What Is Estate Planning?
You Have an Estate
Estate planning is about managing and distributing your estate and providing for lifetime management of your affairs if you are mentally incapacitated.
Believe it or not, you do have an estate. The word “estate” doesn’t mean a big fancy house. It means a collection of stuff. Your stuff, that is your property, is your estate. Your estate includes your home, other real estate, clothes, jewelry, money, investments, life insurance, and anything else you own. It doesn’t matter how much or how little, you have an estate and you can’t take it with you. And you can’t manage it if you are incapacitated.
What is Estate Planning?
When you can’t manage your estate any more, and it’s when not if, you need to leave instructions for the management and distribution of your estate.
You need to leave instructions for who you want to manage it during your lifetime, who you want to receive something, when you want them to receive it, and how they are to get it. Plus you want to do all of this without hassles, probate, taxes, and unnecessary expenses.
That is estate planning in a nutshell.
What Happens if You Don’t do Estate Planning?
You have two choices…
- Accept the Government’s default estate plan by doing nothing
- Create your own estate plan
The Government’s Plan
When you are unable to manage your own legal, business, or healthcare matters (mental incapacity), hopefully somebody you want and trust steps up and helps. That person will have to go to court and get a guardianship. A guardianship allows them limited power to manage basic affairs. All too many decisions, like selling real estate or other stuff, require the Judge’s approval.
A guardianship is as expensive or more expensive than a complete estate plan!
Guardianship is overseen by a court, time consuming, expensive, and public. Guardianship can be difficult to end even if you completely recover.
And, if nobody steps up, Adult Protective Services may get involved, putting you and your money under full government control.
Your final estate is subject to the State’s default distribution plan. Most people don’t like the terms and conditions of this plan. And it must be under a Judge’s Supervision.
The State’s default plan is call intestate succession. In other words, if you don’t create a Will or Trust, the state has created one for you. Even when the wishes are known, they are ignored, and the law applies.
Here are the highlights (in Arkansas):
- Spouse gets 1/3rd of the personal property like furniture and cash
- Spouse gets a 1/3rd life estate in real estate
- Children get 2/3rds outright which can destroy access to government benefits like Medicaid or SSI
- Children over 18 get their distribution in hand. They can squander it as them please.
- Children under 18 get their money in a court supervised trust. Then when they turn 18, the money is paid to them.
- Every step of the process requires a Judge’s signature.
- Takes at least 6 months and more typically 9-12 months
Your Estate Planning
Good estate planning is more than just deciding who gets what when.
Good planning includes:
- Instructions for passing down values, like religion and education, in addition to giving your stuff away
- Incapacity planning. You leave instructions as to who will manage your financial, legal, business, and healthcare matters when you become incapacitated, even for a short time, like after an auto accident.
- Naming a guardian for minor children
- Making sure any family members receiving government benefits get the benefit of your gifts without losing those government benefits like Medicaid and SSI
- Protecting loved ones with an addiction – alcohol, drugs, gambling, etc. – from themselves
- Safeguarding loved ones with credit problems from their creditors
- Securing loved ones that are irresponsible with money from themselves
- Providing for the smooth transfer of your business interests
- Minimizing court costs, attorney fees, taxes, and other expenses
- Keeping your family out of court for guardianship and probate
- Ongoing review of the plan. Planning is not a one time, set and forget event. Every 3 to 5 years you should dust it off and review it. In case of a major family event, you need to review and update your estate plan.
Everyone Needs an Estate Plan
Estate planning isn’t just for the elderly, retired people, and wealthy!
We can’t predict when accidents will happen or major medical incidents will occur.
Though the “wealthy” tend to plan more than those with more modest means, those with modest means probably need planning more. The people with modest means can’t afford to lose as much as the “wealthy.” The middle class has less wiggle room for losing 6-10% of their total estate to fees and costs.
Your Estate Plan
Begin with the Core – A Will or Trust
A Last Will and Testament nominates and Executor, names guardians for minor children, and provides instructions to the court on the final distribution of your estate.
A Last Will and Testament does not prevent Probate!
Any assets titled in your name must pass through Probate before the property, real estate or otherwise, can be given to your heirs and other people you want to receive things. And, if you own property in other states, your family can look forward to probate in each of those states as well.
They can expect probate to take 6 to 9 months. Sometimes it takes years, especially if there are disputes or complex estates. They can expect 6%-10% in attorney and executor fees. Probate, except in rare cases, is open to the public. That’s right, anybody can see probate records and know how much your family is getting and who is getting what.
In summary, probate is a public, court controlled process that is expensive and takes a long time. The court controls the process, not your family.
The good news is that not everything goes through probate. Property that is jointly owned with a right of survivorship does not go through probate. Accounts with payable on death setup do not go through probate. Retirement accounts, investment accounts, and life insurance with the beneficiaries properly named do no go through probate. If you haven’t done these things properly, the property will have to go through probate.
If you name a minor child as the beneficiary, then the court will often order the money to be held in trust until they are 18. Then they will get it outright. And the court may force a guardianship for the minor child.
But, there are problems with joint ownership, especially with your children and others. That property is subject to their creditors, the IRS, and lawsuit judgments against them.\
For the above reasons, many people and planners prefer a trust.
For probate avoidance, tax planning, and more, the most common type of trust is is the revocable living trust. Revocable means you can change or even do away with the trust. Living means you establish it now.
Unlike your Will, your trust doesn’t stop when you do. Property can stay in your trust for years after you are gone. The trustee can continue to manage the property for the benefit of your children and others as you see fit, not as the court and law see fit. Your trust can protect children with addictions, children with credit problems, children with marital issues, and children receiving government benefits like Medicaid or SSI.
A Revocable Living Trusts costs more in the beginning than a Last Will and Testament, but it can avoid court interference with your private family affairs. The Trust will also keep your private family affairs private. Many people consider a trust to be a bargain in the long run.
Estate Planning helps you organize your estate.
When you finish planning, you will have a record of what you own, where it is, and how it is owned. Your family won’t have to go on a scavenger hunt to find everything. It will also force you to look at your beneficiary designations and correct any mistakes.
The Best Time to Estate Plan is Now!
While this is not an easy topic to think about, it is so very important to get done as soon as possible. You can’t predict when an accident or major medical incident may occur. You have people relying on you for their support and well being.
Many people and families are caught off guard and ill prepared in case of emergency.
Don’t wait. Prevent Probate.
You can always change your plan later, but it is very important that you get something in place now.
The Greatest Benefit
The greatest benefit of planning is gaining peace of mind.
Knowing that you have done all you can do to protect yourself, your family, and your hard earned property will give you and your family a new found sense of peace of mind. This is a very thoughtful and generous gift to give your family.
You now have two choices:
- Do nothing and accept the Government’s default plan for you and your estate
- Do something, control your estate, and gain peace of mind
Given the choice, and the choice is yours, would you rather be in control or let the court be in control? Would you rather these affairs be handled privately by your family or publicly by a court? Do you want to control who gets what, when, and how much? And for your young children, if you have any, do you want a say in who raises them and controls their money?