Estate Planning 101: Back to Basics
Estate planning is the process of designating who will receive your assets and handle your responsibilities after your death or incapacitation. One goal is to ensure beneficiaries receive assets in a way that minimizes estate tax, gift tax, income tax and other taxes.
I don’t have an estate plan; what would happen if I died?
It’s important to have an estate plan for several reasons. During your life, you want to ensure that you control your assets and that if you are ever incapacitated, your estate is controlled by a trustee that you have selected. When you pass away, you want to be sure that your assets are distributed to your beneficiaries in accordance with your wishes. This is especially important if you have charitable bequests, young children, or want to distribute specific assets to certain beneficiaries or in specific ways such as by age or in trust.
Can I opt for a will?
A will takes effect at death; it does not consider incapacity and medical choices needed during life. Unfortunately, neither does it ensure that your heirs will avoid probate. In fact, without a trust or beneficiary designation, a will can trigger a probate action. Generally, a probate takes anywhere from fifteen months or more (especially during COVID-19). Not only is it a long process, it is also expensive. The probate fees are statutory, which means that the fees are based on the gross estate, not net estate. For example, statutory fees for a one million-dollar estate are about twenty-five thousand dollars for the executor and twenty-five thousand dollars for the attorney, which would cost the heirs about fifty thousand dollars. Probate is waived if the estate is less than $166,250.
What is the Solution?
The trust is the centerpiece of an estate plan. It provides for incapacity planning for you during your lifetime, distributes your assets to your beneficiaries in accordance with your wishes, and avoids probate (so long as your assets are titled properly).
The trust allows you to appoint trustees to help manage the trust. While initially, you are trustee of your trust, if you are incapacitated or unable to manage your own financial affairs, your “trusted trustees” will have the legal authority to step in to manage your assets on your behalf. Without a trust, you would have to go through a conservatorship to have someone take over when you can’t manage your estate. In this process, the court appoints a conservator for you, who may be a complete stranger. Most of us would want to avoid this costly and impersonal process and appoint a spouse, family member, or friend for this critical role.
How about medical decisions and what is an advance health care Directive?
An Advance Health Care Directive is a document that gives someone (otherwise known as an “agent”) the legal authority to act on your behalf if you are unable to do so. This document allows you to give authorization to a parent, spouse, sibling, or friend to advocate on your behalf in medical decisions—per your instructions—when you cannot speak yourself. You can make detailed decisions for your agent to follow such as whether you would like to be a donor, what type of treatments you would accept or refuse, and end of life decisions.
Can I Update My Will, Trust, or Advance Health Care Directive?
Yes, your plan can be updated whenever you want and as many times as you want. Beneficiaries, trustees and agents can change over time as we navigate through life.
Conclusion
These days there are enough issues to keep you awake at night—your estate planning doesn’t need to be one of them. This is a good time to create, review, and/or update your estate plan.