Estate Planning has Two Parts
Estate Planning is a “term of art.” That is, it doesn’t mean what the words say. It is much more than just planning for money, property, and assets.
Estate planning isn’t just planning for your assets though that is part of it.
Estate planning is also about planning for who will manage your decisions and affairs if you become mentally incapacitated. Estate Planning is about who will be in control of your decisions and money if you can’t manage.
You Have an Estate
Almost everybody has an estate. If you own anything at all, even the clothes on your back, you have an estate. Your estate is made up of everything you own: your car; home; real estate; bank accounts; cash on hand; life insurance; personal possessions; furniture; and more. Your estate may be large or it may be modest. However, there is one thing all estates have in common…you can’t take them with you when you die.
You Have Affairs to Manage and Control
In addition to your estate, you are in control of managing your life decisions. Only you have the right to make decisions for yourself. Even your spouse doesn’t have the right to make your decisions if you can’t.
One thing everybody has in common is that nobody else has the right to make decisions for you without permission.
Estate Planning is…
When you die, you probably want to control who gets what, when, how, and how much. To make sure your wishes are carried out, you need to leave instructions about who gets what, when, how, and how much. And you probably want to minimize the expense, time, and hassles involved.
Estate planning is planning now for who gets what, when, how, and how much.
But there is more to planning than that. A great estate plan should also include:
- Plans for who will manage financial and legal affairs if you are incapacitated
- Provide for the transfer of any business you own at retirement, disability, incapacity, and eventually death
- Name a guardian for your minor children’s care and managing their inheritance
- Provide for loved ones with disabilities without disqualifying them from receiving government benefits
- Provide for, and protect irresponsible family members who may need protection from themselves, creditors, or divorce
- Minimize costs, taxes, and legal fees
It is important to know that planning is an ongoing process, not a one-time event. You should review and update your plan as your family and life evolves.
Estate Planning is for Everyone
All too many people think they don’t need an estate plan. They think this for a variety of reasons listed below.
- Nobody over the age of 18 is too young to plan. Young people have accidents, sometimes as simple as slipping in the tub, and major medical incidents too! If a young person can’t make decisions, then without a plan, their family faces the time and expense of court to get permission to manage for them. Young men and women leave home for the first time to go into the military. They need somebody at home that can manage their affairs while they are away. Husbands and wives travel for work and need somebody at home with the authority to manage when they are away.
- Almost everybody has something to protect. Even if you don’t have a lot of property and rent an apartment, you still have your freedom of control to protect. Most people want to control who make decisions for them if they can’t. Without a plan, the State will decide who makes the decisions and it may even be the State that does the management through Adult Protective Services.
- Most people have an estate worth protecting. Think for a minute…You probably have a house, 2 cars, retirement, life insurance, and more. That is your estate. Without a plan, the State has decided who gets what, when, how, and how much.
Too Many People Without an Estate Plan
So many people put of planning because they think they are too young or don’t have enough. Others put it off because they think it will be hard or confusing. They think there will be plenty of time later, don’t know where to start, or who can help them get their planning done. Some people just don’t want to think about it.
Then, when something happens, their family has to spend a lot of time, money, and effort to pick up the pieces. That’s what happens with the do nothing plan.
The Do-Nothing Estate Plan – You Probably Won’t Like It
The do-nothing plan is just that, nothing has been done.
But, if you do nothing, the State has done something for you…they’ve written you a default estate plan. And you probably won’t like it.
Upon disability: If your name is on the title to assets, on a bank account, etc. and you cannot conduct business yourself due to mental (or physical) disability, only somebody appointed by a Judge in Court can sign for you!
The court will oversee and control how your assets are used for your care and who is managing your care and your assets. This is done through a proceeding called a guardianship (in Arkansas). A guardianship can quickly become very expensive and time consuming. And it is all in the public record. A guardianship is not easy to end if you recover later.
Upon death: If/when you die without a valid estate plan in place, any assets owned in your name will be distributed according to state law. This is done in the Court supervised probate proceeding that follows. In Arkansas, your children will get the majority of the property and your spouse will get a share. You can’t disinherit children or divide things differently.
Given the choice, and the choice is yours, would you rather be in control or the courts? Would you rather things be handled quickly and privately or in the public record? Would you like to control who gets what, when, how, and how much?
An Estate Plan Starts with Durable Powers of Attorney
Much like building a house, or baking a cake, everything begins with the bottom layer, the foundation.
The foundation of an estate plan is durable powers of attorney. The foundation is a durable power of attorney (for finances and legal matters) and a durable healthcare power of attorney.
These may be the two most important documents in your estate plan. These affect you during your lifetime.
You need to think about who you would want to manage your legal, personal, financial, and healthcare affairs if you were unable to for any reason.
Choosing the agent or attorney-in-fact for your durable power of attorney is perhaps one of the most important decisions you can make. Here are some things you should consider:
- They need to meet the legal requirements in your state
- They must be ready, willing, and able to act on your behalf and in your best interest
- Your agent must be able to act in your best interest, not in their best interest
- This person should be someone you trust to manage your financial, legal, and personal decisions
- For healthcare, they should know your choices and wishes
- Knows what is important to you
This is a very important decisions. It doesn’t have to be your oldest child because they are oldest. Everybody has strengths, and you should use those strengths. If your youngest is a financial advisor and your oldest a nurse, then perhaps the youngest should be in charge of finances and the nurse in charge of healthcare.
Sprinkle on Healthcare Directives
Your healthcare directives include your protected healthcare information release (HIPAA waiver) and advance directive.
Under the HIPAA laws, your healthcare information is protected. In many cases, not even your spouse or parents can get access. However, you can give them permission with a waiver listing the people you want to have access to medical information.
The advance directive, often called a living will, is a document that states your end of life wishes when there is no hope and everything has been done.
Then You Layer on a Will or Trust for Assets & Property
Now it is time to consider whether you should have a Last Will and Testament or a Revocable Living Trust at the center of your asset planning.
There are a lot of factors that go into deciding which should be at the center of your plan.
However, for many families, a Last Will and Testament plus some additional asset planning is sufficient to keep assets out of probate.
But, for some families, a Revocable Living Trust is the best.
How do you know which is the best for you? Consider these factors:
- Do you have children under 18?
- Do you have children with special needs?
- Do you have children receiving means tested government benefits?
- Do you have children with credit issues?
- Are you worried about the status of your children’s marriage?
- Do you have children with addiction issues?
If you answered yes to any of the above, then you should strongly consider a Revocable Living Trust at the center of your asset planning.
Those aren’t the only factors to consider, but are some big ones that point to a Revocable Living Trust.
Protecting Assets from Medicaid, Creditors, and Lawsuits
If you own it, it is available for paying for medical care, paying creditors, and satisfying lawsuits.
A Revocable Living Trust does not give you protection from Medicaid, creditors, and lawsuits.
You must step up to an Irrevocable Living Trust to give protection from Medicaid, creditors, and lawsuits.
The drawbacks of irrevocable trusts are:
- Once property goes in, it stays in
- You give up ownership of the property to a Trustee that can’t be you or your spouse
- You need 5 years for an irrevocable trust to protect you against Medicaid
- You can’t use it to hide money from an active lawsuit or lawsuit you should have known that was going to happen. A Judge can undo an irrevocable trust in these cases.
- You can’t use it to hide money from current creditors