Estate planning basics

What estate planning covers

Estate planning answers four questions. Who receives your assets, and in what form? Who is responsible for administering the process? Who makes financial and medical decisions if you are alive but unable to decide? And who cares for dependants?

Note that only the first question is about money. In practice the questions about authority and care are the ones that cause the most distress when they have not been answered in advance, because they arise suddenly and usually in a hospital.

It is also worth stating plainly that this is not a subject reserved for the wealthy. Anyone with minor children, a property, a retirement account or a preference about medical treatment has something to decide. Estate tax planning is a specialist concern affecting a minority of estates; estate planning is close to universal.

The core documents

What overrides your will

This is the most consequential and least understood point in the whole subject. A will governs probate assets — property that passes through the court-supervised process. A great deal of a typical household's wealth never enters probate at all, because it passes by contract or by operation of law.

Assets that generally pass outside a will include:

• Retirement accounts — 401(k)s, IRAs and similar pass to the named beneficiary.
• Life insurance — pays the named beneficiary directly.
• Accounts with transfer-on-death or payable-on-death instructions.
• Jointly owned property with survivorship rights — passes to the surviving owner.
• Assets already titled in a trust — governed by the trust's terms.

Probate

Probate is the court process that validates a will, appoints a personal representative, settles debts and taxes, and authorises distribution. It exists to provide legal certainty, and for straightforward estates in many states it is manageable.

The criticisms are that it takes time — often many months — that it costs money in court and professional fees, that it is generally a matter of public record, and that assets may be difficult to access while it runs. How significant each of these is depends heavily on the state, the size of the estate and whether anybody contests. Many states offer simplified procedures for smaller estates.

Avoiding probate is a common objective, but it is a means rather than an end. Structures adopted purely to avoid probate can create their own costs and complications, and an unfunded probate-avoidance structure achieves nothing at all.

Trusts

A trust is a legal arrangement in which a trustee holds property for beneficiaries under the terms the grantor sets. The two broad families:

Revocable trusts can be changed or cancelled during the grantor's lifetime. They are commonly used to keep assets out of probate, to provide continuity if the grantor becomes incapacitated, and to keep arrangements private. Because the grantor retains control, a revocable trust generally offers no asset protection from creditors and typically does not remove assets from the taxable estate.

Irrevocable trusts cannot readily be altered once established. Giving up control is the point: it is what may allow assets to sit outside the estate and, in some structures, beyond the reach of certain creditors. They are used for specialist purposes — estate tax planning, special-needs provision, charitable structures, protecting assets for future generations — and they are unforgiving of mistakes.

One warning applies to all of them: an unfunded trust does nothing. Creating the document is only half the job. Assets must actually be retitled into the trust's name, and this is the step most often left incomplete.

Incapacity planning

You are considerably more likely to experience a period of incapacity than to die suddenly, and the consequences of having no plan are immediate. Without a durable power of attorney, family members may have no authority to pay your bills, manage your accounts or deal with your property, and obtaining that authority may require a court guardianship or conservatorship — slow, public and expensive.

Medical decisions have a parallel problem. Without a healthcare proxy, providers follow state default rules about who may decide, which may not be the person you would choose. An advance directive additionally records your own preferences so the decision-maker is not guessing.

Two practical points: the person you name should know they have been named and should know where the documents are; and financial institutions sometimes resist accepting older powers of attorney, so periodic refreshing is worth discussing with your attorney.

Situations needing extra care

• Blended families. Providing for a current spouse while preserving assets for children of an earlier relationship requires deliberate drafting; default rules rarely produce the intended result.
• Beneficiaries with disabilities. An outright inheritance can disqualify someone from means-tested benefits. Specialist trust structures exist precisely for this.
• Business ownership. Succession, valuation and buy-sell arrangements need to align with the estate plan or the business becomes the estate's problem.
• Property in more than one state. Real estate may require probate in each state where it is held.
• Non-citizen spouses. Different rules can apply to transfers between spouses; this needs specialist input.
• Digital assets. Access to accounts, photographs, domains and cryptocurrency depends on planning that most documents drafted a decade ago never contemplated.

Keeping it current

An estate plan is a snapshot of a life that keeps moving. Review it at least every few years and always after: marriage or divorce; a birth, adoption or death; a move to another state; a significant change in assets; a change of employer; a beneficiary's change in circumstances; or a change in relevant law.

Also make sure somebody can find everything. A perfectly drafted plan nobody can locate is functionally the same as no plan. A simple, secure inventory of accounts, institutions, advisers, insurance policies and document locations — kept current and known to the people who would need it — is one of the highest-value hours you can spend.