The Basics of Estate Planning

When you think of an estate, you might think of a millionaire with valuable assets, or perhaps a wealthy British aristocrat with a big house and acres of land. You might assume that estate planning applies to only wealthy people, not ordinary people.

In fact, estate planning is for everyone. We demystify estate planning and how and when to do it. Armed with these facts, you can help the older adults in your life start estate planning or, if they have already started, make sure everything is in place.

Related: 8 Tips- Keeping Seniors Safe From Scams

What Is an Estate?

An estate includes all the assets a person owns, such as:

  • Property (including residential property, timeshares and vacation homes)
  • Financial assets (including bank accounts, savings accounts, stocks, shares, IRAs and any other financial products)
  • Business assets if the person is a business owner
  • Life insurance policies
  • Personal property (such as a car, artwork, jewelry and other personal effects)

We all have an estate, no matter what our financial status.

The last will and testament – an important part of estate planning
(c) Can Stock Photo / ragsac

What Is Estate Planning?

Estate planning means making decisions on what will happen to a person’s assets after they pass away. As hard as it is to think about, we all eventually pass on, and when we do the question of what happens to an estate is a pressing one.

Estate planning includes making clear how all assets will be distributed, and detailing who will be given what, and when. It also includes desired funeral arrangements and medical wishes in the event that the person making the plan becomes disabled, or can no longer communicate their wishes.

Why Estate Planning Matters

Some people shy away from estate planning, and that’s understandable. It can seem very daunting. However, an estate plan is an absolute must for adults to ensure their wishes regarding their estate, their funeral, and their end of life care needs are met.

Estate planning makes things easier for those who are left behind. A clear plan removes questions and doubts and gives guidance for everyone involved in handling the estate.

If there is no estate plan in place, then the local laws of the state take effect. These laws govern everything from what happens if a person becomes incapacitated and cannot make decisions for themselves, to how their assets will be divided.

This could lead to problems such as an estate being divided equally between their children and their partner, leaving their partner without enough to live on. Estate planning lets people take control of their assets and make the best decisions for their loved ones.

Good estate planning can also help save on taxes and fees. For example, in some situations, it’s possible to reduce the amount of tax paid on financial inheritance by spacing the payments out over a period of time.

We recommend talking to an experienced elder law attorney to get information on your loved one's specific financial situation.

When Is It Best to Start Estate Planning?

The answer to this is simple: As soon as possible. The sooner an estate plan is put in place, the more seniors and their families can relax, knowing that everything is taken care of. It’s a good idea to talk to your loved one about estate planning as soon as you can.

Four Key Components of Estate Planning

Depending on the size and complexity of an estate, there might be several components to it. However, we recommend everyone get advice regarding the following four key components:

1. Will

A will is a document detailing how assets are to be distributed after death. It covers any assets that fall outside of a trust (more on those in a second) and don’t have a beneficiary. People also need to choose an executor for their will, who will make sure their wishes are carried out. For many people, a close friend or relative is an obvious choice.

2. Living Will

Living wills are documents that detail medical care instructions in the event that a person becomes incapacitated and cannot communicate their wishes. For example, if there are circumstances under which they would not want to be given a feeding tube, or kept on a ventilator. In some states, living wills are known as health care directives.

3. Power of Attorney

A power of attorney is a document giving another person (known as the “attorney in fact”) the power to make decisions on the person's behalf. These decisions might include:

  • Financial decisions, including control of banking accounts
  • Medical care decisions such as when to resuscitate or withhold treatment
  • Home management such as hiring a repairman
  • Property management such as collecting rent on rental properties owned
  • Daily life issues such as canceling unneeded cable subscriptions if the person goes into hospital
  • Distributing charitable donations

These are just a few examples – a power of attorney can cover all kinds of financial, legal, medical, and other decisions.

People can choose between a power of attorney that grants the right to make all decisions, or specific powers of attorney such as a financial power of attorney or medical power of attorney that grants the attorney-in-fact rights to make decisions in one specific area only.

4. Trusts

Trusts may seem like the province of the very wealthy, but in fact, establishing a trust can have benefits for many older adults. A trust is a legal document drawn up to hold assets (such as money, property or personal effects) for a named beneficiary, or multiple beneficiaries. A trustee is chosen to control the trust. The benefit of a trust is that it avoids the public probate process – this is the process that takes place after death to prove that the will is valid.

What About Taxes?

The tax rules surrounding estates can be confusing. There are two types of taxes that apply to estates:

  • Estate taxes are based on the value of the property and are paid before the money is distributed. Estate taxes only apply if an estate exceeds the exemption amount (this amount varies by state).
  • Inheritance taxes are paid by the person receiving the estate.

The rules about estate and inheritance taxes vary by state. For example, Alabama has no estate or inheritance tax, while Maryland has both estate and inheritance taxes. Because exemption rates, tax rates, and even the existence of tax, varies between states, we recommend going with your loved one to talk to a local elder law attorney with experience in estate law.

Helping your loved one get their affairs in order is one of the most helpful things you can do for them, and for their family and loved ones. We suggest contacting an attorney who specializes in estate planning for an initial appointment and advice to help you get started.

DIY Cookies, Not Your Estate Plan

With websites like Pinterest and television shows on HGTV, we are in a world of DIY (In case you are not familiar with the term, DIY = Do It Yourself).  From making crafts with kids, to building your own shed, there is likely a website to help with step-by-step instructions and pictures to help you along the way.

There are even self-help estate planning websites and forms that offer low-cost will, power of attorney, and other legal documents.  However, a failed craft simply hurts your ego; a failed estate plan can have devastating consequences to you and your heirs.

Don't DIY Your Estate Planning

Do NOT DIY your Estate Plan.

Here are a few common issues I see that people run into when they try to DIY their estate planning documents:

  1. Bank refusing to accept your power of attorney;
  2. Giving too much away in your power of attorney;
  3. Failing to properly exclude family you don’t want to give money to;
  4. Unintended tax consequences for your heirs;
  5. Not using the correct documents for your state.

These common problems can be very difficult to work out, especially after cognitive decline or death.  Heirs may be burdened with financial obligations that you were unable to envision or even knew about when the documents were created.  If the documents are unrecognized in your state, your loved ones may have difficulty accessing and advocating for you in a medical facility.

Working with a skilled attorney can help you avoid many of these issues and more.  In addition, make sure to seek out an attorney familiar with estate planning who is willing to meet with you face-to-face.  Ask your friends, co-workers and advisors for attorney recommendations.

If money is a hurdle, know that there is a wide range of rates among attorneys.  You can work with a new attorney whose rates are lower or contact your State Bar to see if they offer programs for people with lower incomes.  In the end, it may be less expensive to have a lawyer draft a good estate plan than have to work out a bad plan later.

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