Estate planning is an important aspect of wealth management that should be addressed early in your career, and reviewed and modified periodically as you age.

In fact, estate planning could require updating every five to seven years, or when major life events occur (marriages, divorces, the births of children or grandchildren, a move to another state, or a major change in the estate tax code).

A common misconception about the term “estate planning” is that many people believe that such planning only concerns what happens after someone dies. Certainly, as we will see in this article, estate planning has a broader scope and includes areas that impact individuals while they are still alive. We will discuss two significant aspects of estate planning:

  • Incapacitation planning. Deals with decision-making regarding legal, financial, and medical issues if one is unable to make decisions for oneself.
  • Estate distribution planning. Concerns what happens to assets upon death.

A third aspect, transfer tax planning addresses and plans for the various gift, estate, and other taxes that may be triggered under state and federal law when transferring wealth during life or at death. This topic is covered in other articles and book chapters. Contact us if you would like more resources on this topic.

Incapacitation Planning

Planning for one’s own incapacitation (i.e., what happens if you are not able to make decisions for yourself) is never pleasant but always important.

As an example, what happens if you are hospitalized and cannot express your wishes regarding decisions that must be made about your medical care? Many people assume that their family members would automatically be able to make decisions in this scenario. However, rules vary greatly from state to state. In some cases, decisions are left up to the healthcare providers and institutions in charge of your care. Also consider what may happen if such decisions can be made by your family members but they do not all agree on the best course of action.

There are several key documents that everyone should have in place, for which the exact names of and requirements are controlled by state law and thus will vary. Typically, an estate planning attorney will prepare these at the same time he or she is preparing estate planning documents such as wills and trusts. Such documents might include the following and should be part of everyone’s overall planning:

Living Will: A written record of the type of medical care you would want in specific circumstances.

Health Care Proxy: A document that names someone you trust as your proxy, or agent, to express your wishes and make health care decisions for you if you are unable to speak for yourself.

Advance Directive: This term often refers to a combination of the living will and health care proxy documents.

Power of Attorney: A document that names someone you trust as your agent to make property, financial, and other legal decisions on your behalf.

Estate distribution planning

Before we address the foundational estate planning documents most should employ, consider what occurs if you die without any will or other estate planning document in place. Would you be surprised to know that you already have a will, even if you have never written one or had an attorney draft one? If you die without a will, then your property will pass under the scheme that your state legislature has written for its citizens. This is what is known as dying “intestate.”

There are various negative consequences of dying intestate. While the precise rules vary among the 50 states, typically the laws are very rigid and formulaic. Usually, your nearest relatives get a piece of your property but no one else does—not friends, cousins, or charities. Furthermore, no one gets more than the state-allotted share, even if that seems unfair. Often, this ends up hurting the surviving spouse if there is one. In this all-too-common scenario, the decedent’s grown children may get some of the money meant for the surviving spouse, even if it means the surviving spouse then has too little to live on. In larger estates, this could have the very impractical effect of creating an estate tax payable when the first spouse dies if the children’s intestate share of the estate exceeds the federal or state exemption amount. Moreover, intestacy may lead to expensive and lengthy court battles by family members contesting the division of assets.

Perhaps the most upsetting thing about intestacy occurs if one has minor children. In this case, and if both parents die intestate, the courts will decide who becomes the legal guardian of the children. What parents would want to have an unknown judge decide who will care for their children after they pass away? Furthermore, any minor children will receive their share of the estate when they turn 18, rather than at some more appropriate later age that you can specify with proper planning.

Wills and Living Trusts

While estate planning documentation is completely state-dependent, we can say that in every state, having a will is better than not having a will. However, in many states, with a will alone, your entire estate will be stuck in the probate process. Probate is the court-controlled process by which the state administers your will.

In most states, knowledgeable estate planning advisors recommend combining a living trust with a short will called a “pour-over will” because this combination ensures that much of an estate will avoid probate. Depending on the state, probate can be time-consuming, public, and very costly.  It many states, the goal is to avoid the process as much as possible.

The Living Trust: A Foundational Estate Planning Document

“Living trust” is a common name given to a revocable trust (which, unsurprisingly, is revocable, meaning you can revoke it or amend it any time during your life). Such trusts are also sometimes called “family trusts” or “revocable family trusts.”

Regardless of its name, the living trust is a revocable trust that provides direction for the use of your assets both while you are alive and at the time of your death. During your life, the assets transferred to the trust are managed and controlled by you, as the trustee, just as if you owned them in your own name. When you die, these trust assets automatically pass to whomever you designated in the trust, outside of the probate process. Other benefits of the living trust include the following:

  • avoidance of the unintentional disinheritance caused by joint tenancy
  • prevention of court control of assets if you become incapacitated
  • protection of beneficiaries with special needs
  • the ability to nominate guardians to take care of your children if you are incapacitated (but still alive) or when you die

For these reasons, many will want to use a living trust as the foundational document in their estate planning.

Conclusion: Estate Planning is a Must

Incapacitation planning is essential at any age and estate distribution planning is valuable for those with even minimal assets.  For these reasons, everyone should engage in basic estate planning early in their careers.