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Estate Planning

What Is Estate Planning?

At its most basic level estate planning is the creation of a plan for managing your wealth while you’re alive and distributing it after your death. So what exactly is included in your estate?  When we talk about your estate, we mean all assets that you own, including real property, business interests, investments, insurance proceeds, personal property and your personal effects. These assets may be owned solely by you, or they may be owned jointly with others. Some common examples of how a married couple often holds title to property are as follows:

  • Community Property: Undivided one-half interest owned by each spouse.
  • Separate Property: Entire interest owned by only one of the spouses. This is a common occurrence when one spouse acquired property prior to marriage.  It is also common where property was gifted or inherited by one spouse after the marriage.
  • Joint Tenancy: Individual interest owned by and two or more people in which the survivor(s) acquires the entire interest upon the death of the other joint tenants. I Don’t Consider Myself Wealthy. Do I Need Estate Planning?

What Hurdles Are We Trying To Clear With An Estate Plan?

There are three principal hurdles we have to clear in planning our estates:

  1. Conservatorship: The expensive court process to manage your estate if you are disabled or
    incapacitated
  2. Probate: The expensive court process to manage and distribute your estate at
    death
  3. Death Taxes: The taxes the government demands at your death.  The federal estate tax
    currently starts at 41% and can go as high as 50% of everything you own
    at death.

What Are My Estate Planning Options?

There are only four options when it comes to estate planning:

  1. Do nothing
  2. Hold title to your assets in Joint Tenancy
  3. Create a Will
  4. Establish a Revocable Living Trust

What Happens If I Do Nothing?

Surprisingly, most experts report that 70% of all Americans have no written estate plan.  Furthermore, of those that do plan, most only have a simple will or rely on joint tenancy ownership of their assets to distribute their estate.  Unfortunately, for those who have no plan in place, the state will provide one for you and you might not like it.  State law will dictate how your estate is distributed at death.  So that crazy uncle you always avoid during the holidays may end up with a piece of your estate! As you can imagine, the state will have no particular concern for the best interests of your family. There’s no argument that doing nothing will incur significant attorney’s fees, probate costs, and higher death taxes.  However, what most people don’t realize is that there can also be major problems as a result of creating a simple will or holding title to your assets in joint tenancy.

What Is Joint Tenancy And Why Do So Many People Use It?

Joint tenancy is where two or more people hold title to an asset together.  So, what makes joint tenancy different from other forms of joint ownership?  Upon the death of one joint tenant, the ENTIRE interest passes automatically to the remaining joint tenant(s). The full name for joint tenancy is Joint Tenancy With Right of Survivorship (JTWROS).  Right of survivorship simply means that whomever dies last owns the whole property.

Because a joint tenant’s interest automatically passes, as an operation of law, to the surviving joint tenant, it’s not controlled by the owner’s will.  For example, let’s say two good friends, Joey and Chandler, owned a piece of property as joint tenants.  Chandler dies and his will says that upon his death all of his estate should go to his wife, Monica.  What happens to his interest in the real property he owns with Joey? Because the interest passes automatically at death to the surviving joint tenant(s), Joey will own the entire property and Monica will own nothing. This is only one of the many unforeseen problems that joint tenancy ownership can create.

What If I Create A Will? Is That Any Better?

Many people plan their estates by creating a document called a Last Will and Testament.  At its core, a will is a legal document that explains how you want your assets distributed at death.  As we’ve already learned, a will doesn’t totally control the distribution of all of your assets.  Joint tenancy and property and lie insurance proceeds both pass outside your will.  Additionally, wills don’t take effect until you die so they are no help with lifetime planning.  Upon your death, your will becomes a public document as it has to be filed with the probate court and will be available to anyone who wants to read it.  Once your will enters the probate process, your estate is no longer controlled by your family.  Instead, it is in the hands of the court and the probate attorneys.  Thus, because a will guarantees that your estate will go through probate, it’s a very poor estate planning document document for most families.

Why Do So Many Estate Planning Professionals Recommend A Revocable Living Trust?

A Revocable Living Trust is a complete will substitute.  It can control all of your assets both during your lifetime and after your death.  Here’s how it works: When you set up your living trust, you transfer the title of all your major assets (stocks, bonds, real estate, etc..) from your name to the name of the trust.  You then name yourself as the initial trustee and beneficiary.  That gives you, or you and your spouse, complete and total control of your assets. You can buy, sell, trade, do whatever you want—just like you do now.

For example: Chandler and Monica own a home together as Joint Tenants (we already saw how that ended for Monica the first time around).  Let’s say that they decide to create a Revocable Living Trust.  Instead of owning their home as ‘Chandler and Monica Bing, JTWROS,’ they will now own the home as ‘Chandler and Monica Bing, Trustees of the Geller Bing Family Living Trust.’

Here’s the difference, and the real benefit: when you die, there will be no assets left in your individual name, and therefore, no probate for your family to endure.

Whomever you name as your successor trustee will immediately gain control of your assets to distribute them according to your exact instructions.

What Is A Complete Estate Planning Portfolio?

Revocable Living Trust: Avoids Conservatorship and Probate
Schedule A: Summary of assets owned by Living Trust
Pour Over Will: Transfers any assets outside of the Trust into your Trust
Advanced Health Health Care Directive Authorizes an agent you’ve selected to make medical decisions if you become incapacitated
Durable Power of Attorney: Authorizes an agent you’ve selected to manage your financial affairs if you become incapacitated

 

 

Shouldn’t I Just Create My Estate Plan Online To Save Money?

No, you definitely should not create your estate plan online.  Online document preparation companies and software use generic language and are not customizable.  You, your family, your values and your assets are unique to you.  Why would a one-size-fits-all solution work for you?  The expense of creating a complete estate plan through a qualified attorney is minimal compared to the devastating effects of not having an estate plan at all or even worse, a poorly drafted one.  And unfortunately, you won’t ever know that your estate plan is deficient or doesn’t accurately reflect your wishes.  Your beneficiaries are the ones who will discover this fact when it’s too late to change anything.

I’m Not Rich And I Don’t Have An ‘Estate’.  Do I Still Need An Estate Plan?

If you own more than $150,000 in assets, you will need a complete estate plan.  If you own property of any kind with a fair market value in excess of $50,000, you will need a revocable living trust as part of your estate plan.  You may not think you’re rich, but that doesn’t exempt your family from having to go through the pain of probate if you don’t have a trust.

I’m Not Married And I Don’t Have Children.  I Don’t Need An Estate Plan, Right?

Wrong. You need an estate plan more than most people!  In the case of a single person with no children, probate law will pass your assets to your parents, then your siblings and your nieces and nephews if possible.  The distributions of your assets then go to more distant relatives if your immediate family is not alive at the time of your death.  Most people have friends, specific relatives and even charities to whom they want to leave their estate.  You can’t do this without an estate plan!

 

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