Two million people die each year in the United States. More than 70 percent of these people haven't planned for their death in any way. They haven't created a simple will, much less an estate plan. The problem is that you can create a real mess when you die without planning for it. For example, if you die without leaving a will or estate plan, here's what can happen:
The book Wills, Trusts and Estate Planning by Richard Saul Wurman provides a compact, easy-to-understand road map to the world of estate planning, and it is a great tool to guide you through the entire process. Click here to order your copy!|
On the other hand, if you do have a will you have total control. You get to decide:
- Your home or business may be sold to pay debts and expenses.
- The courts (not you) will decide who will take care of your children and their finances.
- The courts (not you) will pick the administrator for your estate.
- Expenses will be much greater because the courts are involved and that means lawyer fees.
- There may be unnecessary taxes.
- Your estate may go to unintended beneficiaries, because the courts decide and there are lots of very strange rules on how to distribute money when there is no will.
You also greatly diminish the strife, disagreement, pain and anguish that your family members will have to go through to get what's rightfully theirs.
- Who will take care of your children
- Exactly who gets your property and how much they each get
- How much money goes to legal expenses and the government
As you can see, having your estate in order makes a big difference to the people who survive you -- most importantly, your spouse, children, parents and family.Now, we will examine exactly what is involved in setting up your will and planning your estate. After reading this article, the hope is that you will take the time to get your affairs in order so that you are not in the 70 percent of people who die totally unprepared.
What is an Estate?
For most people, the word "estate" seems foreign. Millionaires have estates, so you may not feel like the word applies to you. But we all have an "estate." Your estate is everything you own, minus your debts.
This will seem strange, but after you die, your estate takes on a life of its own. It becomes a legal entity. Your estate can owe or be owed money, for example. It gets bills and has to pay them. In some cases, your estate can live more than twice as long as you do.
Your estate is equal to your net worth -- the value of your assets -- minus any debts. Assets in your estate can include:
All liabilities are also taken into account, whether it is the mortgage on your house, your credit card balance, or the money you owe your uncle. Your estate also gets bills from lawyers and courts, tax collectors and so on, and the estate pays these as well.
- Any real property (houses, land, etc.)
- Bank accounts
- Investment accounts
- Stocks and bonds
- Mutual funds
- Insurance proceeds
- Retirement plans
- Money owed to you
- Tangible personal property like jewelry, art, furniture and cars
Your estate is all of your assets (everything you own) minus all of your liabilities (any loans, IOUs or mortgages).
The point of estate planning is to pass along your assets -- however great or small -- to the persons or institutions you choose. With a good estate plan, your assets move on to the recipients directly, quickly, and with as little trouble and expense as possible.
In order for a will and estate plan to work, you must take certain steps. Otherwise, the courts take over and make all the decisions for you. With each year that passes, it becomes more critical for you to prepare or refine your estate plan. If you're like most people and you haven't done anything, the most important thing is simply to get started.
Steps to Preparing Your Estate
To create a complete estate plan, here are the steps you need to take:
This list may look a little daunting when you first see it, but keep this important fact in mind -- if you don't decide all of this stuff ahead of time, then a bunch of strangers in the court system will make these decisions for you. Their decisions may be very unlike what you would have chosen. The only way for you to control your estate is to figure all of this out before you die.
- First you need to make a list of all of your assets and liabilities. That will tell you roughly how much your estate is worth right now.
- Next you need to think about who should get what.
- Next you should think about when people should get things from your estate. For example, your four-year-old twins might not receive their inheritance until they reach a certain age.
- Then you need to think about guardians for your children (and other dependents) and talk to those people. You need to make sure they would actually be willing to take on the job, rather than springing it on them as a surprise if you die. Eventually, you will need to create detailed instructions for them. Don't forget pets.
- Decide what you would like to have happen -- for yourself, your dependents and your property -- if you become seriously ill or incapacitated, and make sure you talk to people about it.
- Select trustees and/or executors and establish their responsibilities. Most people don't know a thing about this, so it is good to read a book or two, talk with a lawyer, and definitely pick people who are trustworthy and reliable.
- You definitely need to talk with a lawyer to set up all the legal documents, establish any trusts, etc. A professional can also answer lots of questions, help you look at potential tax and probate liabilities so you can avoid them, and help you choose which assets should go toward the payment of debts, legal fees and taxes that will pop up when you die.
- Once you have it set up, review your estate plan regularly and make updates. For example, if you have another child, get a divorce, move to a new state, get married, etc., you will want to update your plan.
There may be a number of unfamiliar concepts in this list --"trusts," for example. We'll take a look at these concepts in the following sections.
What is Probate?
You can live your entire life and never hear the word "probate." But the instant you die, probate becomes a big deal. Probate is the process of legally passing property from a deceased person to his or her heirs or beneficiaries. Probate courts administer the process.
Probate courts have been a part of our legal heritage for centuries. Every county in every state in the United States has its own probate system. Keeping the property in your estate out of probate court is a big estate planning goal. There is nothing you can do with your will to allow it to bypass probate, but there are ways to keep property from passing through probate.
Probate court appraises, assigns, files and distributes your estate.
Techniques that allow you to keep property out of probate include:
The gist is, "If you can have the asset automatically pass to someone when you die, then it never hits probate." For details on these different techniques, see Wills, Trusts and Estate Planning.
- Living trusts
- Life insurance
- Retirement plans
- Joint tenancies
- Designated beneficiaries
- Pay-on-death or transfer-on-death accounts
Because probate is not a simple legal process, survivors usually have to call an attorney, as well as an administrator/executor to guide them through the legal maze. The estate pays the administrator, the executor and the lawyer. Probate costs generally run five percent to 10 percent of the gross estate, depending on the size of the estate. The larger the estate, the lower the percentage. Many small estates have been almost entirely consumed by legal fees.
The process of settling an estate when there has been inadequate or no planning can be extremely costly, time-consuming and heartbreaking. The good news is that none of this frustration is necessary -- with proper estate planning, settlement can be easy.
When the term "estate planning" is used, most people think of writing a will. Similarly, many people who have prepared a will believe that they have an estate plan. In reality, a will is just one part of a complete estate plan.
A will is a revocable document (you can cancel your will or change it at any time) that tells the world:
- How you want to give away your property when you die
- Who you want to have as your executor -- the person who will carry out the instructions in your will
- If you have children (or other dependents), who their guardians and the guardians of their property should be
Usually, one guardian does both, but it is also possible to split the two tasks.
The parts of a will include:
All wills must be written in a certain way so that they comply with certain technical requirements in your state's laws. For example, some states require a will to include a statement at the end that says it is your will, the date and place of signing, the fact that you signed it in the presence of the witnesses, and the fact that the witnesses also signed both in your presence and in each other's presence.
- Your name and address
- A brief description of your assets
- Names of spouses, children and other beneficiaries, such as charities, friends or relatives
- Alternate beneficiaries, in case a beneficiary dies before you do
- Specific gifts, such as your car or your home
- Any establishment of testamentary trusts and the designation of a trustee
- Any cancellation of debts as a gift
- Name of the executor to manage the estate
- Name of a guardian(s) for minor children and their property
- Name of an alternate guardian(s), in the event that your first choice is unwilling or unable to act
- Your signature
- Witnesses' signatures
- The signature and stamp of a notary public (in some states)
How your will is executed after you die
For details on wills, see Wills, Trusts and Estate Planning.
Trusts allow people to transfer their property to other people, either during their lifetime or after death. Trusts also make it possible for people to make gifts but still exert some pre-arranged control over the gifts in the trust -- to truly give gifts with strings attached.
Trusts allow people to give what they have to whomever they want, when they want and in the way they want. Trusts can also be used to help reduce taxes, attorney fees and probate costs. Trusts can accomplish a wide range of estate planning objectives. Most attorneys will look at a whole assortment of trust instruments to meet the needs of their clients.
Think of a trust as an empty container into which you can place assets. A trust is created by a trust maker through the creation of a trust document.
The written trust document (or instrument) contains all the terms and provisions of the trust. It must contain a statement of purpose, as well as instructions issued by the trust maker about the details of the disposition of the trust property. A trustee is named to be in charge of carrying out the trust maker's instructions. The trust must also spell out the amount of control the trustee has to distribute funds and invade the principal (or main asset) of the trust, as well as any restrictions on distribution of the funds or their use. To be effective, all trusts must be in writing and signed by the trust maker. A single trust document can contain any number of separate trusts.
Trusts can be established to meet just about any objective you would like, as long as it doesn't break the law or go against public policy. Trusts can be created for the benefit of the trust maker and/or the benefit of others. People who receive the benefit are called beneficiaries, and there can be as many beneficiaries as you like. The beneficiaries who first benefit from the trust are called the primary beneficiaries. If the primary beneficiaries die or become disqualified according to the instructions given to the trustee, the property will then go to others, called the contingent beneficiaries.
Trusts cannot last forever (no longer than 121 years) unless the beneficiary is a legally established charity. So there is some limit on how long you can maintain control over the assets you leave your beneficiaries.
For details on trusts, see Wills, Trusts and Estate Planning.
For much more information, check out the links on the next page.
Lots More Information!
The book Wills, Trusts and Estate Planning by Richard Saul Wurman provides a compact, easy-to-understand road map to the world of estate planning, and it is a great tool to guide you through the entire process. Click here to order your copy!
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