What is Estate Planning?

Estate planning is a process involving family relationships, social and financial issues, along with choices regarding the future interests of others in the accumulation, management and distribution of our wealth. Estate planning is the legal mechanism that gives effect to those choices. This includes, but is more than, deciding who will receive all or different portions of our accumulated assets after we die. It includes financial and tax planning that is individually suitable for each person during our lifetime as well as after we are gone.

The first step in estate planning is to identify assets and their approximate value. The next step is to recognize the circumstances under which we may not, either temporarily or permanently, be able to personally control the accumulation, depletion and management of those assets. These occasions arise if, and when, we become physically infirm or mentally incapacitated.

Next, a general question to be answered as part of estate planning is who we want to receive all or any part of our assets, and when. For example, it may be prudent to transfer some assets to our loved ones during our lifetime. This could be an annual cash gift, a gift or transfer of family heirlooms or even our home, perhaps retaining the right to live there for the rest of our life. Or, we may wish to gift an interest in an income-producing asset to a charity, retaining the income during your lifetime. Both examples can save taxes during our lifetime.

In addition to a will or trust, an estate plan may include a durable power of attorney for financial matters (sometimes called a power of attorney for management of assets). Such a document can enable a designated person, usually a trusted family member or friend, to handle our financial affairs if we become temporarily or permanently incapacitated due to injury, illness or simply age and mental infirmity. This can delay or even avoid the need for a court conservatorship, which can be both expensive and cumbersome. On the other hand, when some independent review of the handling of finances is desired, this may not be appropriate.

Similarly, a health care directive, sometimes known as a power of attorney for health care, should be part of an estate plan. This document can provide directions about such things as whether blood transfusions can be provided, or whether to resuscitate us. It also empowers our representative to use his or her discretion to make health care decisions for us when we are not in a condition to do so ourselves.

Finally, an estate plan can include something often known as an “ethical will” or statement of wishes. This is a last statement to our family, not to be read until after we are gone. It can include funeral and burial wishes, who should care for young children or plans for a pet. Every ethical will is as unique as the person authoring it.

Do I Need a Will or Living Trust?

If you do not have a will or living trust, you are making some big decisions by your inaction. You are deciding that the government can dictate who inherits your wealth and how it will be divided. This would be your spouse if you have no children, one third to your spouse and the rest to your children (one half to your spouse if you have only one child), all equally to your children if you are not married, or to your closest relatives if you have no spouse or children. Depending on the size of your estate, without a will or trust you may be deciding that the government should receive more of your wealth than might otherwise be the case. And, unless you have a small estate (currently under $150,000), you are deciding that a public record of your assets and liabilities, as part of a probate of your estate, is okay. In some instances, a will may be more suitable than a living trust for individuals or young couples without children or significant assets.

Once you’ve decided to prepare an estate plan, the question becomes whether you should use a living trust as part of that plan or resort to other tools, such as holding title to an asset with a spouse or other person intended to receive the asset after your gone in what is known as joint tenancy with rights of survivorship. A living trust, also sometimes known as a revocable living or intervivos trust, is a legal document and mechanism that partially substitutes for a will or joint tenancy ownership and is used to hold and manage your assets during your life, as well as to pass them on after you are gone.

During your lifetime, the trustee, usually you as the person who established the trust, controls and manages the assets. It is fully revocable during your lifetime. You can decide who will be the trustee if you become unable to handle your financial affairs and after you pass away. If your assets are not in a living trust and you become incapacitated, your community property assets, if married, can be managed by your spouse. Typically, neither your spouse, if any, nor anyone else can manage your separate property without court approval, such as through a conservatorship. Conservatorships (of the estate) are designed to protect you when you are incapable of handling your financial affairs. If you have a living trust, and have designated an alternate, or successor, trustee, they can handle most of your finances without a conservatorship.

Even if you have a living trust, you will still need a will. The will directs what to do with assets that are not in the trust. Sometimes assets are left out of the trust in error; the will can then “pour” those assets over into the trust. At other times a will may be the simplest way to handle selected assets of limited value, such as automobiles.

What Else Should I Be Concerned About?

There are many issues and considerations in estate planning that address more than just what happens to your “stuff” after you’re gone. An estate plan can cover circumstances when you are incapacitated. For this reason, you should also consider whether you want to create a power of attorney for your financial affairs that will be available even when you aren’t. If you don’t already have one, you should also have a completed and signed Advanced Health Care Directive. With the passage of strict privacy laws a number of years ago, you will also need a HIPAA/CMIA Authorization for Release of Protected Health Information, without which the person you’ve asked to make health care decisions may not have access to your medical records or to your doctor.

Part of your estate planning also involves creating an inventory of your assets. This is a good time to consider a separate asset inventory that will be helpful in the event of theft or natural disaster, along with preparation of a secure list of other account numbers (such as for credit cards), your passwords, the location of such things as safety deposit box keys, etc. A list of people to contact in case of emergency or incapacity is usually a part of your estate plan documents, but if not, should also be created and maintained as part of an estate plan.