While there are a variety of reasons why people decide to meet with an estate planning attorney, I have found the ones listed below to be the top five.
1. Avoiding Probate
This by far seems to be the most common reason why people seek out the advice of an estate planning attorney. While many have never even dealt with probate, they still know one thing: they want to avoid it. This stems from probate horror stories covered by the media or told by neighbors, friends or business associates. Suffice it to say that for the vast majority of people, avoiding probate is a very good reason for creating a foundational estate plan and can be easily achieved.
2. Reducing Estate Taxes
The significant loss of one’s estate to the payment of state and/or federal taxes is a great motivator for putting an estate plan together. Through the most basic planning, married couples can reduce or even possibly eliminate estate taxes altogether by setting up AB Trusts as part of their foundational estate plan. In addition, a variety of advanced techniques can be used by both married couples and individuals to make the tax bill less burdensome or completely go away.
3. Avoiding a Mess
Many clients seek the advice of an estate planning attorney after personally experiencing, or seeing a close friend or business associate experience, a significant waste of time and money due to a loved one’s failure to make an estate plan. Choosing someone to be in charge after your death and deciding who will get what, when they will get it, and how they will get it goes a long way towards avoiding family fights and costly court proceedings.
4. Protecting Beneficiaries
There are two main reasons why people put together an estate plan in order to protect their ultimate beneficiaries: (a) protecting a minor beneficiary, and (b) protecting an adult beneficiary from bad decisions and outside influences. If the beneficiary is a minor, all 50 states have laws that require someone to be appointed to oversee the minor’s needs until the minor becomes a legal adult (at age 18 or 21, depending upon the laws of the state where the minor lives). You can prevent family discord and costly legal expenses by taking the time to designate a guardian and trustee for your minor beneficiary. If the beneficiary is already an adult but is bad at managing money or has an overbearing spouse or partner who you fear will squander the beneficiary’s inheritance or take it in a divorce, then you can create a plan that will protect the beneficiary from their own bad decisions as well as those of others.
5. Protecting Assets from Unforeseen Creditors
Lately asset protection has become a very important reason why people, including those who already have an estate plan, are meeting with their estate planning attorney. Once you know or even just suspect that a lawsuit is on the horizon, it’s too late to put a plan in place to protect your assets. Instead, you need to start with a sound financial plan and couple that with a comprehensive estate plan that will in turn protect your assets for the benefit of both you during your lifetime and your beneficiaries after your death. You can also provide asset protection for your spouse through the use of AB Trusts and your other beneficiaries through the use of lifetime trusts.
When do you need to update your estate planning???
As an estate planning attorney, I believe that it’s my duty to contact my clients once a year through an annual review and maintenance program in order to remind my clients to think about their estate plans and any changes that may be needed. But, unfortunately, not all estate planning attorneys follow this type of process. If your estate planning attorney doesn’t, then here’s a list of the top six reasons why you should consider updating your estate plan.
1. Change in Marital Status
A change in your marital status will require significant changes to your estate plan. If you’ve recently married, then a whole new set of gift and estate tax planning opportunities have become available to you and your new spouse, including tenancy by the entirety, community property, AB Trusts, and split gifts. Or, if you’ve recently divorced, then your estate plan should be updated to insure that your former spouse is removed as a beneficiary and fiduciary and you’ll also need to update the beneficiary designations for your life insurance and retirement plans, including IRAs and 401ks, to insure that your spouse is removed there as well.
2. Change in Financial Status
A change in your financial status will also require significant changes to your estate plan. If you’ve recently won the lottery or received an inheritance, then you’ll need to reevaluate if your estate is taxable at both the state and federal levels and, if it is, then explore techniques that will minimize these taxes. You should also fund your winnings or inheritance into your Revocable Living Trust so that these assets won’t need to be probated. Aside from this, you should segregate your winnings or inheritance from your marital assets if you don’t want them snatched up in a divorce. On the other hand, if your estate has declined in value, then you should review your plan to insure that it still makes sense.
3. Birth or Death of a Beneficiary or Fiduciary
If a beneficiary or fiduciary named in your estate plan has died, then you should update your plan to remove the deceased person’s name. If you don’t, then years from now your Personal Representative or Successor Trustee will have to track down an original death certificate for the deceased person, and this can become time-consuming and costly. If your spouse has died, then your plan will need to take on a whole new structure. On the other hand, if you or a beneficiary has adopted or had a child, then you should review your plan to insure that the new child is, or perhaps isn’t, included. Suffice it to say that the birth or death of a beneficiary or fiduciary will most likely lead to changes in your estate plan.
4. Purchase or Sale of a Business
If you’ve recently purchased a business, then you should meet with your estate planning attorney to insure that your estate plan is structured properly to deal with the business if you become disabled or after you die, and also to put together a comprehensive business exit plan. On the other hand, if you’ve recently sold a business, then you should meet with your estate planning attorney to insure that your plan is properly structured now that you don’t own a business, that the sale proceeds are titled in the name of your Revocable Trust, and to determine if your estate is no longer, or has become, taxable. If it has become taxable, then you’ll need to figure out how the taxes will be paid as well as ways to minimize the estate tax bill.
5. Moving to a New State
Moving to a new state is one of the most important reasons to meet with an estate planning attorney in your new state. Why? Because state laws dictate what estate planning documents need to include and how they need to be signed. The last thing that you want is for your plan that would have worked well in your old state to be declared invalid in your new state because of one wrong provision or one missing signature. Aside from this, if you move from a state that imposes an estate tax to one that doesn’t, or vice versa, then your plan will need to be updated to take into consideration this change in the taxable status of your estate.
6. Changes in Lives of Beneficiaries or Fiduciaries
While significant changes in your own life will require changes in your estate plan, so will changes in the lives of your beneficiaries or fiduciaries. If your children were minors when you initially set up your plan, then as they get older you should assess whether they’re ready to be named as your fiduciaries. If a beneficiary or fiduciary moves away or you simply lose touch with them, then you should reevaluate your plan to insure that your property is still going where you want it to go and that you’ve named the right fiduciaries. Suffice it to say that you should monitor the changes in the lives of your beneficiaries and fiduciaries to determine if these changes will have any affect on the goals and structure of your estate plan.
What is a Revocable Living Trust?
Much has been written recently regarding the use of “living trusts” (also known as a “revocable trust” or “inter vivos trust”) as a solution for a wide variety of problems associated with estate planning through wills. Some attorneys regularly recommend the use of such trusts, while others believe that their value has been somewhat overstated. The choice of a living trust should be made after consideration of a number of factors.
This brief summary is intended to provide a framework of basic knowledge regarding “living trusts” in general, in order that you might determine whether you should pursue a discussion of this technique further with your attorney licensed to practice in the state where your estate would be administered.
The term “living trust” is generally used to describe a trust (a) which you can create during your lifetime, and (b) which you can revoke or amend whenever you wish to do so. You can also create an “irrevocable” living trust, but that is permanent and unchangeable and is almost exclusively done to produce certain tax results beyond the scope of this summary.
A “living trust” is legally in existence during your life, has a trustee who is currently serving, and owns property which (generally) you have transferred to it during your life. While you are living, the trustee (who may be you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries. Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (a) provide you with a vehicle for managing your property during your life, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.
What Happens if You Die Without A Will?
If you die intestate (without a will), your state’s laws of descent and distribution will determine who receives your property by default. These laws vary from state to state, but typically the distribution would be to your spouse and children, or if none, to other family members. A state’s plan often reflects the legislature’s guess as to how most people would dispose of their estates and builds in protections for certain beneficiaries, particularly minor children. That plan may or may not reflect your actual wishes, and some of the built-in protections may not be necessary in a harmonious family setting. A will allows you to alter the state’s default plan to suit your personal preferences.
What a Will Does
A will provides for the distribution of property owned by you at the time of your death in any manner you choose (subject to the forced heirship laws of some states that prevent disinheriting a spouse and, in some cases, children). Your will cannot, however, govern the disposition of properties that pass outside your probate estate (such as certain joint property, life insurance, retirement plans, and employee death benefits) unless they are payable to your estate.
Wills can be of various degrees of complexity and can be utilized to achieve a wide range of family and tax objectives. If a will provides for the outright distribution of assets, it is sometimes characterized as a simple will. If the will establishes one or more trusts, it is often called a testamentary trust will. Alternatively, the will may leave probate assets to a preexisting inter vivos trust (created in your lifetime), in which case it is called a pour over will. In either case, the purpose of the trust arrangement (as opposed to outright distribution) is to ensure continued property management and creditor protection for the surviving family members, to provide for charities, and to minimize taxes.
Aside from providing for the intended disposition of your property to spouse, children etc., there are a number of other important objectives that may be accomplished in your will.
You may designate a guardian for your minor child or children if you have survived the other parent and, by judicious use of a trust and appointment of a trustee, eliminate the need for bonds and supervision by the court regarding the care of each minor child’s estate.
You may designate an executor of your estate in your will and eliminate the need for a bond; in some states the designation of an independent executor will eliminate the need for court supervision of the settlement of your estate.
You may choose to acknowledge or otherwise provide for a child (e.g., stepchild, godchild, etc.) in whom you have an interest, an elderly parent, or other individuals.
If you are acting as custodian for the assets of a child or grandchild under the Uniform Gift (or Transfers) to Minors Act, you may designate your successor custodian and avoid the expense of a court appointment.
Good planning can also enhance your support of religious, educational, and other charitable causes.
What a Will Does Not Do
A will does not govern the transfer of certain types of assets, called nonprobate property, which by operation of law or contract pass to someone else on your death. For example, real estate and other assets owned with rights of survivorship pass automatically to the surviving owner. Likewise, an IRA or insurance policy payable to a named beneficiary passes outside the will.
How to Execute a Will
Wills are signed in the presence of witnesses and certain formalities must be observed. A later amendment to a will is called a codicil and must be signed with the same formalities. In some states, the will may refer to a memorandum disposing of tangible personal property, such as furniture, jewelry, automobiles, etc., which may be changed from time to time without the formalities of a will. In many states, a will that is formally executed with the signatures notarized is deemed to be self proved and may be admitted to probate without testimony of witnesses or other additional proof.