Estate Planning Primer – Keeping It Simple

Estate planning can be fun!  This is because once you take care of it, you know your assets will transfer to your loved ones efficiently.

What follows is a basic primer on the process including some steps you can take to implement a good deal of the estate planning process yourself.  In our next newsletter, we will have one of the attorneys we work with go over some more intricate examples where working with an estate planning attorney is paramount.

There are four basic ways in which an estate is transferred to named heirs or relatives:
1)      By Joint Tenancy:  the execution of Joint Tenancy titling on an asset
2)      By Contract:  the execution of named beneficiaries which overrides any will
3)      By Probate:  the execution of a Will (or lack of one)
4)      By Trust:  the execution of a Trust Document

And so, perhaps even before you visit with an attorney, the first stop in your estate plan could include the following:
• Joint Tenancy:  Assets that are titled Joint Tenancy bypass probate and the surviving individual assumes full ownership of the asset.  If you don’t see the words Joint Tenants on an asset, it is owned as Tenants In Common which means the asset will go to probate (unless subject to a beneficiary designation).  Sometimes this happens on a house by accident in a rushed closing.
• Beneficiaries:  Named primary and secondary beneficiaries on insurance contracts, retirement accounts, and even now on taxable accounts will automatically bypass probate and supersede any will.

The musician Prince recently passed away without a will.  The good news for him (and his sister) is that even without a will the laws still give him an effective estate plan.  Without a will, the probate law distributes your assets to any relatives according to very explicit rules.  Parents, then kids, then grandparents, then grandchildren, etc and any guardianship is in place until the age of 21.  But don’t be lazy here, as these rules may not coincide with how you would like the wealth transfer to occur.  If there are no living relatives, the estate does then go to the state.

However, no matter the size of the estate, it’s a sad thing when no real planning has gone into a generation’s assets.  There are so many other issues to think about including Guardianship, Medical Directives, Trusteeship of assets for children, blended families, single parent issues, charitable planning, and remote contingent disposition.  This can all be part of the outcome of a good estate plan.

So almost everyone should have a will and spend time on the estate planning process.  Here are the basic documents:
• Will, possibly with a Testamentary Trust for children who are too young to inherit sizeable assets
• Financial and Healthcare POA
• Healthcare information release form (HIPAA)
• Living Will – an end-of-life medical directive
• Burial Instructions / Personal Property Memorandum

The estate law has been reformed a great deal over the last decade in a number of ways to make probate less cumbersome.  Probate law is vastly improved – unless you live in CA, NY, or FL.  Colorado is probably the most efficient state in union.  Tax law seems to have evolved over that same time frame.  There aren’t any Federal unless you have more than $5.45m per person ($10.9m married).  Moreover, most states have eliminated or greatly reduced any estate tax and Colorado does not have one.

Some other interesting side notes that appealed to the estate planning geek in me:
• What is a Living Trust and when should I use it?  Probably not that often.  There is no credit protection in a Living Trust but it can help you to avoid probate.  This is very useful if you live or own real estate in CA, NY, or FL where the probate laws are very onerous.  Real estate always goes through probate in the state it is located in so a living trust is a great way to own that vacation home even if you don’t live in one of those three remaining byzantine probate states.
• Living Trusts for Disability Planning: However, living trusts are better for disability planning as they specify who takes over in such an event. Banks are more reasonable than when you try to use a financial power of attorney.
• When not to use Joint Tenants? Think credit exposure.  If one joint tenant has a creditor problem, then the entire asset is subject to the creditor, not half.
• Divorce and Beneficiaries: If you divorce and forget to change your beneficiaries don’t necessarily worry.  All non-Federal assets (any asset that is not a Federal retirement program) has an automatic divorce revocation law regarding beneficiaries. It is probably still a good idea to change your beneficiary information though!
• Pre or Post Nuptial agreements:  these can help override the Spouse Elective Share especially for blended families wanting to pass on equal share of assets to their children.
• Per Stirpes:  this allows equal share of assets to pass on to the children of your children.
• International Property:  very country specific so consult with a local country attorney
• Blank Beneficiary IRA: the inheritor must then take all distributions within 5 years which is usually not optimal from a tax perspective

Where to store all of your documents?  Despite the reformed nature of much of the estate planning world you must have hard copies with wet signatures for the documents to be effective.  Store your documents with your estate attorney, give a copy to a third party, and have one saved in secure location in your house.  Oddly, digital copies are not that helpful at the moment.

When do you absolutely need an estate planning attorney?
• If you have children that you don’t want to inherit sizeable assets at too young of an age
• If you have assets over the Federal estate tax exemption limit
• Second marriages can create issues with blended families and spousal rights

At the end of the day, if you want to make sure that you have a complete plan in place then please see an estate planning attorney.  You can get a head start by titling your assets correctly and naming beneficiaries.  But, these days, estate planning attorneys most often work for a flat fee and will give you a free initial consultation.  So there is little excuse not to visit one.

One surprising statistic – as it turns out, estate planning attorneys get the highest satisfaction ratings in client exit surveys across the legal profession.  People apparently actually enjoy seeing them.  We can introduce you to consummate professionals that we know well.  Get out there and take care of this part of your financial life.

Stay tuned for our next segment on more advanced estate planning issues.  We have a guest writer who will tackle the subject for us.

-Will (no pun intended)