I often hear that someone didn’t or doesn’t need an Estate Plan, or needed only a “simple plan” because they didn’t have much in the way of assets, or they only had relatively few beneficiaries. Other potential clients indicated that they didn’t need a plan because they added a beneficiary to all their assets. None of these circumstances means that an individual doesn’t need an Estate Plan. In fact, individuals whose estates are modest, who have few beneficiaries, or who have added beneficiaries to assets may require more planning than they realize. I make it my mission to disabuse potential clients of the notion that they need a large estate or multiple beneficiaries to create an Estate Plan. Nothing could be further from the truth. Let’s examine why in this first part of a two-part series. Part II will examine the most common mistakes that occur in an Estate Plan and how to avoid them.
As a threshold matter, it’s a good idea for anyone aged 18 or older to have at least the basic Estate Planning documents that include a Will, or Will substitute also known as a Revocable Trust, a Property Power of Attorney, a Health Care Power of Attorney, an Advance Health Care Directive / Living Will, and a Health Insurance Portability and Accountability Act (“HIPAA”) Authorization. These documents need to lay out who should make decisions if the adult cannot and who should have access to their protected health information. These documents play an invaluable role both during life and at death. For young adults headed off to college or living on their own for the first time, they establish clear boundaries and instructions regarding circumstances in which those individuals want their parents or another individual to have access to their financial or health information. For older adults, it provides those same benefits plus many more. During life, the plan gives directions regarding finances and medical care during incapacity or other periods when an individual cannot articulate their preferences. At death, the Estate Plan provides a roadmap complete with instructions regarding who should distribute assets, in what manner, and to whom.
If an individual dies without a Will or Revocable Trust, that’s called dying “intestate.” When a person dies intestate, the laws of intestacy in their state of domicile control what happens to their assets upon death. Intestacy laws usually give at least half of those assets to the surviving spouse and distribute the remainder among an individual’s children, all outright. Allowing the laws of intestacy to dictate disposition of assets upon death equates to a failure to plan. Outright distribution could have disastrous consequences for any special needs beneficiary by making them ineligible for the benefits that they were receiving. Outright distribution causes issues for a minor child by requiring establishment of a guardianship for such child to receive the assets. Outright distribution could result in a beneficiary’s creditor, rather than such beneficiary, receiving assets. Any of these consequences could prove costly, costlier, in fact, than if the individual had simply decided to create a comprehensive Estate Plan. If outright distribution would not cause any of the issues raised above, the distribution pattern set forth in the intestacy statutes may not match an individual’s preferred pattern of distribution. Creating a comprehensive Estate Plan that consists of the documents noted above avoids these potentially catastrophic results and leaves control of important decisions to the individual creating the plan.
Some individuals try to avoid creating an Estate Plan by using titling mechanisms to transfer their assets at death. Practitioners often cite avoiding probate as one of the reasons for creating a Revocable Trust to govern the distribution of assets at death. As any good Trusts and Estates attorney knows, probate avoidance comes in other forms. For example, taking title to an asset as joint tenants with rights of survivorship avoids probate as long as the other joint tenant(s) survive. However, using that form of joint ownership raises certain issues that using a Revocable Trust does not. Because joint tenants each have rights to the entire asset, a joint tenant could deplete a joint account without the permission or knowledge of the other joint tenants. In addition, joint tenants could share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Finally, this form of ownership could create gifting issues if one or more of the owners failed to contribute to the purchase price of the property or failed to contribute funds to the account. Transferring assets to a Revocable Trust, however, avoids those problems. Owning assets in a Revocable Trust allows the owner to maintain the use of the assets during life and prevents the creditors of another individual from getting to those assets while the trustor is alive. The Revocable Trust also allows the trustor to include safeguards for the beneficiary that will continue after the death of that trustor and that could continue for multiple generations.
As this article demonstrates, there are many great reasons to create an Estate Plan. First, it provides detailed instructions regarding what happens both during life and death. Next, it avoids application of the laws of intestacy upon death. Further, an Estate Plan provides an opportunity to consider the individual circumstances of each beneficiary and plan in a way that protects those beneficiaries. This is particularly important for any beneficiary with special needs who may receive government benefits, for minors who cannot hold legal title to property directly, and even for spendthrift beneficiaries whose creditors might obtain the assets. While potential clients may be tempted to use shortcuts to create an Estate Plan, those shortcuts often cause more problems than they solve. A true Estate Plan entails creating a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization, but that’s just the beginning. A comprehensive Estate Plan involves regular meetings to ensure the plan remains current both with the grantor’s goals and the ever-evolving estate tax laws. The next part in this series will explore the most common mistakes that could undermine an Estate Plan.