This article discusses the importance of estate planning and highlights key questions and considerations. It emphasizes the significance of creating an estate plan to determine asset distribution, management, and decision-making after one's passing. It also explains the differences between wills and trusts, the probate process, and the components of a comprehensive estate plan.
When you pass away, your estate will be distributed to your heirs in one of two ways:
- In accordance with your state's intestate succession laws; or
- In accordance with an estate plan that you put in place while you were alive.
Your state's intestate succession laws will consider neither your wishes for the distribution of your estate nor what is actually best for your loved ones. While having an estate plan will allow you to distribute your assets in a manner that you see fit, based on your personal desires and your family and loved one's needs.
The estate plan you create should ultimately address the following three questions:
- Who will receive your assets?
- How will your assets be received (i.e. outright or in trust)?
- Who will manage your estate when you are unable?
- Who will handle the distribution of your estate after you pass away?
The most important thing is that by creating an estate plan, you get to decide how all of those questions are answered. That said, here are the answers to some other very common estate planning questions:
- What is the difference between a will and a trust?
The difference between a will and a trust is that a will must be probated in court before your assets can be distributed to your beneficiaries. With a trust, the person that you selected to handle those distributions doesn't need to wait to get a court's approval.
Both a will and a trust will allow you to dictate how your estate will be distributed after you die. However, passing your estate through a will, because it must be probated, will cost your estate 2% to 5% of its market value.
- What is Probate?
Probate is the court-supervised process by which assets are transferred to your heirs after you die. Before distributions from your estate can be made, public notice has to be given and a judge must give a final "OK".
The probate process can last for a few months to a few years and cost anywhere between 2% and 5% of the estate's market value. So, for an estate valued at $500,000, probate can cost anywhere between $10,000 and $25,000.
- What is Included in a Comprehensive Estate Plan?
A comprehensive estate plan includes:
- A will;
- Powers of Attorney for your financial affairs;
- Advance Health Care Directives for your medical decisions;
- A HIPAA Release; as well as
- Additional documents needed to fund your trust, such as a certificate of trust to transfer bank accounts into the trust, deeds to transfer property into the trust, and assignment documents to transfer business interests into the trust.
- What is a Durable Power of Attorney and an Advance Health Care Directive?
Durable Powers of Attorney and Advance Health Care Directives are documents that name someone to make decisions for you if you are incapacitated or otherwise can't make those decisions for yourself.
A Durable Power of Attorney for finances will encompass all things legal and financial, such as closing a real estate deal or opening or closing a bank account.
An Advance Health Care Directive will deal exclusively with medical decisions that need to be made on your behalf. So, if you were involved in a car accident, or need surgery and a decision has to be made about the type of care you will receive, you will have already named someone to make those decisions for you.
A lot of problems arise in these situations when there is no health care directive in place and the spouse, the children, and the parents have different ideas as to what decisions should be made. With a health care directive in place, you will have already decided who will make the final decision, which can eliminate a lot of the infighting and bickering that can arise in these situations.
- Can I Set Up a Distribution Plan That Holds Money For My Children Until They Are Old Enough to Manage Their Own Funds?
Yes. Setting up a trust will allow you to dictate when and how assets from your estate are distributed to your children. You can specify, for example, that while your children are under the age of eighteen, the assets can be used for their health care, education, and other maintenance costs.
Then when your children turn 21, they may get some portion of their share, perhaps a third. Another third can be distributed to them when they are 30, and the final third may be given to them when they are 30, 35, or even 65. The bottom line is that you get to decide when your children receive the trust assets.
- What if I Have a Child With Special Needs?
If you have a special needs child, the most important thing you need to do, from an estate planning point of view, is to select a guardian to care for that child after you pass away, in the same loving manner that you cared for him or her while you were alive.
It is just as important to set up a special needs trust that can set aside money from your estate for your special needs child's maintenance and care. A special needs trust will allow you to provide for your child in a way that will not jeopardize his or her ability to continue to receive or to be eligible for public assistance benefits such as Medicaid and Social Security in the future.
- How Often Should I Review My Estate Plan?
As a general rule, you should review your estate planning documents every 3 to 5 years. Furthermore, you may want to review your estate planning documents to address any change in circumstances after any of the following events:
- A wedding or divorce (yours or that of a close relative or friend)
- A birth or death in the family
- A significant change in your asset mix, or a significant upward or downward shift in the value of your estate
- Changes in the laws governing estate planning mechanisms and/or taxes
- Some Other Quick Tips
- Protect, but don't hide your estate planning documents. In other words, keep them in a safe place but, since they have to be found in order to be used, make sure that someone knows where they are kept.
- Seek experienced counsel. You have worked really hard to accumulate the assets you own, so you shouldn't rely on some downloaded DIY form or an attorney who is not a specialist in estate planning to protect your legacy.
- Spending time on estate planning now will provide tremendous benefit your loved ones later. One of the best things you can do for those you love is to create a well-thought-out estate plan.
Estate planning approaches differ based on personal situations. If you have questions about creating an estate plan or need help with reviewing the documents you already have in place, you should contact an experienced estate planning attorney in your state to arrange a consultation.