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What Is Estate Planning – Basics & Checklist for Costs, Tools, Probates & Taxes

By Mark Theoharis

estate planning papersBen Franklin once famously quipped, “In this world nothing can be said to be certain, except death and taxes.” And while millions of Americans spend inordinate amounts of time worrying about their income tax returns every year, death is one of the areas that few people talk about, much less take time to prepare for.

Nevertheless, the immutable fact remains that yes, you will die, and yes, you need to start thinking about it sooner rather than later. In fact, now might be the perfect time to begin forming your estate plan.

What Is Estate Planning?

Estate planning is the term given to the process people go through to prepare for the legal, financial, and personal realities of their death, while an estate plan is a collection of tools specifically designed to address these kinds of issues. Estate planning is not a single topic, but rather a collection of topics that all involve the practical realities surrounding death and mortality. It can also be rather complicated, involving ever-changing considerations in light of personal preferences, new laws, shifting economic factors, and more.

Regardless of your age or personal circumstances, creating an estate plan is an essential task for every adult – and understanding what an estate plan is and what specific kinds of issues your plan might address is the first step.

Estate Planning Costs

The cost of developing an estate plan can differ significantly depending on a variety of factors. At the low end, a do-it-yourself estate plan with a few key pieces, such as a will and medical directive, could easily cost less than $100. On the other hand, having an attorney draft a will or medical directive on your behalf can cost from $300 to $1,200 – possibly more. If you need a more complicated estate plan, the costs of having a professional prepare it on your behalf will only go up from there.

However, when considering the costs involved, you have to consider the cost of not having a plan – or even worse, having a poorly-made plan. If a legal battle erupts between your family members after you become incapacitated, or if a problem arises in your plan that has to be sorted out during the probate process, the costs can easily outpace those involved in crafting a comprehensive plan with the aid of an expert.

What Is an Estate?

Many people conflate the term “estate” with the idea of a large home or piece of property, but that’s not what estate planning is about. To understand estate planning, there are some fundamental ideas you need to begin with.

Estates

Legally, an estate is simply whatever a person leaves behind after death. Some people might leave a lot, while others might leave behind less – but everyone, no matter who they are, how much they own, or where they live, will leave behind an estate.

Probate

Because everyone leaves behind an estate, all states have adopted laws that determine what happens to all that left-behind stuff. While these laws differ slightly from state to state, they are basically the same, and allow for an efficient and uniform transfer of estate property to new owners.

In general, these are known as probate laws, or the probate code. Probate laws protect your right to make decisions about what you want to happen to your estate, but they also require you to make such choices through specifically recognized methods, such as by making a last will and testament that complies with all applicable requirements.

Estate Plans

An estate plan is simply a collection of legally enforceable tools that allows individuals to control what happens to their estates after death. Some estate plans include a small number of tools – such as only a will, or a will with a testamentary trust – while others are more complicated. Yet regardless of the specific kind or number of tools your plan uses, creating a plan allows you to be able to control your estate after you die, assuming that you’ve made your plan in a legal manner.

Intestacy

Largely because people are reluctant to think about death, only about half of all adults in the country ever get around to making an estate plan, according to a Gallup survey. People who die without leaving behind a plan are generally referred to as having died “intestate.” Because of this, all states have adopted laws that predetermine what happens to these estates. These laws are known as laws of intestacy, or intestate succession.

In other words, your state has enacted laws that choose what your estate planning choices are – if you don’t do it yourself. Should you die without a plan of your own, these laws will automatically apply to your estate. Further, you have no control over what these laws choose for you, unless you override them with an estate plan of your own.

estate planning woman

Estate Planning Tools

Perhaps the most important issue your estate plan will address is inheritances. When you craft an estate plan you get to decide who inherits your property after you die.

Do you want to give money to your siblings or your parents? Do you want your wife to get everything? Do you want to split your property between your wife and your grandchildren? Regardless of your specific choices, there are several tools estate plans employ that allow you to make inheritance decisions.

The Last Will and Testament

The last will and testament, or a will, is probably the most well-known estate planning tool around. Most people know what a will is, and understand that by making one they can choose what kinds of inheritances they leave behind.

But making a will is a lot more complicated than just writing your wishes down on a piece of paper. Every state has specific rules that apply to people who make a will, and if you fail to follow those rules, your will is useless. These requirements include:

  • Being at least 18 years old
  • Being of sound mind
  • Making your will in writing
  • Signing the document
  • Having the document signed by two competent adult witnesses

However, meeting the basic legal requirements is not enough to ensure your will does what you want it to do. An effective will is one that meets state requirements, but also one that is matched to your particular needs and desires.

Trusts

Trusts are another popular estate planning tool that many people know about – but they are also one of the least well understood. A trust is sort of like a very small corporation in that it exists as a legal entity apart from the person who creates it. Trusts can own property like a corporation, and are run by people who don’t own that property, but who simply manage it or look after it on the trust’s behalf.

While there are numerous kinds of trusts you can include in your estate plan, one of the biggest benefits of using a trust as an inheritance vehicle is that, unlike wills, they don’t have to go through the probate process. For example, a revocable living trust (also known as an inter vivos trust, or just a living trust) allows you to make inheritance choices without submitting those choices to a probate court. The probate process is open to public inspection, and is often expensive and time-consuming, which is why revocable living trusts can be so useful.

Transfer-on-Death Assets

You may already be familiar with transfer-on-death assets (sometimes known as “payable-on-death assets”), even if you’ve never associated them with estate planning and inheritances. A transfer-on-death asset is one, such as a life insurance policy, that’s automatically inherited by your chosen beneficiary following your demise.

You don’t need to make a will or a trust to choose who inherits transfer-on-death assets – you simply need to make sure you choose your beneficiary in the manner required under the asset’s rules. For example, if you have a bank account that allows you to name a transfer-on-death beneficiary, that beneficiary will inherit the money in the account as soon as you die.

Planning for Incapacitation

Estate plans are flexible. They don’t merely protect your interests after you die, but can also protect you if you lose your abilities to care for yourself or manage your own assets.

Many adults are physically and mentally capable of making their own choices – but that can change. People who have significant disabilities, those who have been injured, or those who are suffering from the effects of terminal or serious medical conditions often cannot make their own decisions. When this happens, once able people become legally incapable of making choices, or incapacitated.

Powers of Attorney and Medical Directives

Just as an estate plan allows you to control what happens to your property after you die, it also allows you to protect yourself in the event you lose capacity.

Financial Powers of Attorney
A power of attorney is a document through which you (the principal) give a legal representative (the agent) of your choosing the authority to make decisions for you. There are many ways you can use powers of attorney, but one of the most common is to name an agent who will manage your financial affairs should you lose capacity.

These powers are often referred to as “springing” powers because they only give your agent decision-making abilities if and when you become incapacitated. Agents with a financial power of attorney can, for example, pay your mortgage using the funds in your bank account, collect Medicare or Social Security on your behalf, or take care of day-to-day expenses.

Medical Powers of Attorney
Unlike financial powers, medical powers of attorney are designed to give your agent the ability to make healthcare choices for you should you become incapacitated. For example, an agent under a medical power of attorney can discuss your medical history and treatment options with your doctors, accept or refuse medical care on your behalf, or seek opinions from other healthcare providers.

Durable Powers of Attorney
You might also hear powers of attorney referred to as “durable.” A durable power is one that allows your agent to continue to represent you even after you become incapacitated. Durable powers are essential for incapacity plans, but they are not the only type of powers available.

Non-durable powers of attorney automatically terminate if you, the principal, lose capacity. These non-durable types of powers of attorney are often used, for example, by people who hire a real estate agent or stock broker, but who do not want that agent to act on their behalf should the principal become incapacitated. For incapacity planning purposes, durable powers of attorney are essential.

Advance Medical Directives

Medical powers of attorney are sometimes referred to as advance or medical directives, though there are many types of advance directives available. An advance medical directive is a document that contains or lists your medical wishes. Should you lose your ability to make choices or communicate your wishes to your healthcare providers, your advance medical directives will serve as your voice.

Advance directives (so-named because you make them in advance) include such documents as:

  • Living Will. A document that states which kinds of healthcare treatments you wish to refuse or accept.
  • Healthcare Proxy. Another term for a healthcare power of attorney, this is a document that states who has the power to make medical choices for you should you become incapacitated.
  • Do-Not-Resuscitate Order (DNR). A document that tells your healthcare providers that you do not wish to receive resuscitative treatments, such as cardiopulmonary resuscitation (CPR), in the event your heart or lungs cease functioning.

advance health care directive

Probate Planning and Probate Avoidance

It might come as no surprise that probate laws can be complicated, cumbersome, and potentially expensive. Once you die and leave behind an estate, your inheritors cannot receive their inheritances until this probate process is complete.

This process involves a number of steps that must take place. For example, if you left behind any debts, your creditors must have the opportunity to file a claim with the estate. Once filed, the administrator of your estate will have to use estate funds to pay off those debts before he or she can distribute any inheritances.

So, many contemporary estate plans focus on taking probate out of the picture as much as possible. There are many ways to do this. For example, people who properly create and fund a living trust can effectively make all (or almost all) of their major inheritance transfers completely outside of the probate process. Other probate mitigation tools can include providing lifetime gifts to friends and family, using payable-on-death assets such as life insurance policies, and taking advantage of jointly owned property.

Tax and Financial Planning

You can’t talk about estate planning without talking about some important financial planning issues as well, such as taxes. If you leave behind a lot of money or property, there is always the possibility that estate taxes might apply. A good financial and estate plan can reduce the potential tax burden your estate might one day face. In some situations, the right plan can allow you to avoid estate and inheritance taxes completely, allowing you to keep as much of your wealth as possible to distribute as you wish.

However, as with any discussion of tax issues, it’s important to note that the current tax laws can – and likely will – change in the future. This is one of the many reasons why talking to an estate planning expert will always be better than trying to craft a plan on your own.

Estate Taxes

Estate taxes, often referred to as the “death tax,” are widely misunderstood in the general population. When you die and leave behind an estate, that estate is worth a certain dollar amount. An estate tax is simply a tax applied to that value.

The estate tax is a tax you will never have to pay because it only applies after you die. Further, it’s not a tax your family or inheritors will have to pay because your estate is responsible for paying it before distributing property as inheritances. Note, however, that if an estate is asset-rich but cash-poor, paying the estate tax may require the liquidation of some assets, such as the family home, to cover the estate tax bill. Further, any time an estate has to pay estate taxes, the tax reduces potential inheritances.

The Federal Government has an estate tax, but it doesn’t currently apply unless you leave behind an estate worth more than $5 million dollars if you are single, or more than $10 million if you are married. If you leave an estate worth less than this amount, your estate won’t have to pay a single dollar in federal estate taxes.

In addition to the federal estate tax, a small number of states have also enacted state-level estate taxes of their own. These state-level taxes can apply to much smaller estates. For example, the state of Illinois imposes an estate tax on any estate worth more than $4 million, while New Jersey’s estate tax applies to any estate worth $675,000 or more. Crafting an estate plan that reduces or eliminates any potential state estate tax assessment can be vital if you want to preserve as many of your assets as possible to use as inheritances.

Inheritance Taxes

Leaving behind property is one thing, but what about inheriting it? Do you have to pay any money if you receive an inheritance?

Like estate taxes, inheritances taxes can apply at both the state and federal level. However, luckily for you and your family, there is no federal inheritance tax, and only a small number of states currently have them on the books.

As of April of 2015, only Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes, with rates ranging from 1% to 20% of the value of the inheritance received. So, for example, if you received an inheritance of $150,000 and lived in a state that imposed an inheritance tax of 5%, you would have to pay $7,500 to the state as a tax.

Asset Protection

Asset protection is the process of structuring your property in such a way that it will be protected from those who might try to take it. Essentially, this means protecting your money from potential lawsuits, or from creditors who might seek to seize your assets to satisfy any debts you might owe.

For example, one of the simplest asset protection strategies involves maximizing your yearly contribution to your IRA. If you get sued and lose, the creditor cannot take the funds you have in the IRA account because such funds are exempt from collections by law. Asset protection plans can include crafting one or more trusts, utilizing a Medicaid plan to protect your assets from the often exorbitant expenses associated with nursing home or assisted living facilities, or other tools that meet specific needs or circumstances.

piggy bank in briefcase

Getting Past Estate Planning Hurdles

Once you understand the basics of what an estate plan can do for you, your property, and your family, it should be clear why creating a plan of your own is so important. But knowing and doing are two separate things, especially when it comes to estate planning. Quite often, people are either reluctant to address issues so closely related to mortality, or don’t think they have enough to worry about that would require them to craft a plan.

When you’re hesitant about starting a plan of your own, it’s often best to focus your attention away from yourself and your possible death, and to think instead of your loved ones. For example, consider some of the following:

  • What would happen to your family members and loved ones if you became sick or died?
  • Who will care for your young children if you no longer can?
  • What about your pets?
  • Even if you don’t own a lot of property, have you done anything to protect their needs?
  • Have you let them know what you want if something happens to you?

If you decide that estate planning is something you need to do, there are several possible steps you can take to get started:

  1. List Your Possessions. First, you can make a list of all your possessions, including both your assets and liabilities. Once you can look at what you have on a single piece of paper, you can get some ideas about how you might want to distribute that property after you die, or what you might need to do to protect that property should you become incapacitated.
  2. Discuss With Your Family. Talk to your family and loved ones about your concerns, as well as theirs. Understanding what each member of the family wants or expects when it comes to estate planning issues can not only prevent potential conflicts later, but can also serve as motivation to get you to create a plan that protects all those who are important to you.
  3. Talk to an Estate Planning Attorney. Because estate planning laws differ so significantly and are so complicated, talking to an experienced attorney is often the best option. If you don’t think you can afford an attorney, you can always ask about pricing and fees before scheduling an appointment. If, after speaking to a local lawyer, you decide that the process would still be too costly, you can start crafting a plan of your own with do-it-yourself resources that are available online (e.g., LegalZoom), or through various companies.

It’s important to point out that crafting a plan is something that can be complicated, not to mention potentially confusing. If you’re not experienced with estate planning issues, you have almost no way of knowing what tools might be best for you and your particular circumstances. Talking to an expert might cost money now, but not doing so could cost you – or your family – a lot more money later on.

Final Word

At the absolute minimum, an estate plan can make your wishes clear to your loved ones, and give them peace of mind in knowing that they are doing what you would have wanted them to do. Instead of wondering what your desires are, your family will have your plan available for reference. When viewed from this perspective, many people quickly realize how important having even a basic plan can be.

Have you made an estate plan yet?

Mark Theoharis
Mark Theoharis is a former attorney who writes about the intersection of law and daily life, covering everything from crime to credit cards. He mostly writes for legal publishers, marketing agencies, and law firms, but gets the occasional chance to publish fiction. When he is not writing, Mark restores vintage and antique typewriters, though his editors have made it quite clear that typed submissions are strictly prohibited.

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  • Stephanie

    Depending on the financial situation, a stay-at-home parent should probably look into life insurance as well, at least until the kids hit adulthood. A sudden death causes a huge upheaval in daily life, and it can be really hard for the breadwinner to readjust. At the very least, that insurance amount can help to cover a year of child care to ease the readjustment.

    • Scott Powers

      Stephanie that is an excellent point! When my wife decided to stay at home after our youngest was born we still had a good size policy in place on her. We knew it would need to cover not only child care and funeral expenses, but also allow me to be able to ease my way back into work. Thanks for that great contribution!

  • http://Kiplinger.com Cameron Huddleston

    Scott —
    Even next of kin need power of attorney to handle a parent’s (or other relative’s) finances if they no longer can. No financial institution (bank, credit card company, insurance company, brokerage) will let you make any decisions for someone else (even if it’s your mom, dad, sibling) unless you’ve been designated power of attorney. And if you’re designated as someone’s power of attorney, you need that document to show to financial institutions to prove that you have power of attorney.

  • Scott Powers

    Hi Cameron, thanks for catching that! There was a miscommunication as this was being edited concerning power of attorney and estate executor, thus the “next of kin” line was accidently left in there. We made the necessary correction and you are right in your assessment of the power of attorney. My estate attorney keeps all copies of this document at his office and only releases it upon request (with supporting evidence as to why it is needed) to keep it from being abused. Thanks so much for contributing to the post!

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