What is an estate plan?
Estate planning is generally meant to achieve three things: identify goals for who will take your assets after your death; create a set of documents meant to carry out those objectives; keep the court out of the process both after your death and during any period of incapacity that you suffer.
An estate plan includes the following:
Open discussions with a qualified estate planning attorney. Talking with an attorney can feel like talking to someone who speaks gibberish. Attorneys use technical terms when they write estate planning documents but good ones will use plain language when they are talking with you. For example, your estate planning documents might refer to a “special power of appointment” related to “generation-skipping transfers.” All that means is that you might want to give someone the right to decide how assets you leave for them should be used if they don’t want the assets. When you are interviewing attorneys, ask them to explain each and every term you don’t understand. If you don’t feel you’re truly able to communicate with him or her, then you won’t talk about the secret workings of your family. Without that kind of discussion, your plan will not truly reflect your wishes.
A revocable (or “living”) trust. When you ask if someone has an estate plan, they will usually tell you whether they have a will or not. In most California estate plans, the primary document is actually a revocable trust, not a will. That’s because California’s rules generally allow you to carry out the terms of a trust without court involvement. However, you almost always need court involvement if your primary document is a will. Your trust will describe how you want your assets used during your lifetime and distributed on your death. A trust will identify someone to carry out your instructions if you become incapacitate, as well as after your death.
“Funding” the trust. Your trust will only be effective in controlling assets you formally connect to your trust. Consider your house. The county knows that you own your house and they will not honor any paperwork concerning title to the house unless it is signed by you. If you want to transfer your house to your kids, the county will expect for you to sign the deed. The obvious problem is that you cannot sign a deed after you have died. If you use a will as your primary estate planning document, then your children will need to get an order from the probate court telling the county to change its records. But if you create a trust and you tell the county that the person who manages your trust has authority to sign deeds, then there is no need for a court order because the county already knows about the trust. The process of telling people about your trust is called “funding” assets into your trust. It is a crucial part of the process.
A “pour-over” will. Although your trust should be your primary estate planning document, you still need a will as a back stop to make sure all your assets are controlled by your trust. Suppose you create your trust and tell the county that your house should be controlled by your trust but then you decide to refinance your mortgage. Lenders don’t like making loans on properties in trust, so as part of the closing, they often ask you to sign paperwork telling the county that the house is no longer in the trust. Your effort to fund the trust has been reversed and you may not even realize it. A “pour-over” will is a simple document that confirms you want all your assets controlled by the trust. Unfortunately, using a pour-over will means you need to ask the court for help.
A durable power of attorney for assets. Incapacity can take several forms. Alzheimer’s and dementia usually pop to mind but there are many other forms of incapacity. A serious bout of shingles or the flu can prevent you from dealing with your own affairs effectively. Falls, car wrecks, skiing accidents – just to name a few – can leave you wishing someone else could go to the bank for you, deal with service providers, and pay your bills. If the situation stretches on, your family may need to go to court for an order authorizing someone to act on your behalf. A durable power of attorney for assets prevents the need for court involvement by identifying the person you want to take these responsibilities and gives them authority
to act on your behalf.
An Advance Health Care Directive. An Advance Health Care Directive does two things: it identifies the person or persons you trust to make health care decisions for you if you can’t make them and it includes your direction about specific issues such as life support, burial, and organ donations. California rules say your spouse can make decisions for you if you cannot. If you do not have a spouse, then your children can make decisions together. If they do not agree, then who suffers? You do because you wait in a facility without treatment until they reach an agreement. You can use an advance health care directive to avoid these stalemates by identifying one child who has ultimate decision-making authority. Sometimes it’s appropriate to name someone other than a spouse or child for this difficult task.
Nomination of guardians for minor children. If you have children who are under the age of 18, you should nominate the person or persons you want to raise your children in case you die before they reach age 18. If you have a trust, the assets you leave for your children will be controlled by the trust, which eliminates the need for a court to oversee those assets. But doctors, schools and a host of others will want paperwork from a court identifying your young child’s legal guardian. Don’t leave this decision to the court. Your plan should include a nomination of guardian.
Three completely wrong reasons people don’t have an estate plan
When we meet with a new client, one of our first questions is, “Do you already have an estate plan?”
All too often, the answer is, “I don’t have an estate.” Few of us have an estate in the country where grandmother grew up riding horses but that’s not the kind of “estate” we mean. The truth is, most of us do have an estate from a legal point of view. Your “estate” includes everything you own or control – your car, house, other real estate, bank and investment accounts, retirement accounts, life insurance, furniture and furnishings, and personal property. Every item that you want to pass on to someone else is part of your estate. If you own real estate or have other assets worth more than $150,000 or children under the age of 18, then you should consider a trust-based estate plan.
Another frequent answer is, “I’m not old enough for estate planning.” Many people think that estate plans only become important in old age but they are crucially important during periods of incapacity. One out of four 20-year olds will become incapacitated for at least 30 days before they reach retirement age. The risk of suffering incapacity before retirement that lasts more than 5 years increases to almost 40% for 35-year olds. An estate plan significantly reduces the hassle your family and friends will face if you become incapacitated. Of course, it also facilitates administration of your estate after your death. Even though it is difficult to think about mortality, it is inevitable.
Rounding out the top three answers is, “I made a will 15 years ago, so I think I’m okay.” Tax considerations aren’t the only factors in estate planning but they are important ones. They change frequently. In 2000, the federal government imposed a tax of 55% on assets over $675,000 that change hands as a result of a death. Today, that tax rate is down to 40%, and it does not apply unless you own more than $5,000,000. Old plans very likely contain provisions that are inappropriate and overly restrictive today and you may be able to simplify your existing plan. If you have an old plan, you should review it to make sure you still like the selections you made for certain jobs (i.e., the person who can make health care decisions or to act as guardian for you children).
