What is an Estate Plan and Why Do You Need One?
What is an Estate Plan and Why Do You Need One?
Estate planning, like retirement planning or life insurance, is an important step to ensure your family’s well-being in times of uncertainty. You may have heard about estate planning before, but may be unsure as to exactly what an estate plan is. We want to help answer that question.
In order to do so, first we must explain what an estate is. Every person has an estate. Your estate is comprised of all of your assets from your car, to your home, to your investment accounts. It also includes your right to control your assets, and like your assets, you have the right to give away or copy these rights through power of attorney, designating a guardian for children, or creating a living will or advanced directive.
Simply put, your estate plan is the comprehensive plan you’ve created, in advance for whom you wish to have control over your assets and rights in the event you are incapacitated, or if you pass away. Your estate plan should also accomplish the following:
- Values. It should be tailored to your specific goals and should pass on your values, not just your valuables. Your estate plan should be a catalyst for your beliefs (e.g. religion, education, work ethic), and should ensure that your family has the opportunity to continue your beliefs and values. This can include requirements on receipt of inheritance (e.g. a beneficiary must be employed to receive a distribution), or it could include specific instructions on how inherited funds should be used such as college education.
- Protection. Your estate plan should ensure that you are protected in the event you become disabled. A power of attorney should be executed to allow for someone to act on your behalf in the event you are unable to make your own decisions or simply need assistance.
- Guardian. Probably the most important step in estate planning for parents is to name guardian for any minor children, and to appoint a trustee of their inheritance while they are underage or incapable of managing their own money.
- Special Needs. Providing for family members with special needs without disrupting government benefits is essential. Money inherited by individuals with special needs will often count against asset limitations for public benefits such as social security disability benefits or Medicaid. Making sure that family members with special needs are not disinherited but remain eligible for their benefits is part of a comprehensive estate plan.
- Creditors, Predators, Outlaws, and In-laws. Sometimes a beneficiary may need to be protected from themselves. If they are likely to overspend or have a history of credit card debt, gambling, or drug use, any inheritance you may wish to leave for them should be protected so that it is only used for their benefit and not squandered.
- Succession Planning. Business succession planning is important if you own your own business. Succession planning can be complex and should be discussed at length with your estate planning attorney.
- Taxes and Fees. Steps should be taken, or you should at least discuss with your estate planning attorney, options for minimizing estate taxes, probate costs, and legal fees.
- Fluid Process. Estate planning should be viewed as an ongoing process and not a one-time event. Families change, assets change, so too should your estate plan.
Everyone Needs an Estate Plan.
Estate planning is not just for the wealthy or retired. People tend to consider estate planning more seriously when they reach retirement age, but that does not mean that it should be put off until then. We cannot predict when we will die, nor can we guess whether we will ever become disabled or need assistance. Estate planning should begin when you are young and healthy and should be kept up throughout your life so you are ready should an unforeseen event occur.
Although the wealthiest individuals are often the best prepared, they are by no means the only individuals who need to be concerned with a properly tailored estate plan. In fact those families with modest or moderate estates should be concerned with estate planning as they are the ones who can afford to lose the least.
If You Don’t Create Your Own Estate Plan, the Government Has a Plan, Whether you Like It or Not.
If you become disabled and have not granted power of attorney to someone, the only method for someone else to gain access to your assets is through a court appointed guardian. The guardianship process in Pennsylvania can be burdensome and intrusive. Unlike a power of attorney which acts as a copy of your rights, guardianship takes away your rights and gives control over your decisions exclusively to a guardian appointed by the court. Your assets, budgetary needs, and the person who manages your assets become subject to the courts discretion and you will also lose other rights such as the right to own a firearm.
When you die, if you have not created a will or trust, your assets will be distributed based on the Commonwealth’s probate statute. The individuals and percentages are all predetermined and based on a person’s relationship to the decedent. The statute makes no provisions for the individual needs of family members, does not allow anyone to be disinherited, and makes no provisions for minor children.
The Foundations of Estate Planning
Estate planning is truly a process and involves many different steps and factors, but the building blocks of any estate plan are the documents prepared by your estate planning attorney. Wills, trusts, powers of attorney, living wills, and the like are the essential parts of any plan. To understand estate planning, you must understand exactly what each of these documents are and how they interact with your estate.
A Last Will and Testament is, simply put, a set of instructions in which you appoint a representative (the executor) to carry out the instructions in the will. The will can name a guardian for minor children, choose who will receive an inheritance and how much, make charitable distributions, and specifically disinherit individuals you wish to leave out of your estate plan. A will can also accomplish more complex tasks such as creating a trust (known as a testamentary trust). These trusts do not exist until after you pass away.
A trust is an arrangement where a person holds property (the trustee) for the benefit of another person or persons (the beneficiaries), and can only use that money for their benefit and according to the specific instructions in the trust. Trusts can be as simple as a few paragraphs of instructions, or it can be a complex lengthy document with detailed instructions to cover a wide range of issues.
Wills and trusts each have their advantages and disadvantages. Wills are simple, usually less expensive, and require little effort after they are signed to be effective. They also have limitations on what they can accomplish and provide no benefit to a person while they are alive. Trusts provide much more flexibility and protection for both the person who creates the trust (the Grantor) and the intended beneficiaries, they can also provide privacy and avoid the time and expense of probate. They do, however, tend to cost more up front and extra steps are required to complete the trust process (assets must be placed into the trust).
Powers of attorney are documents signed concurrently with your will and name an individual or individuals (typically a spouse, family member, or close friend) to act on your behalf and for your benefit. Powers of attorney are usually divided into general (dealing with financial matters), and health care. The person you appoint can help you with managing finances, selling real estate, paying bills, or dealing with other legal or financial matters. This simple document can avoid thousands of dollars and months of delay (the guardianship process discussed above) in the event you become disabled.
Estate Planning Goes Beyond this Essential Documents.
If something happened to you today, would your spouse or family members know where your important documents are? How about your bank accounts, life insurance policies, car titles? Part of the estate planning process is organizing your documents, writing down bank accounts information, and securing important documents like car titles or deeds. In the digital age, it is just as important to list account usernames and passwords so that an executor or power of attorney can access online bank accounts or credit cards.
Often when individuals set up their retirement account or purchase a life insurance policy, they give little thought to how they fill out the beneficiary designation (who will get those funds when you pass away). It may seem simple or straight forward, but minor changes can have huge consequences with these designations. For example, naming a minor child as a beneficiary can circumvent other trusts or accounts you’ve already put in place and may result in the funds being placed in a special account or held by a court appointed guardian, making them very difficult to access and use for the child. If a beneficiary is designated and then passes away without a backup, the funds will go into your estate and will be available to creditors. Part of the estate planning process is discussing all of these accounts and designations with your attorney and making sure they match correctly with the Will.
Cost Should Never Be a Barrier to Estate Planning.
Some individuals avoid estate planning because they see it as too expensive. Estate planning can have a wide range in cost depending on how complex of an estate plan you are looking for. If you can’t afford a complex estate plan, start with a simple one. Young couples often don’t need a complicated estate plan. At Cherewka Law, our attorney’s always provide a free consultation which will help you to identify your basic needs and essentials, and can help you stay within a budget. Our firm can also work with individuals to set up payment plan options.
There’s No Time Like the Present.
Estate planning is not always the most pleasant of topics. Most people don’t care to dwell on the negative or worst case scenarios.