Estate planning is the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life and after death, while minimizing gift, estate, generation-skipping transfer, and income tax. Estate planning includes planning for incapacity as well as a process of reducing or eliminating uncertainties over the administration of a probate and maximizing the value of the estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by the specific goals of the client and may be as simple or complex as the client’s needs dictate. Guardians are often designated for minor children and beneficiaries in incapacity.
The law of estate planning overlaps to some degree with elder care law, which additionally includes other provisions such as long-term care.
Devices
Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney.
More sophisticated estate plans may even cover deferring or decreasing estate taxes or business succession.
Wills
Wills are a common estate planning tool and are usually the simplest device for planning the distribution of an estate. It is important that a will be created and executed in compliance with the laws of the jurisdiction where it is created. If it is possible that probate proceedings will occur in a different jurisdiction, it is important also to ensure that the will complies with the laws of that jurisdiction or that the jurisdiction will follow the provisions of a valid out-of-state will even if they might be invalid for a will executed in that jurisdiction.[8]
Trusts
A trust may be used as an estate planning tool, to direct the distribution of assets after the person who creates the trust passes away. Trusts may be used to provide for the distribution of funds for the benefit of minor children or developmentally disabled children. For example, a spendthrift trust may be used to prevent wasteful spending by a spendthrift child, or a special needs trust may be used for developmentally disabled children or adults. Trusts offer a high degree of control over the management and disposition of assets.[9] Furthermore, certain types of trust provisions can provide for the management of wealth for several generations past the settlor. Typically referred to as dynasty planning, these types of trust provisions allow for the protection of wealth for several generations after a person’s death.[10]
Advance Directives
An estate plan may include the creation of advance directives, documents that direct what will happen to a person’s estate and in relation to their personal care if the person becomes legally incapacitated. For example, an estate plan may include a healthcare proxy, durable power of attorney, and living will.
After widespread litigation and media coverage surrounding the Terri Schiavo case, estate planning attorneys often advise clients to also create a living will. Specific final arrangements, such as whether to be buried or cremated, are also often part of the documents.
Probate
Probate is a process where:
- the decedent’s purported will, if any, is entered in court,
- after hearing evidence from the representative of the estate, the court decides if the will is valid,
- a personal representative is appointed by the court as a fiduciary to gather and take control of the estate’s assets,
- known and unknown creditors are notified (through direct notice or publication in the media) to file any claims against the estate,
- claims are paid out (if funds remain) in the order or priority governed by state statute,
- remaining funds are distributed to beneficiaries named in the will, or heirs (next-of-kin) if there is no will, and
- the probate judge closes out the estate.
Probate Avoidance
Due to the time and expenses associated with the traditional probate process, modern estate planners frequently counsel clients to enact probate avoidance strategies. Some common probate-avoidance strategies include:
- revocable living trusts,
- joint ownership of assets and naming death beneficiaries,
- making lifetime gifts, and
- purchasing life insurance.
If a revocable living trust is used as a part of an estate plan, the key to probate avoidance is ensuring that the living trust is “funded” during the lifetime of the person establishing the trust. After executing a trust agreement, the settlor should ensure that all assets are properly re-registered in the name of the living trust. If assets (especially higher value assets and real estate) remain outside of a trust, then a probate proceeding may be necessary to transfer the asset to the trust upon the death of the testator.
Designation of a Beneficiary
Although legal restrictions may apply, it is broadly possible to convey property outside of probate, through such tools as a living trust, forms of joint property ownership that include a right of survivorship, payable on death account, or beneficiary designation on a financial account or insurance policy. Beneficiary designations are considered distributions under the law of contracts and cannot be changed by statements or provisions outside of the contract, such as a clause in a will.
In the United States, without a beneficiary statement, the default provision in the contract or custodian-agreement (for an IRA) will apply, which may be the estate of the owner resulting in higher taxes and extra fees. Generally, beneficiary designations are made for life insurance policies, employee benefits, (including retirement plans and group life insurance) and Individual Retirement Accounts.
- Identity: A specific, identifiable individual or business must be designated as a beneficiary for life insurance policies. Businesses may not be the beneficiary of a group life insurance policy or a retirement plan.
- Contingent Beneficiary: If the primary beneficiary predeceases the contract owner, the contingent beneficiary becomes the designated beneficiary. If a contingent beneficiary is not named, the default provision in the contract or custodian-agreement applies.
- Death: For retirement plan assets, at the account owner’s death, the primary beneficiary may select his or her own beneficiaries if the remaining balance will be paid out over time. There is no obligation to retain the contingent beneficiary designated by the IRA owner.
- Multiple Accounts: A policy owner or retirement account owner can designate multiple beneficiaries. However, retirement plans governed by ERISA provide protections for spouses of account holders that prevent the disinheritance of a living spouse.
Mediation
Mediation serves as an alternative to full-scale litigation to settle disputes. At a mediation, family members and beneficiaries discuss plans on the transfer of assets. Because of the potential conflicts associated with blended families, step-siblings, and multiple marriages, creating an estate plan through mediation allows people to confront the issues head-on and design a plan that will minimize the chance of future family conflict and meet their financial goals.
