What is estate planning?
Estate planning is simply the process of arranging your affairs so as to achieve the goals you have set for your loved ones in the event of your disability or death.
Good estate planning involves setting your goals, identifying the financial resources available to meet those goals, then employing the proper tools to help your achieve those goals.
It's a lot like planning for an evening out when you have young children. First, you have to find a reliable babysitter. If you're lucky enough to have one, good. If not, then you need to ask other family members, friends, neighbors, etc. for a recommendation. Then, you need to arrange to get the babysitter to your home and back again. You also need to make sure there is food in the house, and diapers, and all the other supplies that might be needed while you're away. You also have to give the babysitter some money in case something needs to be purchased, and you need to have emergency telephone numbers available in case of an accident.
Finally, you need to instruct the babysitter as to your rules and regulations; i.e., no friends over, no loud music, no talking on the telephone, no smoking, no alcohol or drugs, what television shows the kids can watch, what time they have to go to bed - the list goes on and on.
Estate planning is essentially the same process, only on a somewhat larger scale. After all, you'll be concerned with somewhat larger issues, such as whether your spouse and children have enough income to maintain their standard of living, whether your spouse will have the cash needed to put the kids through college, or whether there will be enough left over to make those extra cash payments to your elderly parents. Everyone has somewhat different goals, but that's what estate planning is all about - identifying those goals and developing a plan to achieve them, even in the event of your disability or death.
Do I need lots of money to have an estate plan?
Of course not! Estate planning is about taking care of your loved ones if you're not around to do it on your own. Sometimes it's about arranging your affairs to reduce unnecessary expenses upon your death, sometimes it's about taking care of a particular loved one with special needs. Sometimes it's about how your property is owned. Sometimes it's about making sure that your beneficiary designations are done properly on your 401(k) plan, your IRA, your company pension plan, your annuities, and your life insurance. Sometimes it's about making sure that your minor children will be raised and cared for by the right people in the event both you and your spouse die simultaneously. Sometimes it's just about having enough life insurance to make up for any shortfalls in your cash.
Whatever it's about, the goal is to take care of your loved ones. Money is simply one means of accomplishing those goals. But, it's important to keep in mind that money is simply a means to an end, it's not the end in itself.
What happens if I die without an estate plan?
If you die without an estate plan, you're leaving everything to chance. Simply put, you won't have any idea what will happen to your loved ones in the event of your death or disability
That's not to say that you're loved ones won't survive or even prosper after you're gone. The laws of all 50 states provide for the orderly settlement of estates even though there may not be a Will or other legal documents in place. While those laws are designed to make sure that your creditors are paid and that all remaining property is distributed to the "natural objects of your bounty," they certainly don't take into consideration the particular needs of any of your loved ones, nor do they seek to minimize estate settlement costs or the delays often associated with probate.
The only way to be satisfied that you have done all that you can do is to take the initiative and develop an effective estate plan.
What exactly is probate?
The term "probate" means the process of legally establishing the validity of a Will.
Every state gives its citizens the right to transfer property during life or upon death to whomever they wish. For gifts made during one's lifetime, there is little need to validate the gifts because the donor is fully able to do that on his or her own.
However, for transfers taking place upon death, the donor (i.e., the decedent) is no longer able to say who should get his or her property. That opens the door for many unscrupulous individuals to lay claim to the property through all kinds of cockamamie stories, none of which can be proved or disproved very readily. Here's a simple example that happens all the time - assume that Bill dies. Jim, the next door neighbor walks in and claims Bill's golf clubs, saying that Bill promised the golf clubs to him if he died. There's no way to know if Jim is telling the truth because Bill can no longer speak for himself.
In order to provide for an orderly transfer of property upon death, all 50 states provide that such gifts must be in writing, the writing must have been signed by the decedent, and the decedent's signature must have been witnessed by two disinterested people. In addition, the donor must have been at least 18 years of age at the time of the writing, and he or she must have been able to understand the nature of his or her actions; i.e., the donor must have been of sound mind and not under the undue influence of another person.
If those requirements are met, then there is a reasonable basis on which to establish the validity of the gifts by the decedent. As you might guess, these requirements are essentially the requirements for a valid Will.
But, complying with the requirements for a valid Will when the document is signed is not enough. When you die, your loved ones and other interested parties will want to know that the document purporting to be your Will is, in fact, your Will and not some forgery. Even if it is a document you signed, they will want to know that you knew what you were doing when you signed it and that you weren't under the undue influence of some other person.
That, then, is what the probate process is all about. It's the effort by the state to insure that a document purporting to be your Will is actually your Will. The law of most states requires that anyone having possession of a document purporting to be the Will of a decedent must submit that document to the probate court within 30 days after the decedent's death. The court then schedules a hearing on the admission of the Will and sends notification of the hearing to all interested parties. If no one objects to the admission of the Will, then the Will is admitted to probate and it then governs the distribution of the decedent's property from that point on. If anyone objects to the admission of the Will, then a trial is scheduled.
Can I avoid probate if my property is jointly-owned?
Yes, jointly-owned property with rights of survivorship passes automatically to the surviving joint owner. It does not pass under your Will and, therefore, it does not go through probate.
In addition, there are other types of properties that do not go through probate. For example, life insurance death benefits are payable directly to the beneficiaries designated under the insurance policy. The same is true for retirement plans and annuities. The money held in a 401(k) plan or an IRA is paid directly to the beneficiaries designated under those plans.
The only property that passes through probate is property that is solely-owned by you at the time of your death. That property does not have a designated beneficiary, so a Will is used to indicate your desired beneficiary for the property. All other types of property, as mentioned above, have a built-in beneficiary to receive the property upon your death.
Do I need an attorney to prepare my estate plan?
It's certainly a good idea to have a qualified estate planning attorney assist you in articulating, designing and implementing your estate plan. If nothing else, you should at least consult with an attorney at some point, even if only to review your plan and the documents you may have prepared yourself or purchased over the internet.
Estate planning is often full of complicated issues requiring an expert knowledge of probate laws, property laws, inheritance laws and federal estate tax laws. Too often, these issues are never addressed until after the fact when complications arise. At that point, it is almost always too late. The better practice, by far, is to have a qualified estate planning attorney or other professional review everything for you.
How much does an estate plan cost?
There is no way to answer that question because there are just too many variables. Many attorneys and other professionals charge for their services on an hourly basis. Some will charge a fixed price based upon the size and composition of your estate and the type of documents involved. A simple Will (one that does not contain tax provisions) may only cost a couple hundred dollars. A complex estate plan with revocable and irrevocable trusts may cost several thousands of dollars.
Most attorneys will provide a free initial consultation. You should use that time to ask about fees and to inquire about how much your total estate plan might cost. If your attorney charges by the hour, the more time you invest in locating relevant documents and putting your wishes in writing, the less preparatory work your attorney will have to do. This should go a long way toward reducing the final cost of your estate plan.
What are some typical estate planning documents?
There are several estate planning documents that can be used in connection with your estate planning:
• Last Will and Testament
• Revocable Living Trust Instruments
• Powers of Attorney
• Health Care Directives
Other documents that are sometimes used include the following:
• Family Limited Partnerships
• Irrevocable Living Trust Instruments
• Charitable Trust Instruments
Can I prepare these documents on my own?
As stated above, there is no legal requirement that you retain the services of an attorney to prepare these documents for you. You can prepare them on your own. You can also buy them over the internet for a reasonable price.
However, without the advice of a trained professional, you can't be sure that the documents you create will do the trick. Even if you buy the documents over the internet, you can't be sure because internet companies are very quick to point out that they do not give legal advice.
You can do yourself a favor, however, by doing your homework first. Learn as much as you can about estate planning and how it should apply to you. You can even prepare draft documents yourself or buy them over the internet. But, in any event, have them reviewed by a qualified estate planning attorney before you sign them. For the cost of a few hundred dollars, you may save your loved ones thousands of dollars after you're gone.
How often should I review my estate plan?
Your estate plan should be reviewed whenever there is a significant change in your personal or family situation. The following are typical events that often warrant a change in an estate plan:
• Births - When a new child or grandchild is born, you may want to review the distribution provisions of your estate documents. A trust may also be warranted if you don't already have one.
• Disability - If a family member develops special needs (such as disability, illness or other infirmity), you may need to make special provisions for that person.
• Deaths - The death of a family member, or an executor, personal representative, guardian, or trustee may also require changes in your estate plan.
• Marriage - Your estate plan should also be reviewed in you should marry. If a child or other beneficiary should marry, it may also require changes in your estate plan.
• Remarriage - If you remarry, you may want to consider a trust for your children or grandchildren. If you happen to predecease your spouse, your property may not pass to your children or other intended beneficiaries.
• Non-Citizen Spouse - If you marry and your new spouse is a non-citizen, there are different rules that will apply with respect to federal estate taxes. Special provisions under the tax laws may have to be included in your estate plan.
• Divorce - If you are divorced, you will want to review your estate plan in order to know the effect upon your other designated beneficiaries, particularly your children. For example, you former spouse may be named as a beneficiary on your retirement plans, or named as a joint owner of some of your property. There are many things to check in your estate plan when a divorce occurs.
• Graduations - You may want to take a close look at the cost of your child's or grandchild's education upon graduation from high school. Is your plan keeping pace with the continuing rise in the cost of a college education? You may want to reconsider some of the options available to you.
• Changes in Domicile - If you move to another state, the laws may be somewhat different. It's important that you have your estate plan reviewed by a qualified estate planning attorney from your new state just to make sure that everything is in compliance with the new laws. Also, you may want to consider redoing your estate planning documents so that the laws of your new state will apply. It's probably a good idea, too, to use witnesses from your new state so that your estate won't have to incur the cost of bring in your witnesses from your old state, if that is required.
• Changes in Size or Composition of Estate - If there is a substantial change in the size or composition of any of your assets, you should review your estate plan. For example, if you sell your business, then you may want to eliminate references to your business in your estate planning documents.
• Charity - If your loved ones have sufficient resources of their own, you may wish to benefit a favorite charity.
• Medical Expenses - Long-term medical care can devastate one's assets in a relatively short period of time. If someone in your family develops serious health problems, you may want to review your estate plan.
• Tax Laws - There always seem to be changes in the tax laws, some of which can have a significant impact on your estate plan. It's always a good idea to determine what impact any tax law change will have on your estate plan.
These are just a few of the many events in your life that may trigger a need to review your estate plan. At the very least, however, you should plan to review your estate plan every two to three years.