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Estate planning simplified

Estate planning simplified

ESTATE PLANNING SIMPLIFIED….THREE QUESTIONS TO ANSWER

Chances are if you have done a little research on estate planning, it might be confusing.  The Internet can be like trying to take a sip of water from a fire hose.  So this blog entry is entitled Estate Planning Simplified…I’m gonna break estate planning and the thought process behind it into three questions.

1.  Who do you love?

This question is as simple as it reads.  Who are the people you love?  Family, friends, colleagues, neighbors, pets?  Is there a charity you love?  You can probably arrange the people you love in your head very easily.  These are the people that we want to be part of your estate plan.

2.  What do you have?  

Make a list of what you have.  Checking accounts, savings accounts, money market accounts, CDs, bonds, promissory notes, stocks, annuities, 401(K), IRA, cash, jewelry, a home (primary residence, vacation home, acreage, farm land, timeshares), vehicles (cars / boats / trailers).  This is a great exercise because most people don’t keep a running list of everything they own.  But you’ll need this to do your estate plan.

3.  Who do you trust?  

This is distinctly different, as well all know, than making a list of who we love.  Hopefully you trust your spouse.  From there it can get tricky.  Do you trust all of your children?  Is there a child or children you trust most?  Is there a child you don’t trust at all?  You may ask, well, in what way do I trust them?  Great question.  Do you trust them with money?  Do you trust them to distribute your assets or hold your assets like a trustee or executor is required to do?  Do you trust them to follow your wishes on your death bed with your healthcare directive?  If you don’t, why not?  If you don’t have children, but are married, who would you trust literally with your life if your spouse wasn’t around?  These can be tough questions to think about and answer but they must be answered in completing your estate plan because you need people you trust to make all sorts of decisions if you can’t.

So these three questions, once answered, represent the essence of estate plan.  You should have peace of mind once you have answered them.  The next step is to follow through with putting that peace of mind into writing.  The tangible result of that is paper…your estate plan.

The true costs of probate: money / time / sanity…

A primary goal of almost all of my estate planning clients is to avoid probate.

Probate is the process by which the assets of a decedent are administered through the courts.  Most of my clients know for sure they want to avoid probate but they are not exactly sure why.

The purpose of this article is to explain why probate in Missouri should be avoided. There are three primary reasons:  money, time and sanity.

I mention money first because probate in Missouri is expensive.  Probate fees can include executor fees, attorney fees, court costs, bond costs and miscellaneous.  Executor and attorney fees are set by statute and are based on a percentage of the estate.  The larger the estate the higher the fees.  Court costs are relatively static but add up and can include filing fees, publication fees and service costs.  Here are rough cost ranges for different size estates:  $150,000 = $5,300 – $10,000; $300,000 = $9,400 – $18,200; $750,000 = $21,100 – $41,400; $1,000,000 = $28,600 – $55,100. In a word, probate is expensive.

Time is another component of the probate process and if you ask most people that have endured the probate process they will tell you it takes a long time.   First, a probate cannot be filed until at least ten days after someone has passed away.  Once a probate is filed, the estate must be left open for at least six (6) months to allow creditors of the decedent to makes claims against the estate. Practically speaking, however, most estates take much longer than six months and 10 days to close and that’s because the process can be extremely complex.  For one thing, the executor has to figure out what the decedent owned.  In some cases, the executor (and the attorney for the estate) will spend several months trying to track down all the assets and liabilities of the deceased.

The probate process is very detailed and often involves a lot of phone calls and lots of small steps that are time consuming.  That is why I mentioned the “sanity” aspect of probate, as in losing your sanity.  The complexity and detailed nature of probate drives people crazy.  Add anxious family members waiting on an inheritance and you can see why avoiding the process all together is the best investment of time and money and peace of mind a person can make.

So how can people avoid probate in Missouri? The best and most effective way is to establish a living trust.  Probate is necessary because when a person dies, the assets are in their name.  The probate process ensures that the assets of the decedent go to the persons named in their will or as decided by state law if they didn’t have a will.  It also ensures that the debts of the decedent are paid, to the extent they can be. But the easiest concept to understand a living trust and how it avoids probate is to imagine a box.  The living trust is the box which you place all of your assets during life so that when you pass away there is nothing owned by you as an individual.  It’s owned by the trust and those trust assets are distributed according to the trust terms.  The debts of the decedent are paid out of trust assets, but not through probate.  Again, since the trust owns everything, there is no need for probate.

Trusts are a bit more expensive to create than wills on the front end.  But as we saw above, the back end costs of a will (in probate) are enormous.  Depending on the needs of the client, a trust is a terrific way to save your estate money, time and sanity.

Case Study: Guardianship choices where couple is divorced and have minor children…

Case Study: Guardianship choices

Mom and Dad are recently divorced and have a Daughter, age 5, together.  The custody arrangement is that Mom has primary custody during the week and Dad sees Daughter on the weekends.  Mom is interested in putting together an estate plan, including naming a Guardian in the event that she were to die.

This is a common scenario these days.  A guardian should always be named in an estate plan where an individual or a couple has minor children.  But what happens when two people are divorced?  Who should be named guardian then?

First, in the scenario above, if Mom were to pass away while Daughter was a minor, Dad would be the preferred choice of any court deciding a guardianship issue because he is the biological father.  He will be the favored choice.  But…Mom should still name someone in her estate plan to be guardian in the event that Dad is somehow unfit to be guardian if Mom was gone.  Common examples of why he might be unfit would be substance abuse problems, incarceration and mental incapacity.  So just in case, and most importantly, to give Mom peace of mind, she should name someone to serve as Guardian for daughter in the event Dad could not.

A good estate plan for Mom would then include a will (perhaps with a testamentary trust) and/or a living trust, including a guardianship designation, a healthcare power of attorney, a healthcare directive, a durable power of attorney for finance and some probate avoidance planning, either by completing beneficiary designation assets (referred to as nonprobate transfers), or in the case of a trust, by changing the titling of assets to reflect ownership by the trust.

Case Study: Living trust to avoid probate…

Case Study:  Younger Parents with Minor Children Who Have Moved From Out of State

 

This case study family has five members:  Mom and Dad are in their early 40’s and have done well for themselves.  They have two daughters and a son who all get along.  One of the daughters just turned 18 and the other children are minors.

During our initial consultation I review some general information about their family, their health and their financial status.  Mom and Dad are not close to retirement but are moving quickly in that direction.  Their total net worth is about $800,000 and includes a large house, several cars, life insurance, cash, bank accounts, brokerage and retirement accounts.

I am informed that they are not from Missouri and moved here a few years ago for the husband’s career.  They like it here, but all of their relatives live out of state and they plan to move home within the next five years.

After learning of their circumstances, goals and fears, I start by informing them they definitely need durable powers of attorney and healthcare powers of attorney.  These are two of the cornerstones of any estate plan and cover situations during life where one of the spouses has become incapacitated and is unable to make financial and healthcare decisions on their own.  The documents allow the other spouse to make those decisions for them and to serve as their legal agent in so doing.  These are crucial documents to have and it’s important, as with any aspect of estate planning, that we plan for all contingencies.  Specifically, we want to also name alternative agents to make decisions in case the other spouse has predeceased or is also incapacitated.

We next move to a discussion of wills and trusts.  Because they have about $800,000 in their nest egg, have a variety of assets and, in their particular case, are looking to move out of state within a few years, a revocable living trust makes perfect sense for them.  I describe the trust as a box that is created to place all of their assets.  All assets in the box when the second spouse passes away will avoid probate.  The primary purpose of a living trust is to avoid probate and to avoid the complexity, high cost and time wasting that probate can cause.

Since Mom and Dad are still relatively young, a trust only makes more sense.  They will likely have substantially more assets by the time they retire and would need a trust in any case.

For people interested in moving out of state, a trust can more easily be saved when that move occurs.  By saving, I mean it can be amended but will not have to be scrapped.  An attorney in the new state can amend the trust to note that it should now be governed by the laws of the new state, but the main provisions of the trust will stay intact.  With wills, that is usually not the case because a will is designed to one day be presented in the state in which the testator passes away.  A will from one state can therefore wind up needing to be construed by another state’s courts, which can create confusion and perhaps ruin the benefits of having a will in the first place.  Thus, a trust makes even more sense for the couple in this case analysis.  In cases where a family owns a piece of property out of state (a condo in Florida) perhaps, a trust makes it much easier to avoid probate with that out of state property, ensuring that an ancillary probate (i.e. a second probate out of state, usually for an out of state residence) will not have to be opened.