Estate Planning involves setting up a plan that establishes who will eventually receive your assets. It also makes known how you want your affairs to be handled in the event you are unable to handle them on your own for any reason. It’s a complicated process, and it can definitely feel overwhelming. There are many components to Estate Planning, and while there’s a common misconception that it’s just about your finances, the truth is there’s a lot more to it. Before you begin to take action on your estate plan, it's important to understand the key topics that may arise as you address your specific needs.
Who Needs an Estate Plan?
Short answer: Everyone. It’s easy to try and convince ourselves that we don’t need an Estate Plan. But the reality is, we would all be better off if we were planning a little more for our future. You don’t need to be wealthy, or elderly or even have a specific amount in your bank account to justify the need for a valid Estate Plan. If you are over the age of 18, you should start thinking about creating a plan. Even if you don’t have a lot of assets, your Estate Plan is a guarantee that everyone will know what your wishes are. Health directives and long-term healthcare wishes are perfect examples of this – if you were ever to become incapacitated and couldn’t make your wishes known, your Estate Plan will speak for you, so your loved ones don’t have to make unthinkable decisions or wonder what you would want.
Work with an attorney or tax advisor
It's important to work with an attorney and possibly a tax advisor on your estate plan. The attorney's role will include guiding you through the creation of fundamental estate planning documents. These may include a will, health care proxy, and durable power of attorney. The tax advisor can help you with any associated tax issues.
The good news is that you've probably already done a little bit of estate planning - you just may not be aware of it. If you've designated beneficiaries for your retirement accounts, you've started the estate planning process. Ditto if you've picked a guardian for your young children - even if you've not yet formalized it - or compiled a list of all of your household's liabilities and assets.
Most Common Estate Planning Documents
Several documents will make up your Estate Plan. Each is important in its own way and together they form a powerful representation of your final wishes. When you meet with your estate-planning attorney, they will make recommendations about your estate plan and that will help determine which documents you need.
Guardianship
States what you want to have happen and who you want to care for your children or any other dependent you’re responsible for after your death or in the event you’re no longer able to care for them. Most often, instructions for guardianship will be included in a section of your Will.
Will
A legal document that expresses your last wishes for distribution of your property or other assets.
Trust
A legal three-party fiduciary agreement that allows the first party (the Settlor, also may be referenced as Trustor or Grantor) to give the second party (the Trustee) rights to hold assets and property on behalf of and for the benefit of the third party (the Beneficiary).
Financial Power of Attorney (POA)
A legal document that gives someone the power to handle your financial affairs.
Durable Power of Attorney (POA)
A variation of a Financial Power of Attorney, which is a document that gives legal rights to another person so they can handle any of your non-health or non-medical affairs. “Durable” simply means that even if you become incapacitated, the POA remains in effect.
Advance Healthcare Directive (AHCD)
Also sometimes referred to as a Living Will or a Medical Power of Attorney. An Advance Healthcare Directive directly states what, if any, medical actions should be taken if you become incapacitated and unable to make your own decisions.
Once your estate-planning documents are drafted, destroy any older versions of them. You must also keep the documents in a safe place, either in a home safe or in the top drawer of a secure file cabinet in your home. Notify your executor of the whereabouts of your estate-planning documents, and provide copies of the relevant documents to your executor, agents for powers of attorney, and the guardian for your children. When you hand off these documents to your various agents, it's also a good time to discuss your wishes with them.
creating an estate plan
Estate planning can help establish a platform you can fine-tune as your personal and financial situations change. The key question to ask yourself is: How do you want your assets distributed if you die or are incapacitated?
Gather your assets. Inventory everything you own, from cars to collectibles.
Protect your family. Think about if you have adequate life insurance to leave your family in a position where they could maintain the life you currently lead.
Determine the plan that’s best for you. Decide what type of Estate Plan you need.
Choose who you would like to be guardian of your children/pets/self. If you have children or pets, or if you care for another loved one who cannot care for themselves, you want to choose a guardian. You can also name the person you would want to make medical and/or financial decisions on your behalf should you ever become unable to do so for yourself.
Determine and establish the necessary directives. There are several directives you should include in your Estate Plan, including but not limited to:
Durable Power of Attorney
Medical care directive
Limited Power of Attorney – LPOAs are less commonly used (Durable POAs are more frequently the norm), though an LPOA can be appropriate in some instances.
Name your Beneficiaries. Some documents and accounts will have Beneficiaries already designated. These could include retirement plans and life insurance policies, to name a few. But there are other assets you should note in your Will or Trust if you’d like to leave them to a specific person. If there is an opportunity, you should name contingent Beneficiaries. Keep in mind that Beneficiary designations will only go into effect after you pass, so if you become incapacitated and unable to make decisions, you need to have prepared for more than simply naming Beneficiaries.
Find a trusted partner. Explore your options for creating your Estate Plan. This can be face-to-face with an attorney or you may choose to use another service provider. You have options, but some are going to be much more expensive than others. If you don’t have an overly-complicated estate, working with a partner like Trust & Will could be the perfect solution to starting on the path of Estate Planning.
Create your plan. If you’re using an online program to create your Estate Plan, be sure to go through all the steps and finalize everything.
Sign and notarize your Estate Plan. Don’t forget to check how many witnesses your state requires.
Notify your Executor. It’s a good idea to let the person you chose to be your Executor know of your intentions.
Store your Estate Planning documents. Put your Estate Plan in a safe place where your loved ones can easily find it. A fireproof safe is a good idea.
Update as needed over time. There isn’t a hard rule about when you should update your Estate Plan, but a good rule of thumb is try to update it whenever you have a major life event (birth of a child, death of someone important to your plan, marriage, divorce, etc.). And if you find you haven’t had any life events in recent years, try to review and update as needed every 3 - 5 years.
Mistakes to Avoid
Take caution when developing your Estate Plan. There are many mistakes that could result in delays, inaccuracies or other misunderstandings. Some of the common mistakes people make along the way include:
Not having an official plan
Not updating a plan over time (at major lifetime events)
Not making arrangements for if they become incapacitated (disability or long-term care)
Improper ownership of assets (how easy will it be to pass assets on)
Not including charitable gifts
Not appointing a guardian for children or others who would need their care
Underestimating the implication of taxes
Not having liquidity of assets
Not making gifts during their lifetime to reduce the value of the estate after passing (tax advantages)
Putting their child’s name on the deed to property (potentially huge tax implications)
Estate plan vs. will
A will is a legally binding document that contains information about the distribution of assets after your death. Also, you can appoint guardians through a will to look after your relatives who need assistance due to old age or infirmity. An up-to-date will ensures that your assets will be distributed according to your wishes, and that your loved ones will not face financial hardships after your death.
An estate plan, on the other hand, is a more broad term. Estate planning is the process of arranging the distribution of assets in a way that results in maximum benefits to the beneficiaries. An estate planning attorney can help you in creating a plan that ensures that taxes and associated expenses are minimized. With an estate plan, you can give direction regarding additional matters that cannot be handled by a will — even if they are mentioned in a will.
Will vs. trust
As stated above, a will is a legally binding document that contains information about the distribution of assets after your death.
A trust is a legal entity, existing for the sole purpose of protecting the assets in your estate. Typically, trusts are recommended for people with significant assets, in part because they can be expensive to create and administer, often upwards of $5,000. A trust will cover your estate’s finances and allow the details of your finances to remain private, as a trust passes outside of probate.
While a will determines how your assets will be distributed after you die, a trust becomes the legal owner of your assets the moment the trust is created. There are numerous types of trusts out there, but an irrevocable trust is most relevant in the world of personal estate planning.
Irrevocable Trust
As the name implies, an irrevocable trust cannot be revoked once it is created; in other words, if you put property in the trust, you cannot take it out. This is ideal for people who want to avoid probate and keep the details of their estates private. (Wills are public record.) An irrevocable trust also allows you to make more detailed provisions regarding the use of your estate, as well as offers you protection from creditors or potential litigants.
For many people, however, the number one reason for creating an irrevocable trust is the tax advantage. If you have a trust, the first $11.4 million in assets ($22.4 million for a married couple) are not subject to estate taxes. You can also gift an additional $11.4/$22.4 million tax free. If your estate is large, this setup creates an attractive tax savings.
Few people like to think about their eventual demise, but the fact is, whether we like it or not, we have an expiration date in the future. Think of it this way: deciding how you want your worldly belongings and assets distributed will make it easier for your loved ones to move forward with their own lives when you’re gone.
SUZAN L. PRUTER
PRUTER LAW GROUP, PLLC
Suzan, whose father was a lawyer and an active member of the American Trial Lawyers Association, grew up in an environment that included lawyers, judges, and even Supreme Court Justices in California - so becoming a lawyer was in her nature. She earned her Bachelor of Arts in Communications from the University of Arizona and graduated cum laude from Florida Agricultural & Mechanical University College of Law. Before finding her passion in Estate Planning, Suzan practiced as a certified legal intern in the Criminal Defense Clinic and Children’s Legal Services, however it was her own personal experience of dealing with inadequate estate planning that fueled her passion to where she is today. It’s never too early to begin planning for life’s uncertainties. Comprehensive estate planning benefits all involved, giving you assurance and peace of mind that your hard-earned assets and possessions will remain with your loved ones. At Pruter Law Group, PLLC, we provide you with guidance for a fulfilling future.
