Estate planning is usually thought of as a luxury reserved for the very wealthy with lots of resources to give away. However, estate planning can be beneficial for most people. Few estates are so small that they will not receive any of the benefits of estate planning and having a well-thought out Last Will and Testament. For most people, estate planning involves planning for death. Who gets the property? How much will be due in taxes? Who will take care of the children? Will the estate be tied up in probate court for years? These are some of the considerations that act as motivation to put one's affairs in order. This guide focuses on what the average person needs to know about the importance of estate planning: determining the size of the estate, examining what estate planning accomplishes, and exploring the consequences of dying without a will.
Estate planning involves a lot of jargon that can make the endeavor seem difficult for the layperson to take on. However, the most important task is to define the meaning of "estate" itself. An estate just consists of all of a person's property. This property is divided into two different categories: real property and personal property. Real property means real estate, such as a house or land. Personal property is everything else: cars, cash, stocks, bonds, clothing, furniture, jewelry, antiques, collections, and so on. This is an important distinction to make because most people often think of "property" as only real estate. In the context of estate planning, property includes every type of possession -- real estate and personal assets -- that a person has. It's also possible to divide personal property into two different categories: tangible and intangible property. Tangible personal property consists of possessions that can be seen and held, such as cars and furniture. Intangible personal property consists of things such as insurance policies, bank accounts, pensions, and social security benefits.
For most people, the major assets of their estate are their home, life insurance proceeds, retirement benefits, investments, bank accounts, vehicles, furniture, and jewelry. A first step to estate planning is assessing the size and contents of one's estate. The easiest way to get a handle of the size of one's estate is to fill out a financial statement form that outlines all of a person's assets, from homes to clothing to investments to bank accounts. Many banks or investment groups offer free financial statement templates that a person can use for this purpose. It's important to include all retirement plans and death benefits, such as life insurance benefits (including term insurance, if applicable), Individual Retirement Accounts (IRAs), certificates of deposits (CDs), treasury bills, and pension plans. For items that potentially have a great deal of value, such as jewelry, antiques, or coin collections, an expert appraisal can provide an accurate valuation of these items.
Though estate planning is a foreboding topic for many people, it is actually very useful in many different circumstances and provides a great deal of value for most people. An estate plan is a blueprint for where property goes after a person dies and instructions for the people selected to manage the person's affairs once they die. Here are some of the most important things estate planning can accomplish for a person who is willing to tackle to task:
1. Provide for immediate family: Using estate planning, a person can provide for their surviving spouse or other close family members. Wills and trusts can pass property on to a spouse or other family members, make sure a competent person has been selected to settle the estate and protect the property while the estate is being settled, and even take important steps to protect the property from creditors. Without estate planning, beneficiaries, or those who receive something from an estate after a person dies, will get less and it will take longer for them to get.
If both a person and their spouse die before children grow up, a will can help to assure their children's education and upbringing by nominating personal guardians for them. Otherwise, a court will appoint a guardian for the minor children without the deceased parents' input. The guardian will decide where the children live, are educated, and socialized. By appointing a guardian ahead of time, parents can be sure their children will be able to live as they intended with someone they trust.
2. Provide for other relatives who need guidance: In many situations, people have extended family members whose lives would be more difficult without them. This includes elderly parents, disabled adult children, or grandchildren whose education a person might want to assure. A will can be used to establish a special trust fund for family members who need support that a person will no longer be there to provide after they die.
3. Get property to beneficiaries quickly: Most people want their beneficiaries to receive the property they have been left promptly and without much fuss. Probate, or the court process through which an estate is delivered to beneficiaries, can often be slow and complicated. Probate can be avoided or simplified through estate planning.
4. Ease strain on one's family: A will can be used to ease the burden on grieving survivors by planning funeral arrangements while planning the estate. The burial and funeral expenses can also be limited by designating a place for burial ahead of time and providing for a body to be cremated or donated to science, if desired.
5. Minimize expenses: Good estate planning keeps the cost of transferring property to beneficiaries as low as possible. Choosing competent executors/trustees, or the people put in charge of managing the estate, and giving them the necessary authority through a will saves money, reduces the burden on survivors, and simplifies the administration of the estate. It also reduces the court's involvement and, in many states, eliminates the need to pay legal fees associated with probate.
6. Reduce taxes on the estate: Every dollar an estate has to pay in estate or inheritance taxes is a dollar the beneficiaries will not get. A good estate plan can give the maximum allowed by law to the beneficiaries and the minimum to the government.
7. Make retirement easier: Even though estate planning primarily benefits the people someone leaves behind when they die, an estate plan can, and should, be coordinated with retirement, healthcare, and other benefits to help achieve the most comfortable final years while still providing for loved ones.
8. Plan for incapacity: A person can use a number of associated estate documents, such as an Advance Healthcare Directive, Living Trust, or Mental Healthcare Power of Attorney to be sure they will be taken care of into their old age and when they are no longer able to care for themselves. These documents allow a person to decide in advance about life support and pick someone to make decisions about their medical treatment when they are no longer able to do so for themselves.
9. Support a favorite cause: An established estate plan can provide instructions to use some or all of the estate proceeds to support educational, environmental, humanitarian, or other charitable causes. This also takes advantage of tax laws designed to encourage private philanthropy or charitable giving.
10. Make sure business goes smoothly: If a person owns a business, they can provide for an orderly and hiccup-free succession and continuation of affairs by spelling out exactly what will happen to business interests upon the owner's death or incapacity.
Estate planning can be a tricky topic to broach as many people are reluctant to address the reality of death. However, millions of people of all ages and economic levels can, and should, take steps to distribute their money and property by using a well-thought out estate plan. A recent survey by AARP found that sixty percent of Americans over fifty have a will. The percentage is even higher with senior citizens. Yet, estate planning is not just for the elderly. Unforeseen circumstances mean that it is impossible to predict when a young or middle-aged person might die suddenly, often leaving behind a surviving spouse and children.
Further, it's important to consider the estate planning that addresses a person's needs before they die, preparing for possible mental or physical incapacity resulting from an accident or illness. Through an Advance Healthcare Directive, Living Trust, or Mental Healthcare Power of Attorney, a person can control beforehand how they and their property should be cared for if the worst were to happen.
If a person dies intestate, or without a will in place, their property must still be distributed. By not leaving a valid will or trust, or transferring property in some other way, such as through insurance, pension benefits, or joint ownership, it is essentially left to state law to write the person's will for them. This doesn't necessarily mean that their property will go to the state. This only happens in very rare cases where the deceased leaves no surviving relatives, even very distant ones. However, it does mean that the state will make certain assumptions about where a person would like their money and property to go -- assumptions with which a person might not agree. These laws vary significantly state by state. To get a full overview of how the laws in a person's state could play out in a situation where they die without a will, hiring an attorney licensed in that state is worth the investment.
It is a common misconception that when a married person dies without a will, their surviving spouse automatically gets all of their property. In fact, the amount the surviving spouse receives depends on the ownership of the property, whether there are any children or grandchildren, and whether the parents or siblings of the deceased person are living.
In many states, when a married person dies without a will or trust and leaves a spouse and one child, the surviving spouse gets half of the property and the child gets the other half. If there are two or more children, the surviving spouse receives only one-third of the estate and the children receive the other two-thirds equally. Other states give the surviving spouse one-half or one-third of the estate regardless of the number of children. In some states, the surviving spouse receives cash up to a certain amount and then a percentage (typically one-half) of the rest of the estate. In most community property states, or states where all of each spouse's possession are considered to be equally shared with the other spouse, the surviving spouse receives all of the community property but shares their deceased spouse's separate property (i.e. property the spouse owned before the marriage or acquired during the marriage via gift or inheritance) with any children, or if there are no children, with the parents or siblings of the deceased spouse.
If a person dies leaving a spouse but no children or other issue, some states give the surviving spouse everything. Other states split the estate between the spouse and the decease person's parents, or siblings if they have no living parents. In community property states, the surviving spouse usually gets all of the community property but must share the separate property with the deceased's parents or siblings.
If a person dies without leaving a surviving spouse, then the property goes to the children. An adopted child is entitled to share in an estate to the same extent as a child born and blood related to the deceased person. When there are no children, grandchildren, or any other descendants, the deceased person's parents usually each get one-half of the property if they are surviving. In many states, if only one parent is surviving, they get all of the property. Some states divide the property among the deceased person's parents and siblings. If the parents are not living, the siblings usually split the estate. When a person dies without any close relatives, then the next of kin, such as nieces or nephews, aunts or uncles, or cousins share in the estate.
If a person dies and no heirs at all can be found, the state steps in and sells all of the property. The net proceeds are then deposited in a special bank account. If the money is not claimed within a certain period of time, the state gets to keep all of it.
If a person does not agree with the way the state laws have dictated their estate be distributed, a will is essential to specify who will benefit from the estate. Estate planning puts a person in control and stops the state from disposing of their property in ways they did not intend or agree to.
Though estate planning is often thought of as a process reserved for the wealthy, it's clear that estate planning is necessary and useful for nearly everybody. Estate planning is every bit as important as saving for a child's college education or putting money away for retirement. Here are the most important points to remember:
About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.