A Brief Introduction to Estate Planning

Every person in the United States who owns property can expect that their property to pass to their heirs through one of four different methods. The degree of control over that method depends on what planning the person does prior to death. Below is a very general description of those methods, expressed as increasing levels of complexity:

Level One: No Estate Plan

As you would guess, people die every year without having any estate plan at all. Since this scenario brings into question who will inherit the property of the deceased, state law must provide the answers. One function of state government is to track the ownership of assets. Just as the Department of Motor Vehicles tracks the ownership of cars, the Registry of Deeds is an index of who owns real estate. Each state has special courts that determine the proper ownership of assets, called probate courts. When a person dies without making plans for who will own their assets, people must turn to the laws of the state to determine what happens.

All states have laws to determine who inherits property if a person dies without making a will or other arrangements. They generally provide that property will pass first to the children of the deceased. If there are no children, then the property will pass to the parents. If there are neither children nor living parents, then property will pass to brothers, sisters, or more remote relatives. If there is no estate plan in place, the state will step in upon their death and make the decisions about where assets will go.

Level Two: Simple Plan

This level, often referred to as the simple plan or the simple will, includes the traditional last will and testament that most people think of when thinking of an estate plan. The will appoints an executor who will collect and distribute assets upon a person’s death. State law requires an executor to deliver the original will to the court within 30 days of death, after which, the executor must make regular reports to the court and seek the blessing of the judge when making most decisions. In nearly all cases, the executor will even have to purchase a special insurance policy to protect the beneficiaries from possible theft of assets by the executor.

In addition to the will, the simple plan often includes several other documents sometimes called disability and end of life planning documents. Powers of attorney and health care proxies are used to appoint people who can make decisions for the client if the client is medically incapable of making their own decisions. These documents might be used, for example, if a client were hospitalized and unconscious for an extended period of time.

Level Three: Revocable Trust

The third level of estate planning involves the use of a revocable trust. The revocable trust is sometimes referred to as a living trust or a will substitute. The primary purpose of a revocable trust is to avoid probate court all together. Avoiding probate court is accomplished by transferring the client’s assets into the trust while the client is alive.  In this way, when the client dies he owns nothing and there is nothing to probate. Instead, the client has appointed a trustee to distribute assets according to the client’s wishes.  The trustee acts without the need for court permission.

Not only does “probate avoidance” eliminate the challenges described in levels one and two, but it simplifies the entire process of estate distribution at a time when the client’s family is struggling to cope with the death of someone close. Instead of waiting for the court to officially appoint an executor, the trustee of the trust can immediately move to protect assets, gain control of bank accounts, and operate businesses if necessary. A revocable trust simplifies the process and saves considerable money for the client’s family.

This level of estate planning also includes the disability and end-of-life planning documents described above.

Level Four: Specialized Estate Planning

Level four is generally reserved for those with sizable estates ($ millions) where taxes are a major concern. Although there is some tax planning that can be accomplished with revocable trusts, clients concerned about minimizing tax consequences will often utilize more exotic estate planning instruments. Many times these clients have significant family holdings or business interests that must be considered. Irrevocable trusts, family limited partnerships, and strategic gifting are often incorporated in this level of planning.

Estate planning is a highly personalized process. The experienced attorneys of Legacy Wills & Trust can help.