The new year is a good time to set goals to accomplish things that are easy to put off. This year, it may be beneficial to add creating or updating an estate plan to the list.
What many people do not realize is that everyone has an estate plan. If an individual has not set up their own plan, then their plan is the default set up in state law. Of course, every person’s situation is unique so the default state estate plan may not meet an individual’s needs and, in some cases, may create problems.
The process by which the state administers the default estate plan is called probate. This is a court proceeding where an individual’s will, if any, is consulted, their assets are cataloged, all creditors are paid, and any remaining assets are transferred liability free to the deemed beneficiaries. This process is public record, often takes months or even years to complete, and in some states can be very costly. However, this is not the only option.
Probate can be avoided by setting up an estate plan that creates a private estate administration. This generally involves creating a trust that serves as the primary document for the management and transfer of a decedent’s assets. As long as the bulk of the assets subject to probate are registered to a trust the estate should be able to avoid any court proceedings which will likely save significant time and money. In addition, the process is private, so the decedent’s financial affairs do not become public record.
Assets that cannot be registered in the name of a trust can be transferred by a will, often referred to as a pour over will, that captures assets that are not registered to a trust. Other assets may be transferred via beneficiary designations. Therefore, a comprehensive estate plan does still require a will, in addition to a trust, and makes it very important that beneficiary designations are reviewed regularly.
Yet planning for death is only half of the objective of estate planning. It is also important to plan for the possibility of incapacity where an individual cannot manage their own finances, pay their own bills, file their own taxes, etc. In this case, an estate plan must assign responsible parties to manage these issues. The two major documents that are used to achieve this are the trust and the financial power of attorney. So here we find another benefit of setting up a trust. If an individual who set up a trust becomes incapacitated the trust will become irrevocable (unable to be changed) and stipulate the next person in line who will be given the authority to manage the trust property for the benefit of the person who set up the trust.
Of course, not all assets may be able to be registered to the trust, such as retirement accounts. In this case, a financial power of attorney will assign authority to an agent to act on the owner’s behalf. In addition, the financial power of attorney will typically give the agent broad powers to deal with other aspects of the individual’s financial affairs such as paying bills, filing taxes, etc.
Finally, a comprehensive estate plan also deals with medical decisions in the case of incapacity. This may be as simple as documenting an individual’s final wishes. However, in other cases it may be very important as there are many conditions that can take away an individual’s capacity to make decisions but will not result in death. This could lead to many years in which an individual is unable to make their own health care decisions and therefore those decisions must be delegated to a trusted agent.
An estate plan will include a health care power of attorney which addresses this situation. A health care power of attorney, sometimes called a heath care directive, will assign a decision maker and give instructions as to the individual’s wishes in case they become incapacitated and cannot make decisions for themselves. Without this legal authority in place, the issue will likely end up in court along with the time delays and high costs associated with court proceedings.