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

Have some money or a family? Then you need estate planning. This quick primer will walk you through the basics and help you get started on protecting what matters most.

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, simply put, is a court that oversees the legal process of transferring a deceased person’s property and assets to their living beneficiaries or heirs.

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 help decide who will care for a deceased person’s minor children and manage any property they inherit, making sure the kids’ needs and interests are protected until they’re adults.

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) and Transfer-on-Death (TOD) Accounts: Bank or brokerage accounts that transfer directly to a named beneficiary upon the account holder’s death.
• Assets Held in a Trust: Property placed in a living trust, which bypasses probate and is distributed according to the trust’s terms.
• Life Insurance Policies: Policies with designated beneficiaries receive proceeds directly, avoiding the probate process.
• Jointly Owned Property with Rights of Survivorship: Real estate or other property owned jointly, where ownership automatically passes to the surviving owner.
• Retirement Accounts: Accounts like IRAs and 401(k)s with named beneficiaries that transfer directly upon death.

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 determines who receives the assets by referring to the decedent’s will or, if no will exists, the state’s intestacy laws.

Wills and Estate Planning

A will is essentially a letter to the probate court that must follow specific formalities to be valid. It needs to prove:

• Written form: The will must be in writing, either typed or handwritten.
• Authenticity: The document must be signed by the testator to confirm it is genuine.
• Witnesses: At least two witnesses are typically required to verify the signing.
• Mental capacity: The testator must be of sound mind at the time of signing.
• Intent clarity: The will must clearly express the testator’s wishes regarding property and guardianship.

At its core, it’s a letter saying where the testator wants their property to go, who they want as guardians for their kids, and which family members, if any, will be excluded.

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, other financial accounts, 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 children or 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. Revocable living trusts 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.”

Powers of attorney are one of the legal documents most prone to abuse in estate planning, particularly in the form of self-dealing and malfeasance. If someone appoints the wrong person as their attorney-in-fact, it can lead to mismanagement or even depletion of funds in certain accounts.

Abuse of a power of attorney can include:

• Using the principal’s funds for personal benefit (self-dealing).
• Failing to act in the principal’s best interests.
• Draining accounts or mismanaging assets.

This is why it’s crucial to carefully choose a trustworthy attorney-in-fact and, if possible, implement safeguards such as requiring regular accounting or appointing co-agents to oversee actions.

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.

A durable power of attorney allows someone you trust to make decisions for you if you become incapacitated. It can either take effect immediately or only when you’re unable to make decisions, depending on how it’s set up. Without a DPOA, no one can represent you unless a court appoints someone. It ends either when you revoke it or when you pass away.

A non-durable power of attorney grants someone temporary authority to act on your behalf for a specific period or task. It ends when that time expires, when you revoke it, or if you become incapacitated or die. For example, you might use it to let someone manage your finances for three months while you’re away.

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 and 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?

Estate plans covering the above-mentioned points can range in cost (see below) depending on the complexity. Given the potential problems awaiting folks without the necessary documentation, they’re worth every penny.

• Basic Estate Plan: Typically costs between $1,200 and $2,000.
• Comprehensive Estate Plan: Ranges from $3,000 to $5,000 or more, depending on complexity.
• Married Couples with Revocable Living Trust: Detailed plans, including a revocable living trust and complete end-of-life documents, might cost between $1,500 and $3,000.
• Complex Estates: Plans involving business interests, multiple properties, or intricate family situations can incur significantly higher costs.

Estate planning documents are crucial for avoiding potential problems, and experts widely agree they are “worth every penny”. Proper estate planning protects your assets and ensures your wishes are carried out effectively.

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.