Investing Fundamentals

Estate Planning: A Primer on Why It’s Essential to Your Financial Health

Updated on April 29, 2020 Updated on April 29, 2020
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Have some money or a family? Then you need estate planning. I’ll give you a primer to familiarize you with what it involves. This post comes directly from a former Listen Money Matters podcast guest, Tyler White.

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

Take it away, Tyler!

What Is Estate Planning?

Estate planning is the effective, efficient, and controlled distribution of assets to intended beneficiaries. It can also include specialized tools that protect and effectively manage property in the event of significant illness or mental impairment.

Estate Planning 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 no wonder that clients walk into 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 main tools estate planners use, what they are designed to do, and who should have one.

The Probate Process

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 has the authority to hand over a dead person's property to its beneficiaries.

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

Maybe that’s a glib way of explaining it, but that’s what a probate court does. Now, “property” is a loose way of referring to several different asset classes: houses, financial accounts (e.g., retirement accounts or bank 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 children of the deceased will go and how the children’s’ inherited property is looked after.

Estate Planning and Financial Accounts

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 appoint a new 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.

estate planning - person signing legal documents

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Wills and Estate Planning

A will is a letter written to that probate court. That letter has to meet a lot of formalities. It must prove:

  • Authenticity
  • The soundness of mind at the time of signing
  • The clarity in illustrating intent

At its core, it’s 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 family members who won’t receive a penny from me, etc.

Note: Beneficiary designations aren’t the same as a will. A designated beneficiary is the name attached to a retirement plan (e.g., an IRA), an annuity, or a life insurance policy and says who gets that account if the principal dies. They also override last wills and testaments so keep them updated.

Who Needs a Will?

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 (the 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.

Avoid Probate with a Revocable Living Trust

Another way to avoid probate is to establish a revocable living trust. This alternative estate planning document helps you avoid probate, lets you maintain control of your assets (if you become debilitated), and keeps your affairs private. They can also be changed by you whenever you want.

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 real, but for the most part, this statement is nonsense.

Intestacy Laws

If someone dies without a will (known as “intestate“)” the court follows the state’s respective intestacy laws. These laws direct probate assets to particular people by relationship.

Each state is unique in terms of probate and intestacy laws, so each state handles things differently. For married couples, a decedent’s assets will likely go to the spouse.

If there are no minor children in the picture, some assets may go to both the spouse and parents. This is a gross over-generalization of intestacy concepts, but that’s the quick-and-dirty.

Naming Agents

When no will exists, naming agents are responsible for what happens to a probate estate.

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.

The probate court doesn’t know the decedent or their values. And they 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 were married, the spouse would 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 an ideal position to raise three little kids?

While it sounds like a fun pilot idea to pitch to TLC, it can be a nightmare. And this is why we generally say that people with kids really must have a will.

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 permit another person (known as the “Attorney-in-Fact” or “agent”) to handle the principal’s affairs.

You might be saying to yourself, “Well, that sure sounds like a dangerous document.” To which I would say, “Yes 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 legal documents that produce the most instances of self-dealing and malfeasance in the estate planning arena.

Types of Power of Attorney

A financial power of attorney handles all financial affairs (e.g., pay monthly bills, make changes to accounts, attend real estate closings, etc.).

A medical power of attorney handles all decisions concerning the principal’s health, specifically if the principal is unable to communicate or is incapacitated.

Durable power of attorney goes into effect once you’re incapacitated and ensures someone speaks on your behalf. If you’re unable to make decisions and have no durable power of attorney, no one can represent you unless one is appointed to you by the court. It terminates upon your death or by the principal.

Non-durable power of attorney lasts for a specific time period and usually occurs once. For example, selling a relative’s home while they’re out of town.

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.

Power of attorney is a valuable tool in the event of a coma or medical emergency.

If a person hasn’t established a POA, a court in their jurisdiction has to hold an adult guardianship hearing. For people who don’t have one, most states have what are called statutory short form powers of attorney.

These let residents fill in their info regarding the scope of the authority the principal wants to enable. They aren’t perfect, and some banks and institutions don’t accept them, but it’s much better than nothing!

Living Wills, Health Care POAs, and Health Care Directives

Similar to financial power of attorney, you can also appoint someone to make medical decisions for you.

Living wills and health care POAs (aka health care proxies) inform people of your medical preferences in case you’re unfit to make them yourself.

Folks can also make a document that doesn’t appoint anyone to make decisions for them. Instead, it tells doctors whether or not they desire to remain on life-sustaining treatment. Or, combine the two concepts into one document known as an advance health care directive.

Do You Need Estate Planning?

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.

Terry Schiavo didn’t have a living will or health care power of attorney in place. The two disagreeing parties spent years and millions of dollars disagreeing about whether to discontinue life-sustaining treatment.

It’s an extreme example of what can happen to folks who don’t have one.

If there’s a medical emergency, that’s the worst time for a family talk about what the patient wants.

Putting those wishes and designations in writing ahead of time saves everyone stress at a terrible time for either.

For those clients who aren’t convinced, I recommended a conversation with family members about their end-of-life values. That talk could end up being a significant one.

How Much Does an Estate Plan Cost?

An estate plan covering the above-mentioned points costs between $500-$1500. Given the potential problems awaiting folks without the necessary documentation, they’re 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); instead, this is some preemptive educational reading material for you and your future lawyer to discuss.

It’s good to know what tools an estate planning attorney uses. Why?

Because you can ask informed questions about how to protect your assets and loved ones.

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

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Andrew Fiebert - Chief Nerd Andrew Fiebert is a thirty-something father of twins, a self-professed data nerd, and has worked as a Data Engineer for Barclays Capital and iHeartRadio. He's spent the past six years growing this site into a multi-six-figure business with over 500 hours of free personal finance education that reaches over 1 million people every month. Andrew has a B.S. in Computer Science and has been featured in Quartz, Forbes, Business Insider, and The Telegraph.
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