Why Make An Estate Plan?? To Protect You And Your Family!
07/01/08
Most people, even most lawyers, misunderstand the purpose of estate planning. In the “old” days estate planning meant making a Will and, if you were wealthy, perhaps a living trust to direct how your property would be distributed when you died. But estate planning is no longer just about who will inherit your property. It is about protecting you and your family.
An Estate Plan Protects in Two Ways
An estate plan protects you and your family while you are living and your family after you are gone. An estate plan protects you and your family by making your wishes known so that conflict and confusion among your family members is avoided and preserves the family’s assets, in other words, saves money.
How Does an Estate Plan Protect You While You are Living?
An estate plan protects you and your assets while you are living by making it unnecessary to ever have a guardianship for you.
What is a Guardianship?
Most of us take for granted that we will always be able to manage our own financial affairs and give consent to medical treatment. However, if you become incapacitated because of a stroke, accident, old age or for any other reason and can no longer manage your own financial affairs and consent to medical care, someone has to step in and perform those functions for you. In the old days the only option was for the family to file a petition in court to have a guardian appointed for you. Since it was uncertain who you wanted to act as guardian for you, the decision about who should apply to be the guardian often led to serious conflict among the family members. Furthermore, a guardianship proceeding is long, involved and expensive. Anyone who has ever been through a guardianship will tell you that if you can possibly avoid it you should. The good news is that an estate plan will allow you and your family to avoid a guardianship. How?
How an Estate Plan Avoids a Guardianship
Several decades ago the solution to the problem of avoiding guardianships was developed and that is the Durable Power of Attorney (DPOA). A DPOA allows you to specify in advance who you want to manage your financial affairs and consent to medical care for you if you become incapacitated. The person you appoint in your DPOA occupies the same role that a guardian would and therefore the DPOA eliminates the need for a guardianship and its expense. Because your DPOA preserves the assets available for you while you are living, it is your most important estate planning document from your point of view. No one who owns any property at all should be without one.
How Does My Estate Plan Protect My Family After I am Gone?
Your estate plan protects your family after you are gone by eliminating unnecessary expenses and taxes. It eliminates unnecessary expenses by avoiding probate.
What is Probate?
“Probate” is the legal process of determining the next owner of property that belonged only to a decedent and had no designation as to how the ownership of that property was to be transferred upon the death of the owner. For example, if you own a ten acre lot the fact that you own the lot is established by a deed to you signed by the previous owner. If you want to transfer the lot to someone else you sign a deed to them. If you die owning the lot, however, there needs to be some way to transfer the lot without a deed signed by you. Probate is a judicial process that transfers the lot to the succeeding owner. Probate works for not just real estate but any other property that belonged only to the decedent and on which there was no direction as to how the property was to pass at the owner’s death.
Why Avoid Probate?
Many people want to avoid probate because it is expensive, protracted and public. Though the costs of probate vary widely depending on numerous factors, a good rule of thumb is that probate will cost at least 3% of the estate. Probate is required to last at least six months and usually last at least one year. Probate proceedings are public court records that can be viewed by anyone who wants to go to the courthouse and look at the court file or now, even on the internet.
Three Ways to Avoid Probate
Fortunately, it has become much easier to avoid probate. Remember that probate is only necessary when someone dies with property in his name with no direction as to the new owner of the property upon death. The three ways that probate is usually avoided are joint tenancy, pay-on-death directions and living trusts.
Joint Tenancy
Joint tenancy is the most familiar of the three because that is typically the way married couples hold most of their property. Upon the death of either of them the survivor automatically becomes the owner of the entire property without any probate at all. Joint tenancy works well for married couples, but it is usually not appropriate for joint ownership between persons who are not married. Instead, a better alternative is pay on death directions.
Pay on Death Designations
Both Kansas and Missouri allow an owner of virtually any kind of property to designate that property be paid on death to one or more new owners. Then if the owner dies the ownership of that property automatically passes to the pay on death beneficiaries without probate. The advantage of pay on death directions over joint tenancies is that the pay on death beneficiaries have no ownership interest until the death of the owner and the owner retains the right to change or eliminate the pay on death beneficiaries throughout the owner’s life. Usually both joint tenants have ownership in the property. Therefore pay on death arrangements are far better than joint tenancy and accomplish the same goal, the immediate and uncomplicated passing of the property upon the death of the owner without any probate.
Limitations of Pay on Death Directions
Though pay on death directions work quite well they have some limitations. The first limitation is that the pay on death direction has to be on all of the property the owner owns. The pay on death direction has to be in the deed to the house, the deed to the farm, the stockbrokerage account, the bank account, the collection of gold coins, etc. If the owner wants to change the pay on death direction he has to change all of those. Also, a pay on death direction is usually fairly inflexible. In other words, the pay on death direction does not incorporate any contingencies such as what happens if one of the pay on death beneficiaries predeceases the owner. Sometimes it is possible to customize pay on death directions extensively, especially in real estate deeds, but usually this is not done. Finally, pay on death directions are usually immediate transfers to the intended beneficiary. If the intended beneficiary should not or cannot receive the property after the death of the owner because the intended beneficiary is a minor or incapacitated, a pay on death direction will not work.
The limitations on pay on death directions make them problematic as a means to avoid probate for someone with many assets. Usually the device of choice to avoid probate where there are more than minimal assets is the living trust.
A Living Trust
A living trust is an arrangement in which one person, usually known as the grantor or the trustor, creates the trust by giving property to a trustee with the agreement of the trustee to hold the property for the benefit of one or more beneficiaries. So a trust consists of three positions, a grantor, a trustee and a beneficiary. There is no reason that all three positions cannot be occupied by the same person, and in a living trust the grantor, the trustee and the beneficiary are in fact the same person.
A living trust is simply a trust that is created while the grantor is living. This contrasts with trusts which are created in a Will and are known as testamentary trusts. Testamentary trusts, of course, are only created when the person who wrote the Will is deceased. Though popular at one time, testamentary trusts are now rare.
Living trusts became popular because of federal estate taxes. When the exemption from federal estate taxes was only $600,000, many married couples had more than $600,000 between them and both needed to use their $600,000 exemption from the tax in order to minimize or eliminate the estate tax. Living trusts were used to allow both of the spouses to use their $600,000 exemption and save as much estate tax as possible.
The exemption from estate tax is now $2 million per person and is supposed to increase to $3,500,000 next year. Beyond next year is uncertain and it is possible, though not likely, that the exemption from estate taxes will fall back to only $1 million. If that happens, living trusts will once again become important for federal estate tax savings. At the moment however, living trusts are viewed almost entirely as a way to conveniently avoid probate.
How Does a Living Trust Avoid Probate?
Remember that probate is necessary where a person dies owning property in his or her name alone without any direction as to how that property is to pass upon his or her death. When a living trust is created, the person creating the trust transfers all of his property into the living trust. For example, the owner of the ten acre lot we spoke of earlier would make a deed transferring the ten acre lot to himself as trustee of his living trust. The lot would then be owned by the trust not by the owner. If the owner died the trust would not die with him. Instead, the trust instrument would simply appoint a successor trustee and the successor trustee would automatically have the authority to sign a deed conveying the lot to a new owner. A living trust always specifies how the property in the trust is to be administered or distributed following the death of the trust creator. In this sense a living trust is a substitute for the owner’s Will.
Advantages of a Living Trust
A living trust not only has the advantage of avoiding probate but also avoids the problems inherent in pay on death directions. If the owner wants to change the distribution of his property after death he only has to amend his living trust and that amendment will apply to all of the property held in the name of the trust. He does not have to go to each individual property and change the way it is titled like he would in order to change a pay on death direction. A living trust is also far more flexible than a pay on death direction. It is relatively easy to design in any contingency that the owner wants as far as the distribution of the trust after death. Finally, it is relatively easy to impose conditions and restrictions upon the transfer of property in a living trust if the intended beneficiaries are not capable of owning the property outright, such as a minor or incompetent. The numerous advantages of living trusts make them the probate avoidance method of choice except in small estates.
Last But Not Least – The Will
We have not mentioned what used to be the centerpiece of the estate plan – the Will. A Will is simply a formal written direction as to the distribution of property at death. Wills still have their place but are not relied upon as much as in the past for the actual distribution of property. The property of most decedents is distributed to their joint tenants, to those they have specified in pay on death directions or through their living trusts.
Why Do A Will?
A Will is still necessary because sometimes a minor asset is overlooked in transferring assets into the living trust or making pay on death directions. In that case the Will permits that property to be distributed as the owner intended. However, a Will always has the serious disadvantage of requiring probate. Let me say that again because it is a source of much confusion. A WILL DOES NOT AVOID PROBATE! Whether you have a Will or not, if you own property in your own name with no direction as to how it is to be distributed after your death, that property will have to be probated when you die. If you have a Will the Will just specifies how the property will be distributed after probate. There still has to be a probate.
Another Use For Wills
Another use for Wills for people who have minor children is to name guardians for the minor children if both of the parents die.
A Typical Plan
A typical estate plan consists of a DPOA for financial matters, a separate DPOA for health care, a living trust and a Will which leaves everything to the living trust. Another part of an estate plan that many people choose to sign is a Living Will or Advance Directive. That is the document which says that if you become incurably ill or have no hope to recover you do not want to be kept alive artificially.
What Do I Do Now?
“OK, I know I need an estate plan. How do I start?” Make an appointment with a lawyer who spends at least 50% of his or her time doing estate planning. If you are not sure whether the lawyer concentrates in estate planning to that extent, ask the lawyer directly. Also ask the lawyer if the initial conference to discuss an estate plan will be free. You might also ask whether estate planning is done on a fixed fee or on an hourly basis. Generally you should prefer a fixed fee. You also might ask how long it generally takes for the lawyer to have estate planning documents ready after the conference. Two to three weeks is the norm. The lawyer probably will not want to quote you a fee before the conference because it will be difficult to know what you need before thoroughly discussing your situation. However, the conference is free anyway and if the fee quoted to proceed after the initial conference is too high you can walk away with no obligation.
Before the estate planning documents are completed the lawyer may want you to provide some financial information. This is so the lawyer will be certain that your estate plan is the estate plan that is best for you. The lawyer is not just being nosy!
One of the benefits of completing an estate plan is the assurance that if something happens to you, you have a plan in place that protects your family and your family assets. That’s as much as anyone can do.
For more information, visit Mr. Hipp's Bio or Estate, Business Succession, Asset Protection.
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