What is “Estate Planning”? In the simplest of terms, it is your “plan”, that is, your decisions on who will get what you own when you die. Terms that we normally encounter in looking at an estate plan are usually the tools, that is, the documents, that we use to carry out our decisions. The most common of these are the Will, the Living Trust, beneficiary designations on your accounts, “joint tenancy” designation on deeds to properties and accounts, including insurance policies.
What is your “estate”? It is everything you own, no matter what form it is in. It includes real estate, personal property such as clothing, jewelry, furniture, and appliances, bank accounts of all types: checking, savings, investments, including 401(k)’s, and IRA’s. It also includes intangible assets such as patents and copyrights.
Your “plan” is your decisions as to who gets what when you die, who will carry out those decisions, and the “tools” that you use to carry them out, such as the Will, Living Trust, or beneficiary designations on your accounts.
There are a few other aspects of a good estate plan besides the disposition of your property. These encompass who will manage your affairs and make decisions for you if you are not able to do that for yourself. The main tools we use here are the Power of Attorney for managing your financial and legal affairs, and the Advance Health Care Directive for decisions regarding your health care.
The first question that comes up is why should I have a Living Trust instead of a Will. They both do essentially the same thing regarding who your estate is to be distributed to, and who will carry out those instructions. The Will is the old traditional tool used for this purpose. The main reason we prefer to use a Living Trust instead of a Will is that under state law, if you have a Will, it may have to go through the formal Probate Procedure. This is state law that governs what must be done to carry out your Will instructions, and will be done under Court supervision. It is both time consuming and expensive.
Even under the most ideal conditions, a formal probate will take at least six month, and typically takes a year or more to complete. The law also allows the attorney performing the probate to take a fee based on the value of the estate. This can be quite high. As an example, an estate valued at $500,000.00 will allow a fee of $13,000.00. For both the time and cost considerations we would want to avoid the formal probate process. The most effective way to do this is to use a Living Trust. Most Trusts can be settled within one month, and can cost as little as $1,000.00. Trusts also have the advantage of being able to continue to manage your estate after death, such as when one of the beneficiaries is under the age of 18, or is not capable of managing his or her own affairs.
One of your key decisions is identifying who will carry out your instructions. In the Living Trust, we call this person the “successor trustee”. In the Will, he or she is known as the “executor”. Both terms mean the same. For this discussion we will assume you are naming a “successor trustee”, but it will apply to the “executor” as well. Your successor trustee must be an adult, 18 years of age or older. He may be a family member or a close friend. The person should be someone you trust to carry out your instructions. There are also professional persons and organizations who will provide this service if you do not have an appropriate family member or friend to use.
You can name one person as your sole trustee, or you can name two or more persons as “co-trustees” who must act together in carrying out their duties. Whether you name a sole trustee or co-trustees, you should consider naming “alternates” in case the primary person(s) are not available.
You will want to discuss these options with us when you are forming your estate plan.
Another part of your plan is designating persons who can manage your financial and legal affairs for you if you are not able to so for yourself. This tool is called the “Power of Attorney”. You will name an “agent” who will do this for you. As with the Trust, you can name a single person as “sole agent”, or two or more persons who will act as “co-agents”. It is important to note that you are not giving your agents power to force you to do anything. You are giving them permission to act on your behalf.
In addition to managing your financial and legal affairs, you may also want to designate someone to make your health care and medical decisions for you if you are not able to do that for yourself. This document is called the “Advance Health Care Directive” in California. Other states may refer to it as a “health care power of attorney” or a “living will”. What we do with this document is designate an “agent” to make your health care decisions for you. In addition, there are some basic decisions that you want to make right now. The most important is the “End of Life” decision: Do want to have your body kept alive on artificial life support measures, or to let nature take its course. Related to that decision is whether you want to receive the most powerful pain medication even if it might shorten your life. You can also decide now if you wish to donate any organs or other body parts after you die. There are a lot of details here that we should discuss.
The last part of estate planning is designating “beneficiaries” on certain accounts and life insurance policies. This is in addition to the documents described above. Again, we need to discuss these options in detail so you know when it must be done, or can be done as an alternative to using a Living Trust or Will.