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Do I Need an Estate Plan?

Added by Jason D. Melville in Articles & Publications, Tax Law on October 27, 2017

A familiar phrase to all of us is “life happens.” The flipside to that phrase is also true: “death happens”. I know, it’s a bummer to think about it, but the best scientists agree that we will all die eventually. It’s a reality of the mortal world we live in that sooner or later we will need to take care of an ailing loved one or decedent’s assets, or that someone will be doing that for us. Rather than holding out for the discovery of the fountain of youth, a better course is to make some preparations so that our care and our assets are in line with our goals. It all boils down to the simple truth that it’s your life and your stuff so plan for them. The process of building a plan to prepare for life and death events is called estate planning. Do you need an estate plan? Yes you do.

Elements of Estate Planning
Generally, estate planning involves making decisions related to (1) your care and the management of your assets in the event you become incapacitated, and for parents, the care of your children in such an event; and (2) the care of your children, spouse or significant other and the administration of your assets at your passing. The estate planning process involves naming people that you trust from your family, friends and advisors to manage your affairs and the care of those you love.

Estate planning typically requires more than just a Will and will often include planning for financial, tax, medical, and related business issues with associated documents. Estate planning can also be an emotionally positive process as you put in place plans to care for those you love.

Getting Started
You can get your estate plan started by thinking through some basic questions and writing the answers down. Some questions to consider are:

  • Who do I want to take care of me, my assets and my children should I become incapacitated?
  • Who do I want to care for my minor children in the event I pass away?
  • Who should manage the affairs of my final medical expenses, bills, burial, and the distribution of my assets at my passing?
  • Who should manage my assets over time for the benefit of my children?
  • Who will manage and operate my business in my absence?
  • Will my spouse or significant other be cared for and receive the value of my business, investments and other assets?

The above questions are intended to help you see the benefit of planning now for future events and will assist your family in caring for you and your children in the manner you want and intend. With questions and answers in hand, you can visit with a qualified estate planning lawyer who will help you create a formal estate plan to carry out your goals and desires.

Why Prepare an Estate Plan?
Many people ask “why should I prepare an estate plan, won’t my spouse care for me?”, or “won’t all of my assets go to my spouse at my passing?”, or “I don’t have anything of worth, I don’t need a plan do I?” The reality is that everyone needs an estate plan regardless of whether they are married or have modest assets.

An estate plan will name someone to act on your behalf should you become incapacitated. A plan will also name an executor, or personal representative, of your estate to pay your final expenses, arrange for your burial and distribute your assets. A plan will name guardians for your minor children. A plan can also create a trust that you may want to establish for your children and name the trustee of the trust. Your plan can also provide for a significant other if you are not married; otherwise, a failure to plan may not include such persons under applicable state law.

Depending upon the value of your assets, an estate plan can potentially reduce, defer or eliminate an estate tax or other tax liabilities at your passing. A plan can also ensure that a business will continue and provide your spouse, significant other and/or children with the value of your ownership interest in it. A plan can also provide for the possibility that you are not survived by a spouse.

If you fail to put a plan in place, an estate plan will be created for you under the laws of the state of your residence. If you are incapacitated, most states’ laws defer to your spouse to manage your care. If you are not married, a judge will appoint a person to act on your behalf who may not be your first choice. Upon your death, your spouse, if married, will care for your minor children, and if you are not married, a judge will pick someone to do it. Additionally, your state will distribute your assets through a process called intestate succession, which generally means that your assets will pass to your spouse, and if you have none, then to your children – to the exclusion of a significant other. If assets pass to your children, they usually will be entitled to all of them at age 18 which may be younger than you would like. By having an estate plan, you have the control to determine your future care and the care of your family.

The Core Estate Planning Documents
An estate plan consists of several core documents that will provide a roadmap for your care in the event of incapacity and the care of your family upon your passing. The core documents are:

  • Will;
  • Durable Power of Attorney for financial matters; and
  • Living Will with a Durable Power of Attorney for Health Care.

A Will is the legal document that names (1) the executor, or personal representative of your estate who will manage your affairs and distribute your assets as directed in the Will; (2) names a guardian for your minor children; and (3) names the persons, charities, or others that will receive your assets and how they will receive them (i.e., either outright or over time through a trust established in the Will). Your Will controls the distribution of assets held in your name at the time of your death. Your Will does not control assets that pass by a beneficiary designation at death (i.e., life insurance, an individual retirement account, other benefits plans, or annuities), assets held in a trust, or assets held in joint ownership that pass under state law to a surviving co-owner. Such assets will pass by their respective beneficiary designation, trust terms, or terms of joint ownership.

Many people with minor children provide for the creation of a trust in their Wills for their children. The trust would be managed by a trustee for the benefit of the children and would provide for the use of assets for the children’s care and education until the children reach a sufficient age of maturity. Parents can tailor such a trust to meet the particular needs of their family.

A Durable Power of Attorney for financial matters allows you to appoint a trusted person (called your agent) to act on your behalf with respect to your financial affairs in the event you are incapacitated. If you do not have such a power of attorney and are unmarried, a judge will likely choose a person to act on your behalf called a conservator.

A Living Will, also called an advance directive, is a document that allows you to determine in advance the type of health care you would like to receive in your final illness. A Durable Power of Attorney for Health Care should be added to a Living Will to enable you to appoint a person to make health care decisions for you (other than those related to the care to be given in your final illness) in the event you become incapacitated. Without a Living Will and health care Power of Attorney, most states will defer to your spouse or a parent to make such health related decisions, and if you are not married, state law usually does not recognize your significant other and a judge will likely appoint someone to act on your behalf.

The Living Trust 
A living trust is an additional, elective estate planning tool you can use with the core estate planning documents. It is simply a trust you create while you are alive to hold title to your assets like your home, real property (whether owned outright or through a liability protection entity like a limited liability company), bank and investment accounts, and other assets. When appropriate to do so, assets like retirement accounts may be titled into a trust or made payable to a trust but care must be given to avoid potentially adverse income tax issues in doing so.

A living trust is fully revocable by you during your lifetime. Generally, you serve as the trustee of the trust – the person that controls the trust assets. You are also the person that benefits from the assets (the “beneficiary”) during your life.

A living trust’s main advantages are (1) centralized ownership and administration of assets; (2) avoidance of probate (the process of re-titling assets at your death through court supervision); (3) the ability to name a successor trustee that can assume the management of your assets without court involvement in the event of your incapacity; and (4) privacy, as a trust’s terms need not be filed of public record.

Upon your passing away, the terms of the trust become irrevocable and provide for the distribution of your assets. In that regard, a living trust acts partially as a Will substitute; however, even if you have a living trust you will still need a Will to appoint an executor of your estate, guardian for minor children and to provide for the distribution of assets you may not have titled into the name of the living trust while you were alive.

Because living trusts can be complicated to set up and properly fund with your assets, you should consult with a qualified estate planning lawyer to assist you with the creation of the trust.

Probate
Probate is the process of notifying the state court for the county of your residence that you have passed away and providing the court with your Will, if you have prepared one. The court will then officially recognize and grant powers to the executor, or personal representative, named in your last Will and supervise the transfer of your assets as you have directed in your Will. If you have no Will, then the court will appoint an executor of your assets and distribute your assets according to state law.

In order to change title to your assets held in your name at death, a probate is required to officially make the title changes. However, certain assets are not subject to probate such as assets that pass by beneficiary designation at death (i.e., life insurance, an individual retirement account, annuities, other benefits plans, and certain bank and investment accounts), assets held in a trust (like a living trust), or assets held in joint ownership that pass under state law to a surviving co-owner. Such assets will pass by their respective beneficiary designation, trust terms, or terms of joint ownership.

During the probate process, your executor will prepare an inventory of your assets, pay your final bills and expenses and distribute your assets as you have directed in your Will, or if you had no Will, then as directed by state law.

Most states provide for expedited procedures when your assets pass entirely to a surviving spouse.

The probate process provides the advantage of court involved and supervised administration of your assets and the formal payment and elimination of creditors’ claims. Disadvantages of probate include the potential delay in getting an executor appointed by the court, delay in carrying out the desired distribution of your assets, and costs related to hiring a lawyer to assist with the probate. A probate will usually cost more than the distribution of your assets under a living trust. Issues related to probate should be reviewed with a qualified estate planning lawyer.

Estate Tax Planning
A crucial part of any estate plan is to consider the potential impact of estate taxes at your death. A federal estate is imposed upon estates that have a net value of more than $5.49 million (current law). Your taxable estate includes everything you own at death including the value of retirement accounts and the death benefit paid out under life insurance you own (life insurance proceeds are usually paid out income tax free but count for estate tax purposes).

In addition to federal estate taxes, several states have their own independent estate tax. Idaho is not only great place to live but also to die in because it does not have a state estate tax (unlike our neighbors Oregon and Washington), but the federal estate tax applies to Idaho residents as outlined above. You should consult with a qualified estate planning lawyer and/or certified public accountant to discuss estate tax issues.

Preparing Your Estate Plan
Generally, you should consult with a qualified estate planning attorney to prepare your estate plan. An attorney can ensure that your plan is prepared properly, advise you on all of the key issues related to the plan, and structure your plan for potential estate tax issues. You, or your estate planning attorney, may also find it beneficial to consult with your insurance, financial, and accounting advisors to coordinate your estate plan and assets that will become subject to the plan.

You can also prepare an estate plan on your own using forms, computer software and/or books. If you follow this path, you should keep in mind that often such sources are very general in application as they are meant to be used in multiple states, they may not be accurate as to your state’s laws, they do not provide personal advice and counsel, and tailoring them to fit your needs and desires (i.e., the creation of trusts) may not be possible or difficult. Additionally, each state has technical rules regarding how legal documents like Wills and trusts are created, signed, witnessed and/or notarized that must be followed in order for the documents to be legally binding.

The cost of consulting with an attorney to prepare an estate plan varies and will depend in large part upon your facts and circumstances, whether estate tax planning is required, and the extent of the documents to be created to carry out your plan. Many estate planning attorneys bill for their estate planning services on a flat fee basis while others charge hourly rates. An attorney should clearly communicate his or her billing method to you before you begin.

Peace of Mind
Having an estate plan in place to protect yourself, your assets, and your loved ones will provide you with peace of mind. We may not be able to beat the odds and cheat bad health and death, but through proper planning, you can protect yourself and your family in the event the things we think will never happen do.