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Estate Planning: Learning the Basics

When it comes to estate planning, knowing what to do (and what not to do) is critical to your peace of mind and your family’s. The time of a loved one’s passing is a difficult and stressful for everyone. But a proper estate plan can help your family avoid time in court, maintain control of your assets, avoiding infighting, and minimize delays and costs.

As we take a look at the basics of estate planning, keep in mind that your goal is to protect your assets for your heirs and future generations.

What is an Estate Plan?

An estate plan guides the courts and your heirs as to how you want your estate dealt with after your death or upon your incapacitation. It’s a legal structure for the management and future disposition of your current and future assets. An estate plan provides legal access and instructions to someone you designate to step in for you if something should happen.

What is the Purpose of an Estate Plan?

The goals of having an estate plan in place are to . . . 

  • Maintain control of your assets
  • Decide who steps in and represents your interests
  • Avoid court proceedings
  • Avoid unnecessary delays
  • Avoid unnecessary expenses and taxes

Common Mistakes with Estate Planning

Having no plan in place is perhaps the biggest mistake people make. No plan actually means your estate defaults to using the government’s plan, which leaves everything up to the probate courts. Probate is a court process of transferring assets from one person to another when someone passes away. It’s a very lengthy process, 18 to 24 months on average if everything goes smoothly (and it rarely does). It’s also a very public process. Where you bank, your bank account numbers, and even your balances all become public record. It’s also very costly.

Having no plan is also problematic should you become incapacitated (unable to manage our financial affairs or provide for your care). In these instances, it’s back to court for what is called a conservatorship. This is when a judge designates another person to act for you because you can’t act for yourself. This too is a lengthy, public, and costly process.

Some people only prepare a living will, but there’s more to estate planning than that. A will is essentially a set of instructions for a judge to follow. Of course, since a judge is involved that means we’re dealing with the courts and that’s something we want to avoid. Probate is expensive. Fees are generally determined based on a percent of estate value, often ranging from 2% to 8% of the estate’s value. 

Take Care of Business with a Trust

Probate can be avoided with a Trust. You’ve probably heard the terms “Revocable,” “Family,” and “Living” Trusts. These are essentially the same thing. With a will, you’re saying “This is how I want my stuff distributed after my death, and here’s who I want doing it.” A Trust does essentially the same thing (by appointing a Trustee instead of an executor), but a properly drafted and funded Trust does not need to go through probate. That’s key.

There are several roles people assume with a Trust:

  • Trustmaker, Trustor, Grantor — this is the person who creates the Trust.
  • Trustee — this is person who manages and makes decisions for the Trust.
  • Beneficiary — this is the person (or persons) who receive the benefits of the Trust.

When the Trustmaker is alive, he or she plays all three roles. Upon the Trustmaker’s death or incapacitation, however, the Trust assigns these roles, including the beneficiary (or beneficiaries) who receive distributions according to the Trustmaker’s wishes, not at the discretion of a court. 

Important Things to Know About Trusts

Not Properly Funding the Trust: A Trust can only control Trust property. For example, ownership of your home is most likely deeded to you (and your spouse, if applicable). For a Trust to control the property, though, the property needs to be deeded to the Trust through what is called a Trust “transfer deed.” If this is not done, the house is not controlled by the Trust and the courts will need to get involved.

Not Updating Trust at Time of Life Events: A birth, death, marriage, divorce, move, or property purchase or sale are all life events that can affect Trusts. When such events take place, it’s a best practice to review the Trust. Absent necessary updates, beneficiaries can be left out or left in, which could lead to costly court proceedings.

No Power of Attorney: A power of attorney gives power to someone to act on your behalf for financial and medical reasons. While a Trustee has similar powers, those powers apply only to Trust property. Power of Attorney would apply to things such as retirement accounts (which can’t be Trust assets), paying personal taxes, paying car insurance, utilities, etc. For medical reasons, it applies to medical decisions, such as end of life treatment. 

Not Planning for Blended Family: When families split or join due to divorce or remarrying, this can affect how a Trust applies to inheritance. One common issue is called “inadvertent disinheritance.” Let’s look at an example: a husband and wife, married for decades, has children from previous marriages. They live their lives as a single-family unit. When the husband dies, his share of the Trust goes to the wife, meaning her share is now 100%. When she passes, according to the government, 100% of the Trust will go to the wife’s children because they are her natural heirs. Thus, the husband’s children are inadvertently disinherited. If we take our example a step further, what if the wife were to remarry before passing? If she and her new husband haven’t planned well, upon her death, 100% of her Trust assets go to the new husband and subsequently his kids.

Informal Planning: This common mistake occurs when the Trustmaker has the mindset, “I told my kids what I want to have happen.” Unfortunately, this approach does not work. Informal planning is not honored by the courts.

Do-It-Yourself Planning: Similarly, DIY planning through online venues is common. But beware the false sense of security it provides. Our experience is that many DIY plans are not adequate to withstand court scrutiny. Often, they are too vague or confusing to address specific situations, even if the intent of the Trustmaker is well-known to the family.

Not Just for the Elderly:  If you have a family, you need to plan for the unexpected accident or health emergency … and keep those plans up-to-date throughout your lifetime.

Got Questions?

If you have questions about estate planning, we can help. We are experts at estate planning and helping our clients secure their assets and protect their heirs. Contact the attorneys at Shoup Legal, A Professional Law Corporation, at 951-445-4114 or info@shouplegal.com to discuss your unique situation today. 

Written by Andrea Shoup

Shoup Legal, A Professional Law Corporation can be reached at (951) 445-4114.

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