Estate Planning: The Importance of Making a Plan Deborah Sexton Law Office, PA www.arkansas-estateplanning.com February 2013
Introduction According to the American Bar Association, only two out of every five Americans have an estate plan in place. Studies have shown that most Americans don’t understand estate planning and how it can benefit them even while they’re still alive. Estate planning is not as grim as many think. In fact, those who have a sound estate plan are satisfied to know where their assets go, how much their beneficiaries will receive and who will care for them in the future. This report discusses the basics of estate planning and clears up misconceptions many Americans have about the process in general.
“I don’t have an estate.” Single or married, almost everyone has some sort of estate. An estate is your property, including but
not limited to:
Real estate;
Personal items such as furniture or vehicles;
Intangible property items, including stocks, bonds, pension plans, Social Security benefits, bank accounts and life insurance policies.
“All I need is a will.” While a will is the most important document within your estate plan, it is not the only document you need. These days, you require more documentation than just your average will, especially if you have young children, life insurance policies, jointly-owned property or trust accounts.
“I don’t need to create an estate plan until I’m ready to retire.” According to the National Institute on Aging, 5.1 million Americans suffer from Alzheimer’s disease and many see the first signs of this condition by the time they reach 60. That means that if you wait until you’re retired to complete an estate plan, you could already be considered medically incapacitated and unable to complete a plan on your own.
“An estate plan only applies after I die.” Estate plans do more than distribute your assets—they protect you while you’re still alive also. If you become mentally or physically incapacitated, a sound estate plan can designate someone to manage your health care, finances and property. Without such a plan in place, the courts can designate someone to act on your behalf or decide what medical treatments can be used, including what types of life-saving treatments to use.
The Reality When you die without an estate plan, your property still needs to be distributed. Your estate goes into probate, meaning it will be administered in probate court; the court will appoint someone to manage your estate. This administrator is then responsible for distributing your assets in accordance with state laws. While the administrator is supervised closely by the court, this supervision can be costly for an estate. To pay creditors and court fees, portions of your estate could be auctioned rather than distributed to family. Essentially, dying without a will leaves the state to create a “will” for you. The laws on estates are clear, but not always favorable for beneficiaries. In general, the court is required to pass property to those related to the deceased by blood or marriage. That means that you have no say in how your assets get distributed.
Getting Started An estate is complex and contains more belongings than you might assume. When you’re getting ready to create an estate plan, it is imperative that you make an inventory of all your personal assets and give as much information as possible to your estate planning attorney. The items needed to complete an estate plan can include, but are not limited to:
Names, birth dates and addresses of all individuals to be named in the will;
Names, addresses and phone numbers of the person(s) to be designated the executor of the will;
Names, addresses and contact information for individuals who will be named as guardians for minor children;
Amounts and sources of income—such as dividends;
Amounts, beneficiaries and sources for retirement accounts and benefits—including government
benefits;
Amounts, beneficiaries and sources for any financial assets—including bank accounts and annuities;
Amounts of all debts—including revolving and fixed;
Lists of jointly-owned property and contact information for all co-owners;
Information on safe deposit boxes, including their contents;
Legal documents—marriage licenses, prenuptial agreements, tax returns, divorce decrees, deeds, etc.
Types of Wills There are various types of wills that depend on your estate, your assets and your wishes. The most common types include:
Simple Will This will outlines distribution of assets to one or multiple individuals—referred to as beneficiaries—so that the entire estate is distributed.
Testamentary-Trust Will This creates one or more trusts to designate what portions of the estate are transferred to the trusts and housed there upon death.
Pour-Over Will This automatically transfers any and all assets into a trust upon death.
Holographic Will This is in handwriting by the deceased and may or may not be witnessed. Not all states recognize these types of wills; therefore, they are not recommended.
Oral or Nuncupative Will This will is spoken and video recorded rather than written down. Again, not all states recognize the authority of these wills.
Joint Will This is a will combining a husband’s and wife’s wishes in one document.
Living Will This will doesn’t distribute property. Instead, it is used to state your preferences regarding the use of certain medical procedures.
Selecting an Attorney Estate planning is something that should be completed by a professional. While do-it-yourself estate plans are available online, they lack the complexity the average individual needs for a sound estate plan. How-to guides also require numerous caveats. Even if you insist on creating your own estate plan, you should still have it reviewed by a professional before you finalize your documents.
Working with an Attorney Estate planning requires time—both yours and that of the attorney preparing your documents. While simple estates can be completed within a week, more complex estates can require months. Preparing documents requires numerous meetings and consultations to start, draft and finalize the estate plan. During the initial consultation an attorney can typically gauge how long the process will take.
After the initial draft is complete, you should review it carefully. More importantly, you should have your attorney clarify any passages you don’t understand and make changes if necessary. Once it is signed, the document becomes a legal obligation of the estate.
Trusts Trusts are legal entities that manage property. Property placed in a trust transfers the ownership from the original purchaser to the trust. The trust then holds the property for anyone named in the document. Trusts can be set up with wills so that they don’t take effect until death. The reasons for using a trust can vary. Many parents use trusts to care for young children upon their death, while others use trusts as a way to help manage assets for beneficiaries who cannot do so on their own.
Types of Trusts There are multiple types of trusts. What type to use depends on the size and type of your estate. Living Trust This offers support while you’re still alive. It should also have provisions for what happens to your assets upon your death. Support Trust This directs an individual—called a trustee—to use the assets in the trust for things like general support, healthcare and education of the beneficiaries. This is often created for guardians of minor children. Discretionary Trust This allows a trustee greater discretion in how to distribute assets among beneficiaries than other trusts.
Charitable Trust This is an arrangement to provide for annual gifts to charitable organizations. Spendthrift Trust This limits access to trust assets to help beneficiaries, who cannot manage their own affairs or have problems with creditors, to manage their funds and avoid creditor issues. Insurance Trust This helps minimize state and federal estate taxes through the purchase of a life insurance policy. Medicaid Trust These help you qualify for Medicaid benefits to avoid the costs of nursing home care, long-term care facilities and associated medical expenses.
Selecting a Trustee A trustee can have a variety of duties, but all require an organized, self-sufficient personality. Expertise in estate management, investments and financial management is important for this individual. While many assume that a family member is the best individual to select as a trustee, many attorneys advise against this. A professional trustee, such as an attorney or bank, may charge a fee, but they offer investment and money-management expertise that most family members don’t have. If you have a large estate, you should consider a professional trustee. In general, a trustee must be able to:
Give trust beneficiaries copies of the trust documents;
Inform financial institutions about the status of the trust;
Collect and pay taxes and other estate debts;
Monitor the income of the estate;
Ensure the inventory for the trust is accurate;
Prepare tax returns;
Prepare accounting statements for beneficiaries;
Represent the trust in court if need be.
Maintaining an Estate Plan An estate plan isn’t final once it is complete. Circumstances can occur that require changes to one’s estate plan. An estate plan should be reviewed at least once a year or every other year. When a significant life change occurs—such as births, deaths or divorces—the estate plan should be altered immediately.
Estate Plan Updating Checklist When you’re monitoring your estate plan, look for any of these significant changes that may require your will or trust to be updated:
Marriage or divorce
Death of a beneficiary
Change in relationship with a beneficiary
Death of an executor
Physical or mental change in a beneficiary or executor
Birth of a child
Relocating to another state
Purchase, sale or mortgaging of a business or real estate assets
Acquiring new assets
Changes in financial circumstances
Changes in state laws
Not updating an estate plan means that the original plan is what the court will honor. Furthermore, property not included in the old estate plan may be identified as a “residuary estate” and distributed as the state law provides. Conclusion An estate plan is a set of documents every individual—whether single or married—should complete. While most assume that they don’t have any assets, the fact of the matter is that they do. Assets don’t have to be enormous to require an estate plan, but an estate plan is necessary if they are to be distributed appropriately. You should consult with an estate planning attorney as soon as you become a self-supporting adult. Creating and maintaining an estate plan early is easier and more affordable than generating a complex estate plan later in life. In addition, creating an effective estate plan early on can alert you to any potential trouble areas you’ll have to resolve, such as selecting beneficiaries, identifying assets and preparing for unforeseen illnesses and accidents in the future.