Estate Planning
As you get older, doing some estate planning—or revisiting the estate documents you already have in place—may not be at the top of your to-do list. It should be, though.
This is because estate planning doesn’t just ease your mind about what happens to bank and retirement accounts, real estate and other assets after death. Proper estate planning also has a lot to do with how your life can go after you retire.
An estate plan can protect you if you become incapacitated and unable to make medical and financial decisions for yourself. A properly funded and managed trust can help ensure the money you saved won’t be frittered away by loved ones or seized by their creditors. Here are some estate planning basics:.
Do Most People Take Advantage of Wills and Estate Planning?
A 2019 survey from Caring.com found that 47% of respondents ages 55 to 64 don’t have estate planning documents, such as a will or living trust. Of those 65 and older, 32% don’t have one or both documents in place.
More than half of those surveyed said the main reason they put off estate planning was that they “just haven’t gotten around to it.” Others assumed they didn’t have enough assets to leave or were worried that it takes too long to set up an estate plan.
Fortunately, estate planning doesn’t have to be confusing. Our estate planning guide provides crucial information you need to prepare or revisit your estate plan, including:
- The four documents you need it your estate plan
- How to set up estate planning trusts that can protect your assets
- How to minimize risk to assets you wish to pass on to others
- How estate or inheritance taxes could affect your heirs
- Strategies for long-term care planning and asset protection
- What snowbirds need to know about property owned in another state
- How to choose an estate planning attorney
What Is Estate Planning?
According to the Internal Revenue Service (IRS), your gross estate for tax purposes consists of “an accounting of everything you own or have certain interests in at the date of death.” Your estate may include:
- Real estate
- Cash and securities
- Life insurance
- Annuities
- Business interests
- Other assets like personal collections
Estate planning allows you to design a strategy unique to your individual, family, and/or business situation, including tax and liquidity planning.
“You really do not create an estate plan for yourself, just like you do not take out a life insurance policy for yourself,” says Kyle Krull, an estate planning attorney in Overland Park, Kansas. “In both instances, you’re doing it to protect everyone you love and everything you have from chaos, inconvenience and potential family feuds.”
What Can Happen to Your Estate and Assets Without Proper Wills and Estate Planning
If you die “intestate”—that is, without a will—the laws in your state will determine who inherits from you. If your assets exceed your state’s applicable “small estate” limit, you can expect your estate to pass through state probate court, the formal legal process that appoints an administrator to manage the estate. It’s the administrator’s job to distribute assets to court-selected beneficiaries.
The court basically follows your state’s laws of descent and distribution with no consideration for your family dynamics or any wishes you may have expressed to others. Your estate also may be subject to estate taxes that might otherwise have been avoided with proper wills and estate planning.
“Some people think that having a will is sufficient to avoid probate. It’s not,” says Maureen Lyons, an estate planning lawyer in Riverside, California. “A will just allows the testator (decedent) to ‘override’ the state defaults by naming an executor and beneficiaries. If you don’t have a will, then the state probate code fills in the blanks regarding who gets what.”
Estate Planning Basics
A basic estate plan comprises of at least these four documents:
1. Last Will and Testament
A will provides for the distribution of certain property owned by you and allows you to choose how to distribute or dispose of property in just about any manner you choose. Some exceptions to free choice may apply, though, such as state laws that could prohibit disinheriting a spouse or children. A will doesn’t govern the disposition of titled or jointly titled property with rights of survivorship or assets with designated beneficiaries, such as payable on death accounts, life insurance, retirement plans and accounts, and employee death benefits, which pass outside your probate estate.
2. Power of Attorney for Finances
If you become incapacitated, a durable power of attorney allows the person you name as your “agent” or “attorney-in-fact” to make financial and certain legal decisions on your behalf, including things like:
- Accessing, opening or closing bank accounts
- Filing your tax returns
- Affecting the sale of securities
- Selling real estate
When naming your durable power of attorney for finances, “integrity, not financial acumen, is often the most important trait of a potential agent,” according to the American Bar Association.
3. Durable Power of Attorney for Healthcare
Also called a healthcare power of attorney, medical power of attorney or healthcare proxy, the durable power of attorney for healthcare allows you to name a person who can make medical decisions for you based on your instructions if you become incapacitated and unable to make those decisions yourself.
The agent and successor agent you choose as a healthcare power of attorney should be able to make life-and-death decisions according to your wishes, not their own.
4. Advance Health Directive
An advance health directive expresses your specific wishes for medical treatment if you are incapacitated. Having such a directive in place helps ensure that your wishes are followed and also can reduce the strain on family members who otherwise would be making critical decisions without your input. The durable power of attorney for healthcare is a form of advance directive. So is a living will, which comes into play when you have a terminal illness or are in a state of permanent unconsciousness.
In addition to these four documents, estate planning also may include:
- One or more trusts designed to avoid probate and distribute and/or protect assets
- An asset protection strategy for long-term care planning
- A business succession plan or other business-related documents
- Final wishes for funeral arrangements, pet care and other personal matters
How Often Should I Revisit My Estate Plan?
Life can change a lot in just a few years. Maybe you’ve remarried, moved or bought property in another state. Perhaps you have new grandchildren. It’s a good idea to review your estate plan with your estate planning attorney every two to four years, or more often if you’ve experienced significant change.
Estate Planning: One Size Doesn’t Fit All
Think of a friend with a life and family much like your own. Maybe you’re both married, around the same age, earning similar incomes and have grown children as you approach retirement. However, your estate planning needs could be very different.
Maybe one of you wants to set up a trust for a child with special needs. The other may have a grown child who would blow through an inheritance without restricted distributions and a trustee’s oversight. Maybe you remarried and want to ensure that your kids from the first marriage won’t be disinherited if you die first and your husband or wife remarries.
Your estate plan should—and can—be designed to address your unique needs and situations.
Hiring an Estate Planning Attorney vs. Using DIY Documents for Wills and Estate Planning
It may be tempting to purchase fill-in-the-blank wills, powers of attorney and other documents online. After all, these forms are a lot less expensive than paying an estate planning attorney.
However, unlike an attorney experienced in estate planning for blended families, estranged children, long-term care needs and many other situations, DIY forms may not dig deep enough to avoid potential problems that can arise.
If you’re single with no kids and don’t own more than a house, car, and bank and retirement accounts, you may be able to cover estate planning basics by setting up survivorship titling and beneficiaries on bank and retirement accounts. You may even be able to use state bar association-approved forms for durable healthcare and financial powers of attorney, along with an advance directive.
However, in all cases, you should still ask an estate planning attorney to review your estate plan to make sure it’s set up properly and according to state law.
How to Choose an Estate Planning Attorney
When it comes to identifying the right estate planning attorney for you, you have options:
- If you ask trusted friends and family members for referrals, be sure to verify the experience, credentials and reputation of any recommended estate planning attorney.
- Search your state bar association, or the state agency or judicial branch that is charged with attorney licensing and disciplinary actions.
- You also can search directories such as Avvo and Lawyers.com, which include independent ratings and client reviews.
Estate Planning Trusts
A trust is a legal arrangement that allows assets of your choice to be held in a way that can preserve, protect and distribute your assets. An estate planning trust may include:
- Protecting life insurance proceeds and other assets from a beneficiary’s creditors
- Managing your assets if you become ill, disabled or need long-term care
- Ensuring that a child with special needs has a lifetime “safety net” that doesn’t prevent them from receiving public assistance and other government benefits
- Making sure that, if your spouse remarries after you die, your children or grandchildren won’t be disinherited
- Regulating and overseeing distributions to financially irresponsible heirs
- Transferring property owned in another state into the trust to avoid that state’s probate process
Every Trust Has Three Parties
- Grantor or settler, the creator of the trust
- Trustee, the manager or administrator of the trust
- Beneficiary or beneficiaries, who will benefit from the trust
There Are Two Fundamental Types of Trusts
A revocable trust is set up during your lifetime, and you, the grantor, reserve the right to terminate, revoke, modify or amend the trust.
An irrevocable trust can’t be terminated, revoked, modified or amended by the grantor, with limited exceptions.
Most often, an irrevocable trust is set up for tax or asset protection.
Three Ways for Estate Planning Trusts to Become Effective
A revocable living trust is set up and funded while you’re still alive. You are the beneficiary until your death and, following your death without probate, the trust becomes irrevocable to distribute its assets according to your wishes.
An irrevocable living trust is set up and funded while you are alive, but in most instances, you are neither the trustee nor the beneficiary. This type of “living trust” is often done for tax minimization and asset protection purposes.
A testamentary or death trust is an irrevocable trust created by your will, and the trust provisions are contained in the will. This type of trust is set up following your death after probate to distribute its assets according to your wishes.
Regardless of the type of trust or when it is created, every estate planning trust must be properly “funded” with the intended assets to accomplish its purpose.
An estate planning attorney can help make sure your asset titles and beneficiary designations align with your estate plan to properly fund your trust.
How Estate Planning Affects the Taxes of the Estate and Heirs
If a U.S. citizen dies in 2021, a federal estate tax return must be filed if the decedent’s gross estate is more than $11,700,000. A federal estate tax return also must be filed if the estate transfers any deceased spousal unused exclusion to the surviving spouse, “regardless of the size of the gross estate or amount of adjusted taxable gifts,” according to the IRS.
While most people’s gross estate won’t exceed that federal threshold, several states impose their own estate and/or inheritance taxes, whose threshold amounts may differ.
“The state estate tax is paid by the estate itself before distribution, and the inheritance tax is paid by the person inheriting from the estate and varies based on familial relationship,” says Krull. “An experienced estate planning attorney can help you create a plan to minimize or even eliminate federal, state and inheritance taxes.”
How Estate Planning Can Protect Your Assets for Long-Term Care
“The biggest threat to most people’s wealth and legacy isn’t usually estate taxes. It’s probably the cost of long-term care,” says Lyons. This is why you should implement a long-term care strategy as part of your estate plan, especially if you don’t have long-term care insurance.
Nearly 60% of people will need some form of long-term care services, according to the U.S. Department of Health and Human Services.
The national median cost for a home health aide is almost $55,000 a year, and the national median for a semi-private room at a nursing home is more than $93,000 annually, according to the Genworth’s 2020 survey.
Elder law attorneys typically have more training in addressing the long-term care component of estate planning. Strategies can include moving assets into an irrevocable trust or other methods to protect funds for nursing home and other long-term care costs.
“The purpose of transferring assets into an irrevocable trust isn’t to give anyone an early inheritance,” says Lyons. “It is a means of removing the assets from your own estate so that if you apply for Medicaid (or Medi-Cal in California), you would not report them since you no longer own them. Your trustee can then use those assets to pay for those things not covered by Medi-Cal or Medicaid.”
What Snowbirds Should Know About Estate Planning
Each state has its own probate laws that apply to owned real estate. This means if you own property in another state or spend a lot of time living in a different state, proper estate planning can make life a lot easier on grieving family members when you die.
For example, let’s say that you and your spouse buy a second home, a condo in Florida, where you plan to spend the winter months. You take the title to the home as joint tenants with rights of survivorship. When the last spouse dies, the real estate in Florida would have to go through Florida probate, just like any real estate similarly owned in your home state would have to go through probate there.
One common solution? “Create a revocable living trust and title all of your real estate in it to avoid probate in both states,” says Krull.
It’s also a good idea to consult with an estate planning attorney in any state where you reside during even part of the year. You’ll want to get durable powers of attorney for finances and healthcare and an advance directive drawn up according to that state’s laws.
“While the laws of most states provide that legal documents properly prepared in one state will be honored in another state, it is ‘cheap insurance’ to cover your bases wherever you spend time,” says Krull.
What Are My Next Estate Planning Steps?
Set up an estate plan if you don’t have one, or revisit the estate plan you have in place to make any necessary changes.
What tips would you add for readers based on your personal experiences?
View Comments (14)
It's great that you mentioned how an estate plan could protect you if you become incapacitated and unable to make medical and financial decisions for yourself. My friend is very interested in estate planning, however, he doesn't know where to exactly start with it. So, I think he should ask for some assistance from a lawyer.
Yes, my youngest sister and one of my older brothers took it upon themselves to draw up a power of attorney without consulting other siblings of there's in doing so. They were taking my mom to North Carolina for an assessment of her condition for a couple of weeks till my brother got a room ready for her in his house so she could stay with them and go to a doctor closer to home. They then proceeded without any knowledge of them doing it typed up a power of attorney and went to court house and had a member of there family witness it without notifying any of there immediate family members of what they were doing and got my mom to initial the power of attorney papers and took to court house to get noterized. We had no idea this was happening and we were told she couldn't remember what she done 3 to five minutes after she does it. She was coerced into this by my sister and brother when she did not know what she was doing. She wrote a letter stating me, my youngest sister and my brother that she is feeding property to all three of us. I did not know this letter existed till now. She also has us go to NC to appear at the clerks office so they could sign guardian papers without notifying us or giving us paperwork on what they were doing. My mom was drugged up so bad she didn't know who we were but they managed to say she wanted to live in NC and we didn't get to hear her say it in front of us and According to the paperwork they were supposed to let us hear it. And they said they didn't need us up there it was already done anyways. So what can I do? To me they manipulated my mom into something she had no clue of and yet they still did it without our consent as a family.
Just about all of whatever you say happens to be astonishingly appropriate and it makes me ponder why I had not looked at this with this light previously. This particular article really did turn the light on for me personally as far as this subject goes. However there is actually one issue I am not really too cozy with and while I attempt to reconcile that with the core theme of the issue, permit me see just what the rest of the visitors have to say.Well done.
Before I read your information, I did not know that if a person dies without a will, then it is the laws in the state that decide who inherits from that person. Thank you for pointing out that a will doesn't necessarily avoid probate. My dad is 65 years old. He just retired and he has not even begun to think about a will. We feel like he is playing the chance card with his optimism. I think it is important to talk to him about these things you bring up, which we will probably do the next time we see him.
We're glad you found the article informative! Thanks for reading Extra Mile!
It's great that you mentioned revisiting an estate plan often. My kids are mostly doctors and frontliners in hospitals. They treat patients with COVID every day and with the huge risks involved with that kind of career it would be a good idea to check on our estate plans now and then in case something happens to one of them. As you said, estate planning for one of us may not be what the other wants, I think it'd be best for us to get an estate planning attorney so that way they can talk to us regularly about what each of us wants to happen when we pass.
I should have looked into this a long time ago.
Beyond all legalize is the heartfelt question my sun asked the other day: Mom, what do I do with all that your life is leaving behind? Letters, publications, notebooks, photos, art you created, lectures, songs you sang? How can I possibly remove all this without removing all you are and have been in your life and mine?"
These are deep, human essentials, there is no legal comfort that secures these questions or this aftermath upon a parent's departure.
A well meaning Pyschologist advised my father to sell and move into another house following my mother's death--we three adult children felt it wiped out our childhood and never mititgated his mourning.
To you: thanks for this article. Please continue by providing more details on estate planning.
Gita - Thank you for reading and thank you for your very heartfelt comment. Be well.
This is a great article that I wish I had sooner. With COVID, I took are of much of this but struggled in the effort. Well done! I NEVER take the effort to comment but this is a "must read".
Do you have a booklet with all this information that can be sent to your customers?
Mark - The Hartford Center for Mature Market Excellence® has created helpful publications on topics ranging from family conversations about driving safety to home design ideas. Many were developed from research conducted jointly by the Center and the MIT AgeLab. However, it doesn't look like we have one on estate planning. But, you can print this article by clicking on the gray icon on the right below the author's name. Thanks for reading!
Thanks for helping me understand how estate planning works. I have an aunt who is retiring soon and she asked my assistance in finding her an attorney who can help her comprehend the content of her estate plan. With that being said, I’ll take your tip to find one in our state bar association to get a reputable lawyer.