Estate planning is the process of preparing for end-of-life issues, planning for what will happen after your death, and taking control over your legacy. Estate planning is about much more than simply creating a will. It's also not something that is an exclusive concern of the elderly. If you have assets to protect, family to provide for, or concerns about what will happen to you if you become disabled, seriously injured, or sick, you should make an estate plan.
The process of estate planning isn't typically something that you should handle on your own. Estate planning is complex, with many specialized estate planning tools available to facilitate the transfer of assets and protect your family and property. The stakes are also very high if you make an error—you could end up costing your family thousands of dollars or losing the chance to leave a legacy.
You should talk with an attorney about making a comprehensive estate plan, and you should keep your plans updated as changes happen in your life, such as getting married or having a baby or starting a business.
While getting legal help is always advisable to tailor a plan to your specific needs, this guide will teach you what estate planning is, why you may want to make an estate plan, and what kinds of things you should make sure to include in your plan.
What Is Involved in Estate Planning?
Estate planning entails putting a plan in place to:
- Determine what kinds of medical care you'll receive if you can't give consent to receive care
- Determine who should make medical decisions for you if you're incapacitated
- Determine who should manage your money, property, and life choices in the event of incapacity
- Prepare for what will happen if you need to move to a nursing home
- Protect your assets during your lifetime and after your death
- Make sure your family is provided for if something happens and you become incapacitated or pass away
- Provide instructions for who should raise your children if something happens to you before they reach adulthood
- Ensure there is a plan in place to care for your pets after you've passed on
- Facilitate the timely transfer of assets to loved ones
- Determine who will inherit your money and property
- Reduce the costs associated with the transfer of your assets after your death, including probate fees and estate taxes, if applicable
- Ensure any business you own can continue to operate after you've passed it on to the next generation
- Address any special needs of your loved ones who will inherit, such as making sure that a disabled relative does not lose access to Medicaid—or other benefits intended only for people with financial need—due to receiving an inheritance
Depending upon your specific situation, there may be other steps involved in the estate planning process as well. Because your plan should be personalized to you, you should work with an attorney who can discuss your goals, your financial situation, and your family situation and assist with the creation of a personalized plan.
Why Do You Need an Estate Plan?
It's important for everyone to create an estate plan because if you don't, default rules will apply to some of the most important decisions that could arise in your life. Substantial financial loss could also occur if you haven't taken steps to protect your family and assets.
If you don't make an estate plan:
- Intestacy laws could determine who inherits your money or property instead of you determining who receives your assets. Intestacy occurs when you die without a will specifying what should happen to some or all of your assets. The money and property you haven't provided instructions for through a will or similar instrument make up your "intestate estate" and intestacy law determines what happens to all those assets. While intestacy law does allow family to inherit, intestacy laws may not divide your assets in the way you'd prefer.
- If a court declares you too incompetent to make decisions on your own, the court may have to appoint a guardian to make your decisions and manage assets for you. If you're declared incompetent, you can lose control over who decides whether you move to a nursing home or how your money is managed. The guardian the court appoints would decide these things—often without having knowledge of your preferences. And, the guardian may be someone you wouldn't personally have chosen to make decisions for you. Through proper estate planning, you can make these decisions for yourself ahead of time
- If the court declares you're too incompetent to make decisions on your own, you could end up getting medical care you don't want or not getting medical care you'd prefer. Whomever the court appoints to make your medical decisions when you're declared incompetent may not be aware of what your preferences are regarding the use of extraordinary measures to keep you alive.
- You could force your loved ones to make life-and-death decisions. Your family may need to decide whether to disconnect a ventilator, take out a feeding tube, or otherwise stop medical interventions that are keeping you alive. This is a heavy burden that can lead to a lifetime of guilt.
- The court could be forced to decide who gets custody of your children or what happens to your pets after you pass on. Pets could end up homeless or children could end up in the middle of a custody battle.
- Your assets will have to pass through the probate process. The probate process is a court-administered process to transfer assets. It takes months to complete and can be very expensive. You can avoid the probate process with an estate plan, but if you've made no plans, chances are good your assets will have to go through the probate process unless your estate is very small. The probate process also means the transfer of your assets and the other matters involved in settling your estate become court record, which means they become public record. This results in a major loss of privacy.
- An inheritance may not be structured the right way. Many things could go wrong. For example, if you've left money to a minor but not used an appropriate estate planning tool to ensure that a trusted person is vested with responsibility to manage the funds, the court may need to appoint a guardian. The guardian may not be someone you trust to manage the money. Plus, the child could end up inheriting the entire remaining sum of money at age 18, with no strings attached—which may not be consistent with your wishes.
- You could end up owing estate tax. Your heirs could lose money and property due to high estate tax costs, depending on the size of your estate. On the federal level, you won't owe estate taxes unless your estate exceeds $11,180,000 in 2018, and in 2019, you won't owe estate tax unless your estate exceeds $11.4 million. Estate tax isn't owed if you leave money or property to your spouse, no matter how much you leave. And the estate tax exemption of $11.18 million (in 2018) or $11.4 million (in 2019) is per person. If you die and you leave all your money to your spouse, your spouse can claim your exemption and theirs when he or she dies. This would allow your spouse to transfer $22.36 million in 2018 or $22.8 million in 2019 without your estate owing taxes. However, some states have lower thresholds at which estate tax is owed.
- You and your heirs could lose assets due to high medical costs. Medicare and private health insurance don't typically cover long-term care in a nursing home or at home, so a prolonged nursing home stay can devastate a patient's assets. Medicaid covers this care, but Medicaid could come after your assets after your death—including your family home—in a process called Medicaid estate recovery. Medicaid estate recovery involves the state acting as a creditor in an attempt to recoup money spent on your care if Medicaid paid for institutional care or paid for care after you turned 55. One way to protect your wealth is though a Medicaid plan, which is part of the estate planning process.
- Your business might be unable to continue operations. Your loved ones could lose the family business because estate taxes are so high that the business must be sold to pay the taxes. Or, your company could end up forced to close because it doesn't transfer efficiently to new owners and operations can't continue smoothly after you pass on.
- Your family may be left unsupported. Without a plan in place, you may not have enough assets to take care of the people you love if something happens to you.
Making an estate plan involves using appropriate legal tools to opt out of the default rules and provide your own instructions for what happens if you get sick or pass away.
Who Needs an Estate Plan?
While many people think estate planning is something that only older people need to do, that's simply not the case. Everyone who has a family, assets, or an opinion about their medical care should make a plan. You need to make an estate plan now because:
- You never know when you'll become sick or incapacitated. A devastating illness, such as a stroke, could occur at any moment, even in a healthy young person. If illness or injury leaves you so impaired that a court declares you mentally incapacitated or if you pass away without a plan in place, you'll forever lose the chance to control what happens to your assets or to control what kinds of care you receive when you're unable to consent to medical care that needs to be performed.
- Some estate planning tools take time to put into place. A Medicaid plan, as mentioned above, is a component of many estate plans because Medicaid has both income limits and asset limits. Medicaid planning is used to structure ownership of (or, if necessary, spend down) assets to keep money and property safe during your life and after your death while simultaneously becoming eligible for Medicaid to cover nursing care. Unfortunately, your ability to put a Medicaid plan in place is limited by a Medicaid rule called the five-year lookback rule. This rule requires a review of transactions in the five years prior to the time you're seeking Medicaid coverage. If you transferred wealth to protect to loved ones or to a Medicaid asset protection trust within the five years before you try to get covered, you'll trigger temporary disqualification from Medicaid—so you'll need to make your plans early if you want to protect the maximum value of asset.
- You may have more people counting on you than you think. If you're single, you may not think you need an estate plan if you have no one depending on you. But chances are good that you do have someone who needs you now or who will need you in the future. You may have a pet, for example, or aging parents who need your help driving them to the doctor. Making an estate plan allows you to make plans so the people who matter in your life don't find themselves facing serious hardships if something happens to you.
You can, and should, make modifications to your estate plan as your life changes because you may need to use different tools to make your plans.
For instance, if you get divorced or have kids, you may need to change beneficiary designations. As you take on more responsibilities and have more people counting on you, you may need to purchase more insurance. And as you acquire new assets, such as real estate, you may need to adjust which family members inherit and how the transfer of assets takes place.
What Are the Goals of an Estate Plan?
Every person who makes an estate plan will have their own unique goals and their own reasons for putting a plan in place. In general, however, the goals of making an estate plan include:
- Controlling your legacy: You want to determine who inherits, when they inherit, and how they inherit. To do that, you need to be proactive about using estate planning tools that protect your assets and facilitate their timely transfer. If you have no plan, your family could end up fighting over assets. And you won't get to do things you may have preferred, such as giving some of your money to charity or making sure the money you leave for your grandkids is earmarked specifically for their college education.
- Determining what happens to your assets: You likely have a house, car, money in the bank, and personal property—including family heirlooms that you'll need to pass down. Some of this property, such as real estate, may be jointly owned and will automatically transfer to co-owners. For other assets, such as a 401(k), you can name a beneficiary when you set up the account. In accounts of this kind, the property will pass to your chosen beneficiary automatically upon death. But, for many of your assets—such as the personal property you own including furniture, jewelry, books, and art—you'll have to use a will or another estate planning tool to specify who inherits—or else the law will decide for you.
- Ensuring your loved ones are cared for: You can name a guardian for minor children if you can't raise them and can also make a pet plan to ensure that your pets go to a good owner. Some pet owners even make a trust for their pet, providing funds that only can be used for the pet's care to ensure that their pet's quality of life won't suffer because the owner has passed on.
- Protecting wealth: There are many asset protection tools that can help keep money safe during your lifetime, as your assets pass on to loved ones, and even long after your death. You can also protect wealth by making a business succession plan, which will ensure any businesses you own can transfer ownership upon your death.
- Maintaining your autonomy: It's devastating to become incapacitated by a serious illness or to suffer a medical emergency. But if you've taken steps in advance to determine where you'll live, who will take care of you, what kinds of medical care you'll receive, and who will make decisions on your behalf, you'll be much better off than if there are no plans in place. If there are no plans in place, the court has to appoint a guardian who may not know your wishes or who you may not have wanted to be in charge of making decisions for you.
- Protecting your family: This means doing more than just ensuring your loved ones are financially provided for. You also protect your family by sparing them painful choices about your medical care, by ensuring they inherit as quickly as possible after your death, by ensuring they inherit enough, and by making certain their inheritance is structured so that your heirs don't lose access to benefits or squander the wealth you've left behind.
You may also have other goals based on what you hope to accomplish and how you want to be remembered. For example, some people want to provide a donation to a charity when they pass on. Your estate plan can help you find the best way to do that, whether that involves creating a charitable foundation or charitable remainder trust or simply making a bequest.
What Are Some of the Estate Planning Tools You May Need to Use?
There are a great many different estate planning tools that could help you to accomplish your estate planning goals. Some of those tools include:
- A last will and testament: A last will and testament is one of the most basic estate planning tools, and it's one that many people are familiar with. A will allows you to provide instructions for who inherits. However, be aware that—in most cases—assets you pass through a will must go through the probate process. Probate comes with lots of downsides, as explained above—including high costs of probate proceedings, a loss of privacy as personal information becomes court and public record, and a lengthy and stressful asset transfer process.
- A trust: Trusts—which are legal tools that separate legal ownership of property and its beneficial use—are one of the most powerful, versatile estate planning tools. Medicaid asset protection trusts can be used to keep wealth safe so you can qualify to get Medicaid to pay for a nursing home without having to impoverish yourself first. Special needs trusts can be used to provide for a disabled loved one while ensuring money is managed appropriately and ensuring that access to important government benefits isn't lost. Spendthrift trusts can be used to ensure an irresponsible heir doesn't waste an inheritance or lose it to bankruptcy. And these are just a few of many examples of the ways that you can use trusts to keep assets safe and to take more control over how to provide for loved ones.
- Incorporating or forming an LLC: You can incorporate a business to more easily pass it on to the next generation because a corporation creates a separate identity for the company. You can also create a Family Limited Liability Company (LLC) to facilitate the transfer of assets. The LLC can own the assets, its creator can be a managing member, and other family members can be given an ownership interest in the LLC. Because of their lack of control, the value of their interest is low, so gift taxes or estate taxes aren't triggered by the transfer of ownership.
- Inter vivos gifting: Inter vivos gifts are gifts given during your lifetime. It can reduce the value of the estate you need to pass after your death, which can help you avoid estate taxes charged by the federal or state government where you live.
- A living will: A living will gives you control over what kinds of medical care you'll receive or reject. You can specify under what circumstances you want extraordinary measures to be used to keep you alive, and can accept or decline specific kinds of care. For example, using a living will, you can make clear you don't want a feeding tube to be used or a ventilator to breathe for you.
- Advanced directives: Advanced directives is a broad term for all of the different advanced instructions you provide regarding healthcare choices if you become incapacitated. It can include the creation of a living will as well as naming a healthcare power of attorney or a person to make healthcare decisions for you if you can't.
- Power of attorney: A power of attorney allows you to give someone else authority to make certain decisions for you and to act on your behalf. A general power of attorney gives broad authority to a person you designate as your agent. Your agent, for example, will have the right to control your bank account and to pay bills with your funds. A healthcare power of attorney is a more limited power of attorney that only gives someone control over health choices. A general power of attorney and a healthcare power of attorney are both useful in case of your incapacity because the court won't have to appoint someone to make decisions for you, and it will be clear to all your loved ones who you wanted to put in charge. You'll need to make sure your power of attorney is durable, though, otherwise the grant of authority would end at incapacity—which is exactly when it is needed. In some states, durable powers of attorney are the default while in others you need to expressly specify that a power of attorney should be durable.
- Joint ownership: You may wish to structure the ownership of certain assets, such as real estate, as jointly owned property with rights of survivorship. If you do, your jointly owned asset will pass automatically to your co-owner(s) upon your death without the property having to pass through probate. Be aware that if property is jointly owned, the joint ownership takes precedence over any other instructions you may provide. For example, if you own a family home with your brother as joint tenants with rights of survivorship but you specify in your will that your share of the family home should transfer to your daughter, your expressed preferences in the will won't matter. Your co-owner with rights of survivorship would have a legal claim to the home.
- Pay-on-death accounts: Pay-on-death accounts specify that if the primary account holder passes away, the assets should transfer automatically to designated beneficiaries. Bank accounts, investment accounts, and saving bonds can be structured as pay-on-death accounts. This allows for the timely transfer of money and property outside of probate. Be aware that beneficiary designations do control, so again they'll take precedence over whatever instructions you provide in a will.
- The Uniform Transfers to Minors Act: The UTMA makes it easier to transfer money and property to someone who is underage if something happens to you. Using the UTMA, you can easily transfer the funds in your will while appointing a guardian or custodian to manage the funds. While this does not give you as much control as a trust would, it is a simple and cost-effective way to give money or property to a loved one who will not be an adult at the time of inheritance.
- Life insurance: Purchasing life insurance can help to ensure your family is appropriately provided for and does not see a decrease in their standard of living after a death. You should have life insurance if anyone is dependent upon your income or is dependent upon you to provide services they would otherwise need to pay for. For example, stay-at-home mothers or fathers should have a life insurance policy, even if they do not have income, because the child care, housekeeping, transportation, and other services they provide would be very expensive to replace. Be careful who you designate as a beneficiary on life insurance, though, as you can run into problems with who manages the money if the death benefit goes to a minor—or you can cause a loss of access to benefits if you use life insurance to provide for a disabled loved one who is receiving Medicaid. You may wish to make a trust the beneficiary of your life insurance policy in certain circumstances. The money would then go into the trust, which is managed by a trustee for the benefit of the disabled person, minor, or other designated person. The person the trust assets are intended to be used for is called the trust beneficiary.
Since the creation of a comprehensive estate plan not only involves deciding which tools to use, but also making sure that those tools are used correctly and are legally enforceable, it's very helpful to get expert advice from a qualified legal professional as you make your plans.
Making an Estate Plan
Now you know why you need an estate plan, when you should create one, and some of the key tools that you may wish to include in your plan. Check out our estate planning checklist to learn more about how these tools should be used and what steps you should take to put your estate plan in place.