Complete Guide to Estate Planning for Non-Lawyers

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What is estate planning?

Many people believe that estate planning just means deciding who will get the things they own when they die. While estate planning does include deciding how to leave your worldly possessions, that’s not the whole picture.

A complete estate plan includes planning for events before death (like what to do if you’re alive but unable to act for yourself), and events after death (including funeral arrangements, naming guardians for young children, distributing your property and more). That’s why estate planning is often also called end of life planning – in practice there is no difference between the two.

Who needs estate planning?

Estate Planning is for all adults — not just for rich people, and not just for older people. If you’re an adult, you should plan your estate, whether you have just a little cash in one bank account, or well-funded retirement and bank accounts and lots of real estate. Consider a young adult who’s just starting her career. Let’s say she has $500 in one bank account. If she dies, her family will likely have to spend hundreds or thousands of dollars on funeral arrangements. Unless a little planning was done, the family will have a difficult time accessing the $500 she left behind. Or, even before she dies, if there’s a medical emergency — for example, if a car accident leaves her in a hospital bed — could leave her family unsure of her wishes on important health care decisions.

Of course, the more property and family members, the more important estate planning becomes. The bottom line is that estate planning is for all adults, and it can make life so much easier for your loved ones at difficult times.

How does estate planning work?

Estate planning involves documenting one’s wishes in various legal documents. There’s no single document that does everything — a complete estate plan will usually include several different documents. The most common documents are discussed in the following sections.

For most people, estate planning is no longer very time consuming — technology makes it relatively quick and easy. In the old days, one would choose between fill-in-the-blank paper forms and seeking legal advice from an estate planning attorney. Today, for the overwhelming majority of cases, a good online tool can do everything an estate planning attorney does, like collecting your information and using it to create documents that make up a high quality plan (and software doesn’t get tired and make mistakes).

Still, some people really should seek legal advice from an estate planning attorney — particularly people with special needs children, and wealthier people who want to avoid federal estate taxes and gift taxes.

What’s in an Estate Plan?

Before death

A good estate plan covers pre-death situations, namely the case where one is incapacitated (that is, unable to make decisions or act for himself). Loved ones will face decisions related to health care and finances, and having a plan in place can make things much easier for them. For instance, if you’re in a hospital bed and unable to speak, your family members may need to make health care decisions on your behalf, or they may need to access your finances to pay for medical treatment or even just to keep up with your regular bills. Planning ensures that your wishes are clear, and that the right people have the authorization they need so they aren’t prevented from acting on your behalf.

When it comes to health care decisions, a good plan does two things. First, it documents your wishes regarding certain kinds of treatment (for example, whether you would like to be kept alive by feeding tubes). Second, it nominates someone to make health care decisions for you (for example, whether to receive a new kind of treatment that you didn’t anticipate when documenting your wishes). A person who makes health care decisions for you is called a “health care proxy”, “health care agent”, or “health care surrogate”.

Legal Documents:

Living Will (aka Advance Directive), Health Care Power of Attorney

Stating your wishes for certain kinds of treatment and naming a health care proxy can be done in a single legal document called a “living will” (also called an “advance directive” or “advance health care directive” — these terms mean the same thing).

A legal document that only names a health care proxy but does not state wishes for treatment is called a “medical power of attorney” or “health care power of attorney”. (So, a complete living will contains a health care power of attorney within it.)

Legal Document:

Health Care Power of Attorney

When it comes to financial matters, a good estate plan gives a trusted person the authority to engage in certain kinds of transactions on your behalf. For example, if you are incapacitated, loved ones may need to access your bank accounts. Or they may need to be able to sell your property in order pay for treatment, or move you to a better facility, as you would have wanted. Unless their authority is set forth in a valid legal document, banks and others will turn them away and will not transact with them. This can happen even for married couples, when assets aren’t titled in both names.

After death

Of course, a good estate plan also covers post-death situations. Beginning with the moment of death, up until every last possession is distributed, or until a minor child reaches a certain age of independence, there can be many important decisions to make. These include, for example: How should your body be put to rest? Who should receive what property? Who should raise your minor child and look after property left to that child?

A good estate plan ensures that things go according to your wishes, as smoothly as possible. Importantly, a good estate plan prevents your loved ones from having to go through the long, expensive probate process, where a court supervises how all of your affairs are settled (even if your wishes are clear!).

Final arrangements

When a person dies, probably the very first decision loved ones face is how to put the body to rest. At a minimum, knowing whether you wanted to be cremated, have a traditional burial, or do something else can make their lives much easier. A good plan will communicate your preference. Some people choose to do more — they designate a particular service to use, and even prepay to save money and make life easier for loved ones.

Legal Document:

Last Will and Testament, or Informal

Guardians

If you have minor children, it’s extremely important to decide who will look after them (personal guardian) and any property left to them (property guardian) until the appropriate age (at least adulthood, but sometimes later). Guardianship of the person and guardianship of the property can be done by a single person or by different people (for instance, if one relative is the best person to raise the child, but a different relative is the best person to manage money and other property left to the child).

For many people, naming guardians is the main reason they decide to create an estate plan.

Married couples should name guardians too, because it’s possible for both parents to die at the same time. It’s common that when parents of young children take their first vacation without the children, they become estate planners. Of course, for a married couple, choosing guardians can take some serious discussion, but it’s both critical and fulfilling to carry out this responsibility — and most people wouldn’t want a court choosing who will raise their children.

Legal Documents:

Last Will and Testament and/or Trust

When it comes to managing a child’s property, there is a key difference between simply naming a property guardian in a will and using a trust. Under a will, a property guardian must give the child all of his or her property at age 18 or 21 (depending on the state). An 18- or 21-year-old may not be ready to handle receiving a lot of property. By contrast, under a trust, property can be managed subject to rules and supervision until a later age.

Property

Of course, a central part of most estate plans is the property plan — what will happen to the things you own when you die. Some people have very straightforward wishes. A simple plan may read something like: “I leave everything to my spouse. If my spouse does not survive me, I leave everything to my children in equal shares”.

Here, the phrase “if my spouse does not survive me” means “if my spouse is not alive when I die”.

Other wishes may be more specific. “I leave my guitar to John Rocker, my friend; I leave my stamp collection to Jane Post, my niece; I leave all the rest of my estate equally to Brad Smith, my brother, and Stephanie Smith, my sister.

It may not be immediately obvious, but these wishes raise many questions.

What if Jane Post isn’t alive to receive the stamp collection? Should it go to Jane Post’s children, or to Brad Smith and Stephanie Smith, the decedent’s brother and sister?

What if an estate is left equally to two or more children who live in different cities, and 90% of the value in the estate is a home where it doesn’t make sense for both of them to live together. Perhaps the home should be sold and the proceeds distributed equally — but what if they can’t agree?

A good plan addresses questions like these and many more.

Legal Documents:

Last Will and Testament, Trust, Transfer on Death Deed, Beneficiary Designation Forms

Of course, a Last Will and Testament (also simply called a “Will”) is one of the principal documents used in an estate plan to state who gets what property. The other documents named here — Trusts, Transfer on Death Deeds, and Beneficiary Designation Forms — transfer property more easily than Wills do because they avoid the probate court process. This is discussed below.

Executors

When it comes time for property to be distributed, it’s not a free for all — there’s someone in charge. This person, called the “executor” or “personal representative”, represents the estate. He or she will work with the probate court to gather and inventory estate assets, settle estate debts, and then distribute assets.

Serving as an executor is a lot of responsibility and a lot of work. As described below, the probate process is long and usually requires working with an attorney. In addition, executors can have access to a lot of property. So, a good executor is someone who is diligent, organized, and trustworthy. Because there’s so much work involved, executors are often compensated for serving in the role. Whether you’d like your executor to be compensated is a matter of preference. One thing to consider: If you’re leaving property equally to all of your children, it could cause tension if one of them ends up getting more than the others because of his or her executor compensation.

Note: Executors take on legal responsibility — called a “fiduciary obligation” — to act properly on behalf of the estate.

Legal Document:

Last Will and Testament

An executor is named in a will. If you don’t have a will, the court will select an executor for you according to state law. Like with anything else included in a will, it’s important to provide a backup in case the first executor in line is unwilling or unable to serve when the time comes.

In addition, a good will specifies whether the executor should be compensated, and how much freedom from court supervision he should have (although some amount of court supervision will always be required by law).

Probate

When people die, their property generally must pass through the process known as “probate”. If someone leaves a home to his children in his will, the children do not automatically become the new owners. The home must first pass through probate. Until it does, the children will not formally own it — so, they would not be able to refinance or sell it.

Probate plays a very significant role in estate planning. In the probate process, which can last for a year or even more, the probate court makes several important determinations, including: whether there is a valid will, what property is in the estate, what debts and taxes need to be paid, and who is entitled to receive any property that remains after all obligations are satisfied.

To start the process: When a will is first submitted to the probate court, the court must determine whether it’s valid. This alone can take time and work, and may require testimony from the people who witnessed the will signing. Once it’s determined that the will is valid (if there is one), or that there isn’t a will (if there isn’t one, or if the one offered to the court is held invalid), that’s when the probate process really begins.

Then, over an average of 8 to 12 months, the probate court will work with the executor to take an inventory of estate assets, settle the estate’s debts, and then distribute the remaining assets. Throughout the process, the executor must regularly file all kinds of legal and financial documents to keep the court updated and get its approval before taking certain actions. Because there’s so much legal documentation and interaction with the court, executors are usually represented by a probate attorney. Many states even require the executor to be represented by an attorney.

Probate is a long, expensive hassle — even when you have a will and your wishes are clear. Your executor may spend hours upon hours every week dealing with the estate. And the people intended to receive your property must wait for many months while the process plays out. Meanwhile, the value of the estate is decreasing as estate funds are used to pay attorney’s fees.

Avoiding Probate

The best estate plans will avoid probate altogether. Probably one of the most common estate planning mistakes is thinking that a will avoids probate — wills do not avoid probate. Probate can be avoided in a number of ways, and a single estate plan may make use of several different ways of avoiding probate.

The estates of most people include some financial accounts, a home, and then household items. Household items can usually be handled informally and do not have formal title. That leaves financial accounts and the home — if these can be kept out of probate, probate can be avoided altogether!

To understand probate avoidance, it is critical to first understand what property is “probate property”, and how to make it “non probate” property.

Probate Property

Probate property is basically any property that is not owned or held in any kind of special way. Probably most of what you own is probate property (unless you’ve taken certain actions). It will have to pass through the probate process.

A basic example of probate property is all of the personal items owned by someone and kept in his home. Unless some kind of estate planning is done, these personal items are simply owned and held by the owner alone, and not subject to any sort of special arrangement (a will does not count as a special arrangement). So, these items are probate property, and upon the death of the owner they must pass through the probate process. Another good example of probate property is a house in the sole name of the owner, with no special form of ownership (no special arrangement). When the owner dies, the house must pass through the probate process.

Non Probate Property

Non probate property, by contrast, is property that will bypass the probate process because it is held under a contract or some other particular kind of legal arrangement. Non probate property does not have to pass through the probate process — it can pass directly to people named in a contract or other non-will document.

A good example of non probate property is a home that is held in the name a husband and wife, where the deed of the home specifies that they are “joint tenants”. Joint tenants means equal owners of the whole (they are not each 50% owners — together they are 100% owners). When one joint tenant dies, the other joint tenant is “automatically” the full owner. So, property held is joint tenancy is non probate property.

Another good example of non probate property is life insurance policy proceeds. These are not just owned outright, but are controlled by a contractual arrangement between the policyholder and the insurance company. When the policyholder dies, the proceeds generally will not need to pass through probate; they can be transferred directly to the beneficiaries of the policy.

Turning Probate Property Into Non Probate Property

A critical part of good estate planning is turning probate property into non probate property, so it can go directly to the intended persons and avoid the probate process.

Financial Accounts

Most financial accounts can easily be made into non probate property. For example, you can instruct your bank to pay account funds over to a specific person (or persons) when you die. This is called making a “beneficiary designation”, or making the account a “pay on death” account. Your bank will ask you to fill out some forms, and then the account will become subject to those forms, in a private arrangement between you and the bank. When you die, beneficiaries can simply present your death certificate to the bank and collect the funds — much better than having to go through the probate process.

Beneficiary designations can be made on any kind of financial account, including simple bank accounts, general investment accounts, retirement plans, and more. Most financial institutions have a well defined process for handling this; many of them even make it a standard part of their signup process. So, it is a good idea to set beneficiary designations at the time of opening a retirement account or other financial plan.

Note: It is important to keep beneficiary designations updated, because the people you designated at the time you created the account may not be the same as you have in mind today.

Legal Document:

Beneficiary Designation Forms

Beneficiary designation forms are simple, fill-in-the-blank forms that allow you to name the people who should receive a given account. The forms typically must be filled out at the financial institution. Some financial institutions — with more modern business processes — allow you to set beneficiary designations entirely online. In any case, the institution will process your form and update the details of the account, and then the account becomes non probate.

Real Estate

Real estate can also be made into non probate property. Sometimes real estate even starts out as non probate property because of how title is held (the way the deed is written).

As discussed above, when a deed to a home specifies that the owners are “joint tenants”, it means they are equal owners of the whole (they are not each 50% owners — together they are 100% owners). When one joint tenant dies, the other joint tenant is “automatically” the full owner. So, property held is joint tenancy is non probate property. Note that when the second of two joint tenants dies, there is no longer another joint tenant to automatically become the owner, so the home would be probate property. In addition to joint tenancy, some states have other forms of holding title to real estate that create a non probate arrangement — usually for married couples.

Legal Document:

Deed

Title to real estate is set in a deed. When someone first becomes the owner a piece of real estate, there is usually a deed that gave them that real estate. The deed specifies the form of ownership.

Once someone is already the owner, he can write a new deed to change how title is held. For example, a senior who is the sole owner of a home may decide he wants to leave the home to his daughter, but he doesn’t want her to have to go through probate. He can write a deed to himself and his daughter as joint tenants. This way, she becomes an owner today (along with him), and when he dies she’s automatically the full owner — no probate. He could also write a deed just giving her the home outright, with the understanding that he’ll live in it until he dies. In this case, the home doesn’t have to go probate, but not because it’s non-probate — it’s just not even his anymore, so not in his estate when he dies.

Note: Usually deeds must be filed — “recorded” — in the county where the property is located.

Transfer on Death Deed

The simplest and easiest way to make real estate into non probate property is with a transfer on death deed.

Legal Document:

Transfer on Death Deed

A transfer on death deed, sometimes called a “beneficiary deed”, is an instrument that states who should receive a piece of real estate upon the death of the current owner(s). It’s a 1- or 2-page document that is recorded in the county where the real estate is located.

A transfer on death deed can be revoked (cancelled) or replaced anytime, and has no effect until the death of the owner. Once the owner dies, the beneficiaries just need to record the owner’s death certificate with the county where the property is located, and they become the new owners. No probate!

Unfortunately, not all states have transfer on death deeds, so individuals use other tools to keep real estate out of probate — most popularly, trusts.

Trust

A trust is an arrangement where

(1) someone (the “trustee”),

(2) has title to property (that is, legal ownership of the property), and

(3) must manage it for the benefit of someone else (the “beneficiary”).

For example, think of a large cash gift to a young child. Imagine the cash gift is actually left to a relative who will own the property (as trustee) and manage and distribute it for the benefit of the young child. In this case, the gift is in a trust. The relative doesn’t own it, he’s just the trustee of a trust that holds the cash, and he manages it for the benefit of the young child.

The person who gives property to a trust is called the “grantor” or “settlor”. It is common for large gifts made in wills to be made in the form of a trust. A dying grandmother who wants to pay for college for her young grandson probably wont just leave him the money outright; she may leave the money to his parents as trustees.

Some people have the idea that trusts are just for rich people (they think of the phrase “trust funds”), but that’s not right; trusts, especially revocable living trusts, are an estate planning device used by all kinds of people.

Revocable Living Trust

A revocable living trust is one that can be revoked and that is made while the grantor is living. It is a popular tool for probate avoidance that works as follows.

Imagine someone owns a home, some jewelry, and some antiques, and he wants to leave it all to his three children, but he doesn’t want them to have to go through probate. Also, he doesn’t want to give up these things today — he thinks he may be around for a while yet. He can create a revocable living trust to hold this property. While he is alive, he will be both the trustee and the beneficiary, and he can do whatever he wants with the property (after all, the trust is revokable). When he dies, though, the trust’s estate planning purpose takes effect. Another trustee, designated by the grantor before his death, steps in (privately — no probate) and distributes the property to the grantor’s children, who are the new beneficiaries. The trustee who steps in (the “successor trustee”), can be a regular person (for example, the same person who might have been picked to be executor), or can be a professional who works at a financial institution (an “institutional trustee”). Like executors, trustees have a legal, fiduciary obligation to act properly for the beneficiaries.

Regardless of the terms of a trust, its key feature is that property in the trust will not have to go through probate.

Legal Document:

Declaration of Trust

A trust is usually created with a legal document called a “declaration of trust”. Trusts are extremely flexible documents. Unlike wills, which are submitted to a probate court and are meant to be carried out once (over several months) under the court’s supervision, the directions of a trust are carried out privately, so trusts can get more creative and stretch over an indefinite period of time (for example, until a child reaches age 30, or has a first child of his own, but only if the trustee believes he’s being a good person).

Legal Document:

Deed

In addition to the declaration of trust document, which creates the trust, property must be transferred into the trust. In the case of real estate, the transfer is done by a deed.

Transferring other kinds of property into the trust depends on the property. For example, to transfer a bank account into a trust, the owner of the account would need to be changed to the trust. This would probably be handled by bank forms.

Remember: If someone’s main assets are a home and some bank accounts, probate can be avoided rather easily. For the home, she can create a transfer on death deed, or transfer it into a revocable living trust. For the bank accounts, she can set beneficiary designations. If her household items (like furniture) can be handled by family without disagreement, probate can be avoided altogether. This can save thousands of dollars and months or even years!

Conclusion

Estate planning is an important process that can have a significant impact on your family members and other loved ones. It’s not just for rich people — it’s for everyone. Estate plans aren’t just about who gets what property. A good estate plan will cover events before death (like what to do if you’re alive but unable to act for yourself) and events after death (including funeral arrangements, naming guardians for young children, and property distribution). Each of these areas raises many important questions, and addressing these questions in an estate plan can make life much, much easier for the people who must pick up the pieces when you’re no longer able to speak or act for yourself.

Even when there is a clear last will and testament, property isn’t automatically transferred to the new owners — it must pass through the long and expensive hassle that is the probate process. The best estate plans avoid probate, especially by turning one’s home and financial accounts into non probate property.