First Steps for Estate Planning
The idea of making an estate plan can be daunting. So much so, that many people don’t get started. But preparing an estate plan is actually a great opportunity to:
• Get organized and make, or re-energize, your financial plan,
• Take stock of wonderful people in your life and determine how you might help each other later in life, and,
• Make a plan to preserve and smartly use your lifetime assets for the benefit of your family.
It is true that creating a meaningful estate plan requires some work, thought, and sometimes tough decisions. This article will give you an idea of what information your estate planning attorney will request from you, and hopefully get you thinking about some of the important, first issues in making your estate plan. Then, even if it takes a while, when you are ready you will have already done some of the “heavy lifting” that is required of you to complete a good plan.
THE QUESTIONNAIRE
My approach, and I think it is the approach of many estate planning attorneys, is to first meet with a new client at no charge to learn about their situation. Ideally, the new client will provide information about their assets, family, and goals before the first meeting in a preliminary questionnaire. This meeting allows the attorney to prepare a custom proposal and fixed fee to complete the plan.
In most cases, after that first meeting, it is important to gather a more detailed list of assets and additional information. I suspect that the work required to complete this longer, comprehensive questionnaire is one major reason people are reluctant to begin the estate planning process. But before you get discouraged, you should know that for most people, not all of the questions and sections of the longer questionnaire apply. And hopefully you can appreciate that there are good reasons to ask so many detailed questions.
FINANCIAL INFORMATION
Why is comprehensive, detailed financial information important? There are several reasons. First, a complete inventory of all of your assets is often something only you know. From time to time, we hear of a person who died several years ago, their estate went through probate and was closed, but recently their family became aware of another brokerage account, or other property that they did not know about before. This situation obviously causes additional expense and effort, not to mention the loss of use of the asset by the family for a period of time. It could be that the deceased person even forgot about the asset. So, the first reason to carefully review the entire, long questionnaire and complete the relevant sections is to make sure nothing is forgotten. The questionnaire serves as a helpful checklist of assets to consider and document.
If your situation includes business interests or extensive investment or real estate holdings, for example, it may take significant time and effort for you to complete those detailed sections of the questionnaire. But if it is a chore for you, think of how hard it would be for your family to pull all that information together if something were to happen to you. A thorough inventory and accounting of assets, together with regular updates of that information, is essential to making the settlement of your estate easier on your family.
Beyond the practical concerns discuss above, identifying all assets, confirming the exact title or ownership, and determining the values of those assets are essential tasks if you want to enjoy the benefits of laws that allow you to minimize taxes, protect assets, and efficiently transfer your property at death.
FIDUCIARIES, AGENTS, AND GUARDIANS
Another important, first step in making an estate plan is to select a person, or people, to serve as a personal representative of a probate estate, a trustee, an attorney-in-fact under a durable power of attorney, or as the guardian of a child should the need arise. Most often, married people select each other for important fiduciary roles. But if you are not married, or are planning in case your spouse is not able to serve, an alternate choice is needed.
Selecting and securing the participation of these important people is often a process that takes some time, thought, and discussion. You may be fortunate enough to have people in your life who are obvious choices for some or all of these important roles. In some cases, a person may be great for one role, such as a guardian for a child, but not well-suited for another role, such as handling financial responsibilities. You may then need to think about how multiple people in different roles might work together.
If you do not have an obvious choice for an important role, you might consider professional, commercial fiduciaries such as banks or trust companies, and meet with them to discuss how they can serve in your estate plan. For certain estates, a commercial fiduciary might be the best, first choice given their professional investment and administrative experience.
While all of the roles are important, choosing the right person is paramount when appointing an attorney-in-fact under a durable power of attorney document. The durable power of attorney document gives an agent control over your financial and legal affairs in the event you become incapacitated or disabled and cannot make decisions for yourself. In Florida, any durable power of attorney document executed today becomes effective immediately; it is no longer possible to create a “springing” power of attorney in Florida which becomes effective only later, when the principal (maker) of the power becomes disabled. Michigan still allows “springing” powers. But in either case, not only must you chose someone who is capable of making sound financial and legal decisions, but someone whose trustworthiness is unquestionable.
Before finalizing your plan, it is important that you discuss these issues with the person(s) you hope to appoint. Despite your strong feelings, a potential appointee might not be willing to serve in one of these important roles. Being a trustee, for example, can result in personal liability, and in some situations can require difficult decisions and complicated work. Therefore, it is not entirely unreasonable for even a family member or close friend to decline to fill the role, especially if there are other, equally suitable people who are willing to do so.
The point here is that selecting and securing the right people to serve in important roles in your estate plan is a process that may take time for you to consider, discuss, and decide.
HOW TO TRANSFER YOUR PROPERTY
Admittedly, the thought of just giving property outright to your spouse, or to all of your immediate family members in equal shares, has some appeal due to the simplicity of preparing and understanding such an estate plan. But a little thought usually raises several legitimate concerns that make that an imperfect plan.
As mentioned in my blog article entitled “Five Good Reasons to Have an Estate Plan”, asset protection is one key objective of estate planning. And leaving property to your family at your death provides one of the best opportunities to protect that property from being squandered, or otherwise used against your wishes. Trusts can protect your surviving spouse from creditors who, after the first spouse passes away, are no longer restrained by laws protecting property owned spouses as tenants by the entirety. In addition, trusts can preserve assets of a deceased spouse for the benefit of children in the event the surviving spouse remarries. Even if both spouses agree and are confident that the other would never deny their children their inheritance, having a trust in place can make life easier for the remarried survivor who can keep assets that are ultimately intended for children separate from other assets.
Trusts for minor children seem almost mandatory in most situations. But not only is a trust helpful while the child is a minor, it can also avoid having the child’s assets distributed outright to him/her at age 18. For all the reasons you can imagine, including creditor protection, protection from a possible future divorce, and squandering of the assets by an inexperienced young adult, a trust for children, both minors and adults, has great appeal. Some people who are not familiar with trusts may be reluctant to consider them because they fear they are complicated and difficult to administer. But like anything, once a person gets experience working with a trust, they will get comfortable and appreciate the benefits that outweigh any initial inconvenience or concerns.
IN SUMMARY
Admittedly, estate planning can be challenging. But if you can get organized, give some serious thought and have discussions about who can serve in important roles for you, and think about how you might want to help your surviving family with thoughtful planning for their benefit, you will take the first steps to planning your estate and preserving the value of the assets you accumulate during your life.
