Everything you need to know about estate planning!

Everything You Need To Know About Estate Planning

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For many people, the first thing that comes to mind when you hear the word estate is a fancy house with land in another country. But an estate is everything you own or control, including property, assets, and debts. Unless you plan to live forever, it’s best to have a plan.

Similar to investing for retirement, many people neglect planning for their death. While this may not be an exciting topic to think about, it is necessary. If you fail to plan for the day you die, your family will be left to clean up the financial mess that you could leave them. Avoid putting your loved ones in this position by properly preparing today.

Let’s take a walk through the basics of what your estate plan might include and what options are available. Estate planning isn’t just for the rich and famous. If you have minor children or pet, or any kind of property or assets, you likely want a say in what happens to them when you are gone. Your needs may vary but almost everyone can benefit from having an estate plan.

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What Is An Estate Plan?

what is an estate plan?

An estate plan is more than just a plan for how to divide the property and assets you have once you have passed on. It’s easier to understand what an estate plan involves if you refer to it as an end of life plan.

A full estate plan includes a plan to carry out your wishes if you should become incapacitated or otherwise unable to act for yourself prior to death. In addition, it spells out what should happen to your assets and debts, pets, and minor children when you die.

An estate plan may contain:

  • Power of attorney
  • Advance directive/Living will/medical power of attorney
  • Will
  • Trust
  • Guardianship directions
  • Provisions for pets
  • Transfer on death deed or accounts
  • Beneficiary designations on insurance or retirement accounts

How Do You Know If You Need A Will?

Most people would agree that you need a budget. However, whether you need a will versus a trust depends on a few factors that we will address in a minute. Either way, having either a will or a trust is preferable to not having any plan at all.

If someone dies without having a will (or trust) in place, it is said that they died intestate. What happens next, in that case, will depend on the state laws of the deceased regarding intestacy. The property would pass through the probate process and be distributed according to the state’s laws regarding intestate succession. Information about your estate would be public and may open up your estate to inquiries from fake creditors.

What happens to your estate if you die intestate can get complicated, but the important thing to know is that if you do not have a will or trust, then your property may not get distributed in the way you had hoped or imagined.

What Exactly Is A Will?

what exactly is a will?

A last will and testament is simply a document that spells out your wishes regarding the distribution of your property and/or assets after you die. Creating a simple will is not difficult. You just need to be of “sound mind” (i.e. know what you are saying or agreeing to on paper) and have two witnesses. And even that isn’t always necessary—some states will accept handwritten (or “holographic”) wills as valid.

In addition, your will can address more than just your probate-eligible property and assets. In your will, you can also:

  • Choose guardians for any minor children
  • Make financial and care arrangements for pets
  • Give instructions for paying debts/liabilities
  • Name an executor for your estate (the person who makes sure estate property is distributed and debts are paid)

Things Not Included In A Will

It may be helpful to understand what a will does not include. For instance, specifying your preferred funeral arrangements in your will is not helpful, since wills are not usually read until after the funeral. This can be a separate part of your estate plan.

You also cannot leave certain kinds of property or accounts to heirs in a will, such as payable on death accounts (POD), accounts with specified beneficiaries (like life insurance, 401(k), IRA, etc.), property held in joint tenancy, or property held as joint tenants with rights of survivorship. Those properties will pass to the beneficiaries outside of the probate process.

A will cannot be used to put conditions or timelines on gift either. Once the will passes through the probate process, the property and assets are distributed essentially all at once. The executor is not like a trustee, who may be involved in the administration or management of assets for years to come.

Why You Need A Will

Whether you need a will or a trust depends on a number of factors: the size of your estate, protecting your children and/or spouse, potential tax liabilities, your state’s probate process, the possibility for family conflict, etc.

If you do not have many assets or want to get the ball rolling on an estate plan with the most cost-effective plan for right now, then a will is a good move. It is easy to get at least a basic will in place, and a will gives you a substantial amount of control over what happens to your things when you die. You can always decide to set up a trust when you have the funds or desire to do so.

A will is also a good idea in states where the probate process is fairly straightforward and simple and if your estate does not approach the federal estate tax threshold, which is currently $11.4 million per individual (2019).

Disadvantages of Having A Will

There are disadvantages to having a will that are worth mentioning. For instance, if you have a will, then your estate will go through probate after you die. Probate is a lengthy, public process, and there may be delays in your heirs getting the property you intended for them. Because the estate details are made public, your estate may be susceptible to claims or inquiries from false creditors.

If you have an heir or heirs that you expect will not manage their inheritance well and you would like to put limits on them, then you probably need a trust fund. If you anticipate conflict between family members that could lead to lawsuits, then perhaps a will is not the best choice.

Even if you decide to put all of your assets in a trust, an estate planner would tell you to have a pour-over will in place in case there are assets at the end of your life that were not placed in the trust.

What Is An Executor?

what is an executor?

The executor of the estate is responsible for making sure the will is enforced after the person who authored it dies. This includes locating the will and filing a copy with the probate court, contacting banks, creditors, and relevant government agencies (like Social Security Administration) to let them know decedent has passed away, making sure debts and taxes are paid, maintaining will property, making and filing a property inventory with the court, and distributing assets and property, among other things.

The executor is typically paid out of estate assets, though the amount varies by state.

How To Choose An Executor

You can choose who you want to be the executor of your will, as long as it is someone over the age of 18. But remember to revisit your will later—the person you choose now may not be the same person you would choose later on in life.

If you die intestate, the court will appoint someone as an administrator or personal representative, according to state law. The administrator carries out the same duties that an executor would. Many states have a priority list to follow for appointing an estate administrator. In most states, the surviving spouse would be named as the administrator. The person named as an administrator can refuse to serve in that position and then it would pass on to the next priority relative.

What Is Probate?

Probate is the process of having a will legally be recognized and appointing an executor or administrator to manage the estate and distribute assets to beneficiaries according to the will or state law. This process varies from state to state. In some states, it is somewhat drawn-out and expensive, but in many states, it is relatively fast and inexpensive.

In states where the probate process is simple and relatively streamlined, there is less cause to avoid probate. However, the process gets more complicated if assets need to be transferred to special accounts or payouts have specific instructions

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The Basic Steps Of The Probate Process

The probate process varies somewhat from state to state, as mentioned earlier. However, the basic steps are the same.

First, a petition is filed with the court to admit the will and appoint the executor, or to appoint an administrator if there is no executor. Notice of a court hearing to admit the will should be given to all the heirs and beneficiaries, and notice is usually published in the newspaper as well, in case there are unknown creditors.

Next, the executor or administrator takes inventory of all estate property and informs creditors of the death of the decedent to allow them time to make a claim. The inventory may be done by a court-appointed appraiser or by a third party.

Then, all debts, liabilities, taxes, and expenses incurred by the estate or the decedent must be paid out of estate assets.

Finally, remaining estate property and assets are distributed to heirs according to the will or to the state laws regarding intestacy (if there was no will).

Defining Probate Property

Regardless of what the will may say, certain property must go through probate, while other property can skip probate. It generally depends if the property is shared with someone else and whether or not there is a beneficiary designation.

Probate property includes:

  • Real property for which the decedent was the only owner or was designated as tenant-in-common (and not designated as trust property)
  • Bank accounts in decedent’s name only
  • Interests in partnerships, corporations or limited liability companies
  • A life insurance policy that lists the estate or the decedent as the beneficiary
  • Other property, such as vehicles, furniture, automobiles, etc.

Explaining Non-Probate Property

Non-probate assets or property are those that have some kind of survivorship or beneficiary designation. For example, if you have a life insurance policy, there is a specific beneficiary named in the policy. When you die, the benefit gets paid out to the beneficiary without going through probate.

Similarly, if you have a property that you own with your spouse, for example, as joint tenants, or joint tenants with rights of survivorship, that property passes to your spouse when you die.

Other types of assets that are non-probate assets include retirement accounts with a named beneficiary such as a 401(k), 403(b), IRA accounts, any bank accounts that have a payable on death (POD) or transfer on death (TOD) designation, and assets held in a trust.

How To Convert Probate Property To Non-Probate

You can convert many kinds of assets and property from probate to non-probate by switching it to non-probate accounts. For instance, you can shift cash in your bank account to an account with a POD or TOD designation.

For property and other assets that you cannot convert to non-probate otherwise, you can set up a trust and use the property or assets to fund the trust.

Why would you want to do this? For the same reasons listed above about why you may want to avoid probate. Also, because certain non-probate assets, such as a life insurance policy with a beneficiary who is not the estate or the decedent, are generally protected from being seized by creditors. Your situation may vary based on your estate and the state you live in.

Note: Tomorrow can provide you and your family with peace of mind by helping you create a free legal will, or a trust fund with their premium product. (Tomorrow Plus) 

What Is A Trust?

what is a trust

Trusts are generally positioned as a will alternative, but they can exist in addition to a will or serve the function of a will. A trust can assist your estate planning in various ways.

A trust is a fiduciary arrangement where you (the grantor) give a third party (the trustee) legal title to the property to manage on behalf of someone else (the beneficiary). The trustee is responsible for managing the trust for as long as there are trust assets. The trustee’s duties vary based on the trust assets but can include making investments, paying bills, and managing and maintaining real estate property.

The Different Types Of Trusts

Trusts can be classified into two types: revocable and irrevocable. A revocable trust is one that the grantor can change (or “revoke”) while alive. The grantor retains a great degree of control over a revocable trust. The revocable trust usually does not have a tax advantage, but it does allow property in the trust to avoid probate. A revocable trust automatically converts to irrevocable when the grantor dies.

An irrevocable trust is one that cannot be modified without the beneficiary’s permission once the trust is set up and funded. The grantor does not retain control over an irrevocable trust, and many people use irrevocable trusts to remove property from the taxable estate in order to reduce tax liability and/or protect assets from creditors.

What Are The Advantages Of A Trust?

There are a number of advantages to having a trust. The first is having more control over your assets, where they go, when, and how they are used. If you have a potential heir but you have concerns about giving them a large amount of money or property all at once, you can set up the trust, title your asset in the name of the trust (thus funding it) and give the trustee instructions on how and when you would like it distributed.

Another advantage is privacy. The probate process is public and putting property that would otherwise be probate property into a trust helps keep the distribution of your estate private.

If you have minor children at the time you pass away, having a trust in place can make sure that your children are provided for as you intend.

Some estates have many expenses or debts to pay, and some of the biggest assets may not be liquid, so if you have a trust fund with assets, some of that would be used to pay estate expenses. For example, you could have a trust that is funded by a life insurance policy, and by having the death benefit pay into the trust, you can avoid possible gift or inheritance taxes on the payout while also making those funds available to pay fees on the estate.

One of the biggest reasons that people set up trusts is for tax benefits. If you have a large estate, you can possibly reduce or avoid capital gains tax, gift tax, or estate tax liability, and/or claim a charitable giving deduction.

The Disadvantages Of Having A Trust

A trust can be extremely useful and beneficial, but it’s not for everyone. Creating, maintaining, and distributing a trust can cost money and you need to decide if the benefits are worth the cost.

Additionally, depending on the type of trust and the assets that fund it, the trust could potentially be taxed annually on income.

It is possible that you do not need a trust and a will could suit your needs.

If You Have A Trust You Need To Fund It

A trust is useless if there are no assets or property that belong to it. You need to fund your trust in order for it to function. Once the trust is set up, you will need to retitle all of the assets that you want in the trust in the name of the trust. It may seem like a lot of work, but start with the biggest asset and work your way to the smallest to create a strategy.

Some accounts you can retitle in the name of the trust include:

  • Bank accounts
  • Investment and brokerage accounts
  • Business interests
  • Real property

If you plan on adding real estate to the trust, you generally need a quitclaim deed to transfer it. It should be done according to the laws in the state where the property is located.

If an asset is not titled in the trust’s name when you die, it may go through probate and may not be distributed as you intended.

Choosing Your Trustee

how to choose a trustee

Make sure you choose a trustee carefully, especially if they are part of your family. Consider what position it might put them in with the family if they are solely responsible for the administration of trust assets.

Keep Your Trust Up To Date

Just like you should do with your will, revisit your trust periodically to make sure it is established the way you wanted. You may want to change the trustee if over the years that person becomes unreliable.

Guardianship Is Extremely Important

Guardians for minor children have been mentioned several times because it is extremely important. You should have a provision for who should be the guardian of your minor children if you die. This is a prime reason many people create a will or trust before they think they have the assets to warrant it.

No one can tell you how to choose a possible guardian for your children, and those with children hope that it never becomes a real issue. However, this is an important decision that needs to be carefully thought out. Before you designate a guardian, always make sure you ask them if they are willing to take on this responsibility. In the worst-case scenario, if your minor children lose their parents, you may not want them to be raised by someone the state appoints.

If you don’t name a guardian, the court will appoint one for your minor child(ren).

Don’t Forget About Your Pets

can you put a pet in a trust

Your pets can’t inherit property, though some pet owners have tried to pass it on to them. You can specify in your will who you would like your pets to go to, if alive, and earmark money for the caretaker for that purpose. You can also set up a trust for longer-term care of your animals.

How To Prevent A Will Or Trust Contest

One thing that will have the most impact on your estate, and you have the least control over, is having heirs go to court to contest the will or trust. However, there are a few ways you can avoid this.

You may have strong opinions about how you want to divide your estate, but think two or three times before you divide your estate in a way that appears to favor one person over another. An uneven division of your property is likely to result in a subsequent lawsuit, which could end up reducing the size of your estate.

If you still prefer to distribute your property and assets unequally to your heirs, you should consider setting up a trust for the inheritance of an heir that is problematic or that you prefer to gift with less.

Power Of Attorney, Living Wills And Other End Of Life Planning

The last part of estate planning is a very important part—it addresses decisions to be made towards the end of your life.

No one hopes to get to a point where they cannot make their own decisions or express their opinions on medical, financial, and other matters – but it happens. Before you arrive at a point where you are incapacitated, make sure you have a living will in place.

These documents and powers are called different things in different states, but the basics are the same. In the event you become incapacitated, you will want someone who can make decisions for you.

The following documents will help you achieve that:

  • Durable power of attorney (POA)
  • Medical power of attorney or Healthcare Proxy (HCP)
  • Advance health directive
  • Guardianship for adults
  • Certification of trust/declaration of intent

Durable Power Of Attorney

A general power of attorney allows someone to sign and make business and financial decisions on your behalf – but only while you’re well and able to communicate and act for yourself. A general power of attorney is a matter of convenience in doing business. What you need for end of life planning is a durable power of attorney, which is like a general power of attorney, but it stays valid even if or when you become incapacitated.

Medical Power Of Attorney

medical power of attorney

A medical power of attorney, sometimes called healthcare power of attorney, is a durable power of attorney. It only kicks in after you become incapacitated and only for medical decisions.

The durable power of attorney for finance, etc. and medical power of attorney do not cross over in responsibilities, they are totally separate. For both documents, make sure you choose someone you trust and make sure they are aware of what your preferences are.

Once you grant someone durable power of attorney, it is not set in stone. You can revisit and make changes at any time as long as you are still mentally able to.

An Advance Health Directive

An advance health directive is a document with instructions for what you want done in certain medical situations. This can include a “Do Not Resuscitate” order if you do not want to be brought back to life if you go into cardiac arrest. It can also include orders not to intubate you or keep you alive on life support.

What you put in your directive is up to you, but it is important to have someone who has medical power of attorney as well. If you only have an advance health directive, your wishes may not be followed. Your medical power of attorney can be your advocate to make sure you get the care and treatment you want and deserve at the end of your life.

Guardianship For Adults

Having a guardianship document is also important in the event you become incapacitated. Having someone appointed as your guardian if you become incapacitated allows someone to communicate for you.

Some of the decisions that a guardian can make for you include:

  • What facility you go to
  • Refusing or consenting to medical treatment
  • Where you will live
  • What medical facility you will go to
  • Filing, defending or settling lawsuits
  • Borrowing or lending money

Certification Of Trust/Declaration of Intent

These last two documents help protect your trust to make sure it functions as you intended. A certification of trust states who the trustees are and who will succeed them after you are gone.

A declaration of intent document states that you intend to put all of your titled and non-titled assets in the trust you set up. That way, if there are any assets that were meant to be a part of your trust, they can be added by your agent or guardian.

A Final Word

Estate planning may seem daunting but it is extremely necessary to protect your heirs. Do not leave them with a mess when you die if you have the time now to protect them.

If you need help with this, Tomorrow can provide you and your family with peace of mind by helping you create a free legal will, or a trust fund with their premium product. Your family is worth it.

This article originally appeared on The Money Mix, and has been republished with permission. Learn more about the Money Mix Insiders program.

 

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