What is estate planning?
Why is it important to establish an estate plan?
What does my estate include for estate tax purposes?
How do I name a guardian for my children?
What estate planning documents should I have?
Q: What is estate planning?
When someone passes away, his or her property must somehow pass to another person. Any competent adult has the right to choose the manner in which his or her assets are distributed after his or her passing. A proper estate plan also involves strategies to minimize potential estate taxes and settlement costs as well as to coordinate what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event of death or disability. A proper estate plan should also include directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you know and trust can do that for you.
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Q: Why is it important to establish an estate plan?
Sadly, many individuals don’t engage in formal estate planning because they don’t think that they have “a lot of assets” or mistakenly believe that their assets will be automatically shared among their children upon their passing. If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death. This can result in the wrong people getting your assets as well as higher estate taxes.
If you pass away without establishing an estate plan, your estate would undergo probate. Probate is the legal process of transferring a deceased persons assets to their beneficiaries through a will or by intestacy if there is no will. Probate is a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.
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Q: What does my estate include for estate tax purposes?
Your taxable estate is simply everything that you own, anywhere in the world, including:
- Your home or any other real estate that you own
- Your business
- Your share of any joint accounts
- The full value of your retirement accounts
- Any life insurance policies that you own
- Any property owned by a trust, over which you have a significant control
- Property outside of the United States
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Q: How do I name a guardian for my children?
If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.
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Q: What estate planning documents should I have?
A comprehensive estate plan should include the following documents, prepared by an attorney based on in-depth counseling which takes into account your particular family and financial situation:
A Living Trust can be used to hold legal title to and provide a mechanism to manage your property. You (and your spouse) are the Trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor Trustees to carry out your instructions in case of death or incapacity. Unlike a will, a living trust is effective immediately. Your Living Trust is "revocable" which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate. A property drafted Living Trust will also minimize estate taxes.
If you have a Living Trust-based estate plan, you also need a pour-over will. For those with minor children, the nomination of a guardian must be set forth in a will. The other major function of a pour-over will is that it allows the executor to transfer any assets owned by the decedent into the decedent's trust so that they are distributed according to its terms.
A Durable Power of Attorney allows someone you appoint to carry on your financial affairs in the event that you become disabled. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.
There are generally two types of durable powers of attorney: a present durable power of attorney in which the power is immediately transferred to your agent (also known as your attorney in fact); and a springing or future durable power of attorney that only comes into effect upon your subsequent disability as determined by your doctor. Anyone can be designated, most commonly your spouse, a trusted family member, or friend.
A Healthcare Proxy is an instrument wherein you to appoint someone you trust to decide about medical treatment options if you lose the ability to decide for yourself. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent's decisions as if they were your own.
A Living Will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment. In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.
Some medical providers have refused to release information, even to spouses and adult children authorized by durable medical powers of attorney, on the grounds that the 1996 Health Insurance Portability and Accountability Act, or HIPAA, prohibits such releases. In addition to the above documents, you should also sign a HIPAA authorization form that allows the release of medical information to your agents, your successor trustees, your family and other people whom you designate.
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