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Estate Planning: A Primer

Have some money or a family? Then you need estate planning. I’ll give you a primer to familiarize you with what it involves.

A quick and dirty definition of estate planning is: the effective, efficient, and controlled distribution of assets to intended beneficiaries. It can also include certain tools that protect and effectively manage property in the event of significant illness or mental impairment.

Education

I’m a government attorney with a background in estate planning, bankruptcy, and family law. I’m also a JAG in the Air National Guard. Because there are so many misconceptions surrounding estate planning, one of the most important skills I’ve developed is the ability to educate my clients.

Many Misconceptions

It’s not the client’s fault that they walk in the door confused; if you watch enough TV personalities or listen to enough financial advisors, you’re bound to be a little hazy on things like the difference between a living trust and a living will.

With all the chatter out there, it’s really no wonder that clients walk in to lawyers’ offices thinking that probate is a maliciously byzantine process out to get them, and that that the state’s greedy courts will keep their hard-earned money if they are not careful.

So I’d like to put my educator’s hat on and give a little primer on the basic tools estate planners use, what they are designed to do, and who should have one.

Probate Court

I think it’s easier to grasp the basics of estate planning if you first understand what a probate court[1] is.

A probate court, put very simply, is a court with the authority to give over a dead person’s property to living people.

Maybe that is a flippant way of explaining it, but that is what a probate court does. Now, “property” here is a loose way of referring to several different asset classes: houses, some financial accounts and holdings(more on this in a sec), personal property (including cars, boats, Magic: The Gathering card collections, etc.) and some other property interests. Most probate courts also have a say in where minor kids of the deceased will go and how the kids’ inherited property will be looked after.

Wait… “Some” Financial Accounts?

There are some assets that are referred to as “probate assets” and some that are “non-probate assets.” It’s easier, I think, to explain the features of each category than it is to describe the legal definition of each.

A ‘probate asset,’ for lack of a better term, is an asset that was owned solely by the decedent (dead person) with no living person named as a beneficiary or joint owner on the title or deed. A probate court has the jurisdiction to name a new, living person as that present owner.

Conversely, an easy way to tell if something is a ‘non-probate asset’ is if someone else’s name is already attached to it. Whether that person is named a ‘contingent beneficiary,’ a joint or co-tenant, or if the formation documents govern where the assets go when the principal dies, there is a good chance it is a non-probate asset. Common examples of these non-probate assets are:

* Payable on Death (POD) Accounts, Transfer on Death (TOD) Accounts, brokerage accounts (provided they name a surviving beneficiary)
* Assets held in a trust
* Life insurance policies (provided they name a surviving beneficiary)

If a deceased person leaves behind property that doesn’t qualify as non-probate assets, then a probate court’s authority is required to distribute them. And what is the best way for the probate court to know who to distribute it to? The court either has to look to the state intestacy statutes or…

A Will

This probate court I’ve been talking about? This is where the will comes in. A will is a letter written to that probate court. Sure, that letter has to meet lots of formalities to prove authenticity, soundness of mind at the time of signing, clarity in illustrating intent, but at its core, it’s just a letter saying “this is where I want my property to go, this is who I want my kids’ guardians to be, this is a list of people I’ve despised over the years and never want to have a penny of mine.” You know, the usual stuff.

Who Needs One?

This is a tough question to answer, but I’ll give the safest response I can: folks who have kids, or have a unique family dynamic, or who hold a decent amount of assets, really should have a will.

And here are some of the reasons why a lot of estate planners will stick to that advice: if someone has minor kids, they will want a will to explain to the court who they want to look after them if the decedent and their partner are gone.

The testator (person writing the will) will also want to make sure those kids’ future college funds aren’t left in the hands of an evil sister-in-law and her budding scratch-off lottery ticket addiction.

For clients who are much older and whose kids are grown up, they may have preferences of which child is more responsible and can serve as executor of the estate.

Even for folks who don’t have kids, the testator might have distinct wishes regarding where they want their assets to go; and those wishes might not perfectly line up with that state’s intestacy laws.

The only category of folks that I’m comfortable leaving out are young, single people without much in the way of assets and who just want their property to be divided evenly among their parents. If all there is to distribute is a 2001 Dodge Neon and some lawn chairs, a will likely isn’t a top priority.

What Happens If Someone Dies Without A Will?

I don’t know how common the misconception is, but I have more than once heard someone with a microphone in front of them say, “If you don’t have a will, the court decides what to do with your assets.” I suppose there is some way to massage the definition of “decide” to make this sentence true, but for the most part, this statement is nonsense.

If someone dies without a will—or, as we say in the law-talkin’ world: “intestate”—the court follows the state’s respective intestacy laws. These laws direct probate assets to particular people by virtue of relationship.

Each state is its own unique snowflake in terms of its probate and intestacy laws, so each state handles things differently. But in many states, a decedent’s assets will likely go entirely to the spouse if the decedent was married with children, or will go predominantly to the spouse with potentially some left over for the parents if there are no minor kids in the picture. This is a gross over-generalization of intestacy concepts, but that’s the quick-and-dirty.

Now, there is some half-truthiness to the idea that a probate court ‘decides’ what to do with a probate estate if no will exists; and it has to do with naming agents. Without a will to name who will be the executor of the estate, the guardian of minor kids, or the custodian of said rugrats’ property, then the court has a dilemma.

Obviously the probate court doesn’t know the decedent or their values. And they definitely don’t know about the evil sister-in-law’s scratch of lottery ticket gambling addiction, so in this respect, it has to make some decisions on its own.

If a decedent was married, this decision is easy; the spouse will likely take over as the agent in all of the above roles. But what if the decedent isn’t married, or the spouse passes away in the same car accident?

Then the decedent’s parents will likely fill those roles. But what if they are in their sixties and are not in a good position to raise three little kids? While it sounds like a fun pilot idea to pitch to TLC, it also sounds kind of like a nightmare. And this is why we generally say that people with kids really must have a will.

Up until now, I’ve been talking about what happens to a decedent’s property when they meet their demise. Ominous, I know. But while these next documents are often included in the estate plan discussion, strangely enough, they are really only effective while the principal (i.e. the person signing the documents) is alive.

Power Of Attorney

A power of attorney (POA) is a document that authorizes a specific person or persons to do certain things on a principal’s behalf. Generally, POAs authorize another person (known as the “Attorney-in-Fact” or “agent”) to handle the principal’s financial affairs, like pay monthly bills, make changes to accounts, attend real estate closings, etc.

You might be saying to yourself, “Well that sure sounds like a dangerous document.” To which I would say, “Damn straight it is.”

I have personally counseled clients left with no money in a particular account because they named the wrong person as their attorney-in-fact. Powers of attorney are—hands down—THE documents that produce the most instances of self-dealing and malfeasance in the estate planning arena.

If POA Is So Dangerous, Why Have One?

Thankfully, most of us aren’t surrounded by fly-by-night hucksters and no-account grifters posing as parents, spouses, or siblings. So most of us can have these documents in place without too much concern.

POAs can be an incredibly valuable tool in the right hands in the event of a coma, medical emergency, a stint in the county pokey, a trip out of the country or any other prolonged absence.

If any of the above happens and a person hasn’t established a POA, a competent court in their jurisdiction has to hold some form of an adult guardianship hearing to name someone capable to act on their behalf. If that sounds like a hassle to you—and it is—then you can see why attorneys usually recommend that clients get one.

For those cheapskates out there who need one but don’t want to pay for one, thankfully, a lot of states have what are called statutory short form powers of attorney. They are basic templates that allow residents to fill in their info and the info of their agent, the scope of the powers the principal wants to allow and a termination date if desired. They aren’t perfect, and some banks and institutions don’t accept them, but it’s much better than nothing!

Living Will/Health Care POAs/Health Care Directive

Just as people can make POAs designating who can make financial decisions on their behalf, they can also draft health care POAs appointing someone to make medical decisions for them.

Folks can also make a stand alone document that doesn’t appoint anyone to make decisions for them, but tells doctors whether or not they desire to remain on life sustaining treatment in the event they are in a persistent vegetative state. Or a person can combine the two concepts into one document if they wish.

I’m Young And Healthy. Why Should I Have These?

What if someone is young/in good health/proven up to this point to be invincible? Why should they bother getting one of these?

Do you remember that incredibly sad Terry Schiavo case in the early-to-mid 2000s? I say “early-to-mid” because the legal battles in her case took years to resolve after touching every level of the appeals process available in the United States legal system.

Terry Schiavo didn’t have a living will or health care power of attorney in place, and the years of litigation and millions of dollars spent were the result of two different parties (her husband vs. her parents) disagreeing about whether to discontinue life-sustaining treatment.

This is obviously an extreme example, and maybe it’s a scare tactic, but it is, at the very least, an illustration of what can happen to folks who don’t have one.

Perhaps a more practical justification is this: if there is a medical emergency, that is the absolute worst time for a family to be asking questions about who should be making decisions or deciding what the patient would want for themselves. Putting those wishes and designations in writing ahead of time saves everyone extra stress and hand-wringing at a really bad time for either.

For those clients of mine who aren’t convinced they need one, I recommended that they at least have a basic conversation with those close to them (namely, their spouse and your parents) about their end-of-life values, whether they want to be on life support if there is no chance of bouncing back, if they want to be an organ donor, etc. That conversation could end up being a very important one.

How Much Does All This Cost?

An estate plan that includes all of the above will likely cost anywhere between $500-$1500 depending on location, the complexity of the situation and assets, the size of the law firm, the experience level of the attorney drafting the documents, etc. But given all the potential problems awaiting many folks who don’t have the documents in place, I firmly believe that they are worth every penny.

Legalese

Important Disclaimer: What I’ve outlined above is a primer intended to educate you on the basics. None of the above is legal advice for your situation (nor is an attorney-client relationship formed by you reading it); rather this is some preemptive educational reading material so you can know some of what your future lawyer will be rambling on about. Point is, it’s good to know what tools estate planners use so you can ask more informed questions about how to protect your assets, direct where you want your stuff to go, and make things easier on those you care about.

[1] Some jurisdictions have other names for ‘probate court,’ but its purpose is the same.

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