An overview of estate planning
It’s human nature not to want to think about the temporary nature of our stay in this life. But eventually, if we live long enough, the realization grows that maybe we should put some thought into what happens when we depart. A will that reads, “I, Joe Smith, being of sound mind, spent all of my money while I was still alive!” may sound appealing in a waggish sense, but we know that it’s never as simple as that.
Although most of us are at least generally familiar with what a will is, that is only the allegorical tip of the iceberg when it comes to what you can, and in most cases, should do to make sure that the various kinds of money and property you leave behind go to the people you choose. This realization is your first step in beginning the process we call “estate planning.”
You may be asking yourself, do I need an estate plan? Contrary to what many believe, estate planning is not just for the very wealthy. By definition, an estate plan is an arrangement for your assets and debts upon your incapacity and/or death. The law has a default estate plan for all of us called Intestacy. This default arrangement is often more costly than the plan you would make and it will never take into account your personal preferences. Many people mistakenly think that estate planning only involves the writing of a will. Estate planning, however, can also involve financial, tax, medical and business planning. For example, Trusts, unlike wills, have the benefit of avoiding probate and a lengthy and costly legal process.
What is an estate?
“Estate” is a one-word way to describe everything you own. It includes your home, other real property you possess, personal property, and bank and investment accounts. Although the concept of estate planning is associated by many with what happens after your death, your estate exists while you are alive. The disposition of your estate is what happens when you die.
One common misperception is that only wealthy people have estates. But because the term is simply a legal way to describe what you own, in truth virtually everyone alive has an estate of some kind, even if the dollar value is not great.
What is estate planning?
What estate planning is not: intestate succession
Michigan law does not require you to plan anything when it comes to what happens to your estate after your death. If you choose (or fail to choose), state law has a “default” system – “intestate succession” laws – that will make the needed decisions for you when it comes to who inherits what. As long as you don’t care about how your estate is allocated, intestate succession will at least reduce the prospect of your family members fighting one another over how to divide what you leave behind.
The advantage, if it can be called that, of leaving your estate to intestate succession laws is that it is the easiest choice compared to other estate planning options, and while you are alive it costs you nothing. You do not need to worry about whether your heirs will think highly or poorly of your choices about who inherits. You do not need to be concerned about whether some oversight or technical mistake in your estate planning could cause it to not work as intended.
The disadvantages of intestate succession are flip-side-of-the-coin connected with the “advantages” above: you take yourself completely out of the picture. If you had any preferences, they will not matter. The money you may have saved by not engaging in any estate planning can be lost because of how state and federal estate tax laws work in the absence of any tax planning.
It follows, then, that the more substantial your estate is, and the more you want to be sure that its assets are distributed the way you would like, the less likely it is that you will be satisfied with intestate succession.
Estate planning: a simple definition
Estate planning means rejecting intestate succession and taking control over how to allocate your estate to others while you are still alive. It also gives you the opportunity to control how your estate is managed if you are still alive but for some reason can no longer make decisions or run things yourself (incapacity).
Estate planning takes into account more than just the division of property and accounts. Here are some situations that estate planning can help you to control:
- Providing for people with special physical or other needs.
- Providing instructions for how specific assets are to be handled.
- Providing for your own care if you are incapacitated.
- Naming a guardian for your minor children.
- If you are a business owner, providing for how its control is to pass to others if you can no longer operate it.
- Managing costs and minimizing taxes on your estate management or distribution.
What are some estate planning tools?
Estate planning is a concept. How you realize that concept depends on the instruments you use. Many legal devices are available to you to affect your planning goals; we will consider some of the more common ones here.
A written will is an excellent way for you to leave behind directions on how to dispose of your personal estate. It can be as simple or as complex as you need it to be: you can choose who your estate’s executor will be, identify with specificity who inherits property subject to the will, provide for guardians for your minor children, and more. Most estate plans will include a will.
A will is typically not, however, a sole or universal solution to your estate planning needs. It has limitations and even possible downsides that you need to calculate into your plan, such as:
- You cannot control all of your estate through a will. Only property with title in your name only can be devised through a will. Jointly-owned property, or estate assets such as trusts that have a beneficiary cannot be governed by a will.
- You cannot control with a will what happens to your estate if you are incapacitated. A will takes effect only on your death.
- A will does not mean that you can avoid probate. Probate is the court process through to establish the validity of your will, and to satisfy creditors from your estate before your intended inheritors can receive anything. Probate can cost money and take considerable time. It is public and state-specific, meaning if you have property in states other than Michigan your inheritors could end up having to do through multiple probates and possibly face challenges from excluded heirs.
A trust is one way to ensure control over those parts of your estate that a will cannot apply to. Depending on the nature of the trust, such as with a revocable living trust, you can exercise considerable control over the trust while you are still alive and plan for the possibility of your incapacity, as opposed to a will which takes effect only after death. Many estate plans include both a will and one or more trusts as a way of making sure that any part of the estate not covered by one can be caught by the other.
Trusts can apply to a myriad of estate planning situations, and come in many varieties to match. One significant benefit to a trust is that you can bypass probate for the assets it controls. Trusts can also offer some legal protection for key assets, because legally those assets are not part of your estate. Another potential advantage is that some trusts can avoid estate taxes if your estate’s value is great enough that this would otherwise be a concern.
Another way to reduce the chance of assets going through probate is to share ownership of them. On your death title transfers to the joint owner instead of going through your will (remember, your will covers only those assets you own in entirety).
Beneficiary designation forms
For many kinds of financial accounts, you can identify a beneficiary to whom the account proceeds will go to on your death. This can help to exclude those accounts from having to go through probate.
Incremental transfer of assets to children
If you have a substantial estate, one way to prepare in advance to avoid federal estate taxes and gift taxes is to transfer assets to your children over a period of years. This can take the form of gifts valued up to the maximum allowable under law to avoid gift taxes, or payments made to certain institutions (for example, colleges) on your child’s behalf which can also reduce the long-term tax bite from your estate.
Long-term care devices
A well-rounded estate plan takes into account not only the eventuality of death but also the possibility of the unexpected. An accident, illness or other event can leave you alive but unable to care for yourself or to manage your affairs or your business. If you cannot name someone to manage your estate during this incapacity, a court can eventually appoint one for you; but this precludes you from having any control over who this manager will be.
Fortunately, you can use a number of legal mechanisms to protect your estate if this happens. Here are some examples:
- Power of attorney: This instrument allows an agent you choose in advance to step into the role of managing aspects of your estate on your behalf. The scope of the agent’s authority is something you can control (such as power to manage your financial affairs).
- Health care directives and living wills: These enable you to provide instructions on key medical treatment decisions in case you cannot make them after the onset of an injury, illness or other incapacitating event, and ordinarily include a power of attorney for health care decisions.
- Insurance policies: Long-term disability insurance and some life insurance policies can pay benefits in the event of your disablement.
How do you get started on your estate plan?
By reading this far, you have already taken a major step toward the creation of your estate plan: you are educating yourself about the subject. But your education must not stop here. Entire books can and have been written about how to plan your estate; this article is mainly intended to raise your awareness of the need to learn more.
Aside from reading, other excellent sources of information and advice about planning your estate can come from attorneys who practice in trust and estate law, your accountant, your insurance agent and your financial advisor.
There is no such thing as a “One-size-fits-all” estate plan. Although some estate planning tools like wills and revocable living trusts are used more often than others, what is advisable for you depends entirely on your unique situation: what is in your estate, how old you are, who you want to be your inheritors and beneficiaries, and so on. By being able to have a firm enough grasp of estate planning principles to ask informed questions of your advisors, you can better help them to help you.
Contact an Experienced Estate Planning Attorney
The attorneys at Schock Solaiman Ramdayal, PLLC are trusted estate planning attorneys. We view estate planning as a lifelong process, not a one-time event. We will work closely with you at the onset to develop a full understanding of your interests and objectives. We will then help you create a complete and customized estate plan that protects you and your loved ones.
Ultimately, your estate plan succeeds only if it works when tested, so we will focus on building a lasting relationship with you and your family. We want to become your most trusted advisor to whom you turn for ultimate peace of mind that your plan and family remain protected through life’s twists and turns. Call us at 586-239-0871 today!