The Components and Importance of Estate Planning
Many people do a very good job of funding their retirements as part of their financial planning, but neglect to address the disposition of their assets at the time of death. There are six important components to an estate plan.
1. THE WILL. The first and well-known component of an estate plan is a will. A will determines two things. First, it sets forth who is to step into your shoes as your “personal representative” in order to pay your bills and distribute your assets. Second, it instructs the personal representative how to go about it. In the absence of a will the state decides both who the personal representative is and how the assets will be distributed.
Unless the will states otherwise, your estate is likely to be required to have to be administered in an expensive, protracted, court-supervised manner. Further, your personal representative most likely will have to post a bond, the cost of which depends on the size of the estate and the personal representative’s personal credit score. We remind our clients that the relatively low cost of a will is well worth it because the will can waive the expensive bond requirement and formal probate process. If you have a trustworthy personal representative nominee, do you really need the state to supervise him/her and require him/her to post a bond and be subjected to a credit check? Knowing that a loved one is going to have to take the job, shouldn’t you make it as easy and least intrusive as possible?
Wills are not only important for older folks, but also for families with young children. In addition to providing for the children financially, a will can nominate a person or couple to take over as the guardian of the children. In the absence of a will, it is up in the air as to who would take over parenting, and the final decision would be made by the state after potentially-divisive court proceedings during which the children are in limbo. This is not a decision most young parents would want to leave unresolved. It is simply too important.
2. TRUSTS. A trust is a legal entity separate from the person who forms it that holds assets for beneficiaries. There are several types of trusts that are available for consideration, but most middle class families are most interested in revocable trusts. These are also known as living trusts.
The primary benefits of a living trust are that you can name a trustee of your choice to financially care for you with your own assets in the event you become incapacitated on either a temporary or permanent basis. Spouses are often named with a second-choice nominee as well. At the same time you can provide the trustee with discretion to use your assets to provide for your spouse and children during the period of incapacity.
When you die your trustee can step in and provide for your family by using the assets you placed in the trust either during your lifetime or in your will. In doing so, the trustee is obligated to follow the specific instructions you placed in your trust to provide your own personal guidance. For example, you could decide to instruct your trustee to divide the trust by the number of children you have and distribute funds to the children to pay for their education. The trustee can then be instructed in the trust instrument to distribute the funds to them when they reach certain ages or achieve certain milestones of your choosing.
If you go through the relatively simple steps requires to place title to your assets in your trust, probate can be entirely avoided. If you do not do this, the probate process can nevertheless be made simpler and less expensive by virtue of your creation of the trust. You may want to use what is referred to as a “pour-over will” to have the probate process simplified to accomplish pouring over of your assets into the trust for handling pursuant to your trust instructions.
In addition to living trusts, irrevocable trusts are available to shield certain assets that you may want to irrevocably set aside for your chosen heirs. These assets are shielded from your creditors and the beneficiaries’ creditors, and can be used in a legal and legitimate manner to minimize estate taxes. Of course, you must be mindful of the irrevocable nature of these trusts.
It is also possible to create a trust within your will, referred to as a testamentary trust. However, the assets you place in a testamentary trust do have to go through the probate process.
Finally, families with beneficiaries with special needs may benefit from the establishment of a special needs trust which can help provide for a disabled child or adult without disqualifying him or her from benefits he or she may be entitled to under federal and state programs.
3. POWER OF ATTORNEY. A power of attorney is a document which designates someone, such as a spouse or adult child, to step in and manage your finances in the event you become incapacitated. These are also important for single persons who do not necessarily have a clearly-identified candidate for the job. You are given a great deal of flexibility in determining the amount of discretion and guidance you give your designee, referred to as your attorney-in-fact, in managing your affairs in the event of your incapacity. You can even authorize the attorney-in-fact to nominate a person of your choosing to serve as your guardian and/or conservator in the event the appointment of one is required. If you don’t let you wishes be known in your power of attorney, a court would have to decide who should be appointed, and it may not be the person you would choose.
4. HEALTH CARE DIRECTIVE. Although most medical providers make available a standard-form boilerplate health care directive, our practice in most cases is to dovetail a customized Health Care Addendum with the Power of Attorney. The Health Care Addendum serves two primary purposes. First, it names someone you choose to speak for you when you cannot speak for yourself due to a debilitating medical condition. For example, you could name your spouse, a parent, a sibling or an adult child to step in and make your wishes known and ensure they are followed. Second, your Health Care Addendum specifically sets forth your philosophy and wishes as to whether and the extent to which heroic measures should be taken to keep you alive in the event of a grave illness or injury. Although anyone can gain peace of mind by having a Health Care Addendum, they are particularly popular among folks who would not want a machine to keep them going when there is no reasonable chance of recovery. Keep in mind that so long as you can communicate your wishes, you can continue to do so even if it overrides your Health Care Addendum.
5. BENEFICIARY DESIGNATIONS. Beneficiary designations occur by virtue of written decisions you make concerning life insurance policies, retirement accounts and bank accounts. Most people are familiar with these as relates to life insurance policies, but beneficiary designations are also available on retirement accounts and bank accounts. It is easy to make these designations; all it takes is obtaining, completing and sending the account administrator the correct form.
It is possible to make a trust the beneficiary and thereby have the assets distributed pursuant to the terms of your trust instrument. It is important to remember that beneficiary designations override the distributions set forth in your will.
6. REGULAR REVIEW AND REVISION. It is not enough to simply prepare your estate plan and put it in a file cabinet. It is important to review your estate plan from time to time (we recommend an annual review) and document any changes you require. Amendments to a will are referred to as a “codicil.” Codicils can be prepared at a low cost but must be signed with the same formalities as are required in signing a will.
It is also recommended that you keep (and regularly update) a detailed itemization of your financial assets so that nothing gets missed when it comes time for you persona l representative to collect you assets for distribution.
COODIN & OVERSON, PLLP assists clients desiring to formulate and document their estate plans. Give us a call today at 651-209-1155 to schedule a free initial consultation
© Paul Overson 2015