WHAT’S AN ESTATE PLAN?
Pop culture has done a terrible job portraying what an estate (and therefore, an estate plan) actually is. There are two truths about estate planning that you should know: First—everybody has an estate. But 60 percent of Americans haven't affirmatively planned what to do with theirs—including a whopping 78 percent of Millennials (born between 1980–1995) and 64 percent of Generation Xers (born between 1965–1980)!
Second—everybody has an estate plan (bet you were surprised to know that, huh?). That is, if you haven’t decided what you want to be done with your property when you die, then you’re planning for Uncle Sam to decide for you.
If that thought is cold comfort to you, then be sure to read our series of articles about Essential Estate Planning to find out more about what estate plan actually is and to begin to think about what kind of plan is right for you and your family.
"What is an estate, anyway?"
"Do I have to own a home to have an estate plan?"
"Aren’t estate plans just for rich people and trust fund kids?"
These are just a few of the statements people make about estate planning — and they shouldn’t necessarily be blamed for the misunderstanding. Pop culture has done a terrible job portraying what an estate (and therefore, an estate plan) actually is. Almost everybody has seen some movie where a bereaved family attends the “reading of the will” after a rich patriarch’s death. But would you be surprised to know that there’s no such thing as the reading of the will? I’d bet you’d be surprised to learn that having a “last will and testament” doesn’t keep you out of court, which must still oversee the distribution of the deceased’s property.
So if an estate isn’t any of those things, what is it?
An “estate” is nothing more than the property that you own. Therefore, the core of “estate planning” is simply figuring out what will happen to that property when you die. An estate plan can also include decisions about your young children and their property and what happens to your body after death. Estate planning even allows you to make a decision about your health care and financial matter during life, before you die. So, no matter how much or how little — even if it’s just the clothes on your back and the lint in your navel — everybody has an estate.
Everybody has an estate plan, too. (Bet you didn’t know that, huh?) That’s because not affirmatively planning for yourself is passively planning for the government to distribute your property how it thinks best. That is, if you haven’t decided what you want to be done with your property when you die, then you’re planning for Uncle Sam to decide for you.
But if that thought is cold comfort that doesn’t carry you very far, then pay attention to what follows.
Property. Most people use their estate plan to determine who will get their property when they die, and wills and living trusts are the most popular means of planning. Wills are by far the most popular because they’re relatively simple, cheap, and people generally know what they are. A will primarily names the beneficiaries for your property and nominates a guardian for minor children.
Living trusts are also fairly popular planning tools but are less so than wills. Like a will, a living trust generally names beneficiaries for your property and details the conditions according to which they may receive it. But most living trusts are more complicated than wills—which typically makes them more expensive. Moreover, while most people have heard the term “trust,” they don’t really know what they are, what they do, or who they’re for. Terms like “trust- fund baby” give the impression that trusts are only for the realm of the wealthy. Wrong. Trusts are for anybody and most people probably should have one.*
Finally, a less known but increasingly popular way to pass property to beneficiaries is to use transfer-on-death (or payable-on-death) accounts, deeds, or registrations. TODs allow beneficiaries to receive assets when you die without the asset being first listed in a will, trust, or going through probate. They also allow you to divide the asset in whatever proportions you want to give it to however many beneficiaries you please. But be careful: you need a TOD for each asset you’d like to transfer and must update each of them as your desires change; otherwise, your former BFF may end up with that asset even after your falling out.
Minor children. Through a will, you can nominate a guardian to care for your young children and the assets you’d leave them if both you and your child’s other parent have died.
Health care and financial arrangements before you die. Perhaps the most important—and most overlooked—component of estate planning applies when you’re incapacitated. (To the extent that people think about estate planning, they do so assuming their own death. Most people fail to consider what happens if they’re in a coma!)
You can use your estate plan to make decisions about your health care preferences and financial affairs before you die but while you don’t have the ability to care for yourself. In a health care power of attorney, you can name a person to make health care decisions on your behalf when you are no longer able to make them yourself; a financial power of attorney allows you to appoint someone to pay your bills with your money when you can’t. If you’d like your health care POA to follow specific directions, a living will allows you to set out in detail what kind of health care you would like to receive; for example, if you would like to receive all possible treatments under any condition, or if under certain conditions you would like to receive only limited treatments.
Your final arrangements. You may also want to include instructions about what should happen to your body after you die (e.g., burial, cremation, or donation) and what types of ceremony or memorial you would like to have. In most states, you can appoint someone to make these decisions for you after you die and you can also leave detailed notes about exactly what your wishes are.
Nearly six in ten Americans don’t have an estate plan to address these issues and are planning for Uncle Sam to decide many of these issues for them. Don’t be one of these people. You can’t be too young or too old—but you can be too late.
If you have any questions or concerns, feel free to give us a call. We help entrepreneurs plan for the future, protect their loved ones, and provide for a meaningful and enduring impact through business succession and estate planning.