Over a century ago, Ambrose Bierce wrote, “Death is not the end. There remains the litigation over the estate.” Some things never change.
Today, a solid estate plan is critical – it moves the fate of your estate away from lengthy court proceedings and towards the preservation of both assets and family harmony.
Estate planning is a must-do for everyone regardless of age, marital status, or net worth.
Several important documents form the basis of a comprehensive estate plan. These include wills, trusts, Financial Powers of Attorney, and Advance Directives for Health Care.
A will allows you to state how you wish to have your assets allocated to your heirs. You may have heard the term “probate” thrown around when it comes to wills. That’s because the process of settling an estate under a will is called “probating the estate.” And, it must be done through the “probate court.”
Here, it’s important to take a moment to distinguish between property that passes under your will (called “probate assets”) and property that passes outside the will (called “nonprobate assets”).
You can include things like money, real estate, personal property, family heirlooms, any business you own and stock investments in your will. But things like life insurance policies, IRA accounts, and other retirement accounts with beneficiary designations pass outside the will – meaning they go straight to the beneficiary named under the policy. So, another crucial part of estate planning is making sure that your beneficiary designations on these assets are current and correct.
Bank accounts can be both probate and non-probate assets, depending on how they are designated. If you have a payable on death (POD) account, or if you have a joint account, when you pass away the bank account will go to the POD beneficiary or will simply become the sole property of the joint owner.
A properly written will is a legal document that must be enforced, meaning that your executor must follow what is written in your will. Say, for example, that you leave $100,000 to each of your three children. Each then receives $100,000, outright, from your estate.
But what if you don’t want your heir to receive all of that money in a lump sum? Here’s where trusts come in. In the simplest sense, a trust is like a bank account with rules. Say two of your children are responsible and prudent, but one is a spendthrift. You can set up a trust along with your will to hold this child’s inheritance. The trust document details how you wish the assets to be distributed to the profligate child, and names a trustee, or manager, to oversee the trust account. A common trust provision limits monthly or annual distributions unless the money is to cover education or health care expenses.
You can also provide a trust for a beloved pet. American businesswoman Leona Helmsley made headlines when she left her Maltese, Trouble, an astounding $12 million in trust for the dog’s care. These days, pet trusts are common, as owners seek the comfort of knowing their favorite animal will be well cared for after the owner is gone.
The next two documents in the estate plan will be incredibly powerful in situations where you are unable to manage your finances or make your own health care decisions.
We’ll start with the money piece. Many folks are familiar with the term “Financial Power of Attorney,” but may have some misunderstanding as to what this document can do, and when. First, it is critical to understand that whoever is named as your agent under a Financial Power of Attorney (FPOA) can “stand in your shoes” and conduct whatever business and money transactions that you have authorized her to do. You can give your agent the power to do things ranging from simple banking to selling or buying real estate and other assets.
Here’s the catch, however – the powers granted under the FPOA don’t have to start right away. You can set the FPOA to be “springing,” meaning that the powers granted to your agent don’t kick in until you are incapacitated or are otherwise unable to manage your own affairs.
The Advance Directive for Health Care (ADHC) is the cousin of the FPOA. Here, you also designate someone to be your agent and act on your behalf, only this time it’s in the realm of health care and medical decisions. In your ADHC, you can spell out exactly what your wishes are when it comes to the medical care you would like to receive if you are incapacitated or otherwise unable to communicate your preferences. This document has a natural springing component to it – your agent can’t act unless you are unable to.
If you think planning for incapacity seems like more trouble than it’s worth, I understand your feeling. No one wants to believe they won’t be able to do for themselves. And hopefully, you’ll always be able to make your own decisions. But, if you can’t, both the FPOA and ADHC give your family guidance on how you would like things to be done.
If someone becomes incapacitated before creating an FPOA or ADHC, their family or friends must petition the probate court for guardianship, conservatorship, or both. A guardianship allows someone else to make, among other things, health care decisions for the incapacitated individual, while a conservatorship enables someone else to make financial decisions. This is a costly process, both financially and emotionally.
Benjamin Franklin once remarked, “In this world, nothing can be said to be certain, except death and taxes.” My advice is to pay your taxes and plan for the time when you leave this earth. Do your due diligence and consider executing a basic estate plan. If you do, chances are both you and your loved ones can sidestep heated litigation and messy probate proceedings and challenges, and, most importantly, the possible strain on family ties.