either “probate” their own estates themselves while they are alive or pay the courts and lawyers to do it for them after they are no longer around to answer questions such as, “Where is the deed to the house?” Most people who have gone through the funding process, one asset at a time, report that they feel a great sense of relief and peace of mind knowing that they finally have their records in order.

Yes. A living trust document can be a very powerful estate planning tool, but a comprehensive estate plan should also include a pour-over will. Under the law, you can name guardians for your minor children only in a will, and a new will makes clear that the trust now governs your estate plan. A pour-over will also serves as a safety net. Once you create a trust, you must always remember to transfer your assets into the trust. If any of your assets are not in the trust at the time of your death, the pour-over provision in the will instructs your personal representative, or executor, to place them in the trust so that they can be managed and distributed according to your trust instructions. Any assets controlled by the pour-over will may have to go through probate. You should periodically review your trust-centered estate plan to ensure that all your assets are titled in the name of the trust or, in some cases, that the trust has been named the beneficiary of assets such as life insurance, IRAs and retirement plan funds.

This is one of the biggest misconceptions that people have with respect to living trusts and estate planning. A properly funded living trust avoids probate when you pass away. However, probate and the federal estate tax have nothing to do with one another. In order to save federal estate taxes, your lawyer must and usually will incorporate estate tax planning provisions into your living trust.