Estate Planning: An Overview

THE COUNSELOR

Volume 2 • Issue 3 • March 2012

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will give an overview of common estate planning techniques. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.


Traditionally, estate planning has focused on the transfer of assets at the owner’s death. This type of planning treats the creation of an estate plan as a transaction. Good estate planning, however, is not a transaction; it is a process. It allows you to care for your loved ones with resources, love and wisdom. Good estate planning is not just something done to plan for death – it is planning for life, and life involves changes and uncertainties. Good estate planning will recognize that planning is a lifetime process. It is not a box to be checked. Rather regular review and upkeep is necessary to be sure the plan will work when needed. What follows is a brief overview of the different ways people plan for their estates.

What is Probate?

Probate is a court-supervised process for distributing the individually owned assets of a deceased person. If there is a Will, the court will review the Will to ensure that it complies with local law and is authentic. The court will then appoint a Personal Representative (sometimes referred to as the "Executor") to administer the estate. If there is a Will, the Will governs the priority of persons seeking appointment, if not, state law controls. Creditors are paid and then assets are distributed to beneficiaries in accordance to the instructions written in the person's Will. Probate is a public process and can be slow and expensive. Probate occurs wherever assets are located, thus if assets are located in multiple states, multiple probates may be required. “Non-probate” assets are those that pass on death in accordance with some agreement and thus without being involved in the probate process. Life insurance, retirement accounts, joint tenancy property are examples of “Non-probate” assets.

Common Estate Plans

Some of the more common estate plans that people have are as follows:

  • Doing Nothing (80% of adult Americans)

  • Joint Ownership/Beneficiary Designations

  • Lifetime Gifting

  • Wills

  • Revocable Living Trust

Doing Nothing - The Government Plan

If you have done nothing to plan your estate you have chosen the plan established by the State legislature where you reside and where your property is located.  This is known as intestacy and each State has a plan for what happens with the assets of a person who dies intestate.  The government’s plan is meant to cover everyone generally, so as is often the case it really covers no one in particular.  The government’s plan can be particularly problematic for blended families.  The government’s plan will mean a possible guardianship and/or conservatorship during life and probate at death.

Joint Ownership/Beneficiary Designations

Use of joint ownership or beneficiary designations is also a very common estate planning technique.  These are assets that pass outside of probate and are not governed by a Will or Trust.  When planning, it is important to understand the concept that ownership is important and that beneficiary designations will always control.  The proliferation of these types of non-probate assets have led many to the false conclusion that they do not need to invest in estate planning to avoid probate and meet their estate planning goals. Nothing could be further from the truth.  Reliance on joint tenancy, for example, creates risks for the asset owner that are seldom considered.  Adding a joint owner exposes the asset to the joint owner’s liabilities, increasing the owner’s risk of being named in a lawsuit or losing the asset to a creditor of the joint owner. There is also the risk that the joint owner will not be able to resist the temptation to take or use the property while its original owner is still living or will not be willing or able to follow the original owner’s wishes following death.   Further, avoidance of probate is not guaranteed. If “my estate” is listed as the beneficiary, or if a valid beneficiary is not named, the affected assets will have to go through probate. If a minor is the beneficiary, the asset holder will probably insist on there being a court-appointed and supervised guardian to receive the assets and manage them for the minor.

Lifetime Gifting

Another common technique is lifetime gifting.  While legitimate reasons exist to engage in lifetime gifting it should be done carefully and as part of an overall plan.  Moving forward otherwise may result in adverse tax consequences or ineligibility for government benefits such as Medicaid.  As with jointly owned assets you lose control of the asset and the asset becomes subject to the debts and liabilities of the new owner.

Wills

A Will – or a “Last Will and Testament” – is a legal document that tells the probate court how you want your property distributed after you die, and who has the power and responsibility to wrap up your affairs.  It is purely a death instrument and is only effective when "probated."  Because the Will takes effect only after a court determines that it is a valid document, a judge must act before your executor can step in and manage your estate.  Careful attention must be paid when planning with a Will to ensure it is coordinated with assets held jointly or subject to beneficiary designations.

Revocable Living Trust

A Trust is a legal arrangement where one person, the Trustee, owns property given by another person, the Grantor (also referred to as a Settlor, Trustor, or Trust Maker), for the benefit of a third person, the Beneficiary.  The most common type of Trust is the "Revocable Living Trust."  Revocable Living Trusts are fully revocable and amendable at the request of the Grantor and you generally are the Grantor, Trustee and Beneficiary while you are alive and able. Assets transferred (or “funded”) into a Revocable Living Trust can be withdrawn at any time.  Planning for disability with a living trust is superior to relying solely on a durable power of attorney. Today, many financial institutions and other third parties will not accept a durable power of attorney unless it is recently signed and on their own form. But they must accept the instructions of a Trustee (or successor Trustee) named in a Revocable Living Trust concerning the trust assets. This makes it less likely that a guardianship/conservatorship will be needed.  Likewise, when you die there is no need for a probate because the successor Trustee now owns the property.

Conclusion

Many put off estate planning, forever putting it on their “to do” list sometime in the future, always meaning to get it done “sometime soon.”  But the truth is life is uncertain and sometimes by choosing to wait options that are wide open now become narrowed or non-existent.  Because of this and because our lives are constantly changing we advise our Clients to begin now and make regular review of your plan a part of your routine.  Remember, good estate planning is a process, not a transaction.


This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.