Written by: Corey Janoff
We may have heard about Estate Planning. You may read it in an article or hear about it in a commercial. But what is Estate planning and why is it important? Estate planning is a friendly term for planning your death. Yes, it is death planning. Not planning how you will die, but planning for what happens with your money, assets, and children after you die.
Now, some of you might be thinking, “Why should I care what happens after I die? I’ll be dead!” If you are single with no kids, then sure – I supposed you can have that attitude. However, there can still be benefits to putting together an estate plan. If you have a spouse and/or you have children, then estate planning is a must. If you have children from a previous marriage, then you better have an estate plan. If not, after you finish reading this post, clear your schedule and do not do anything else until you have one in place.
Why is Estate Planning Important?
Estate planning enables you to dictate what happens after you pass away. If you have children who are minors, you get to choose who their guardian will be if you are no longer around. You also get to decide who will be in charge of managing the money and assets you leave behind for the benefit of your kids.
You can also decide who gets what. Maybe you have a sister who you want to leave some money to because she is not as financially fortunate as you. Maybe there is a certain charity you want to leave money to.
You will also be able to dictate how manners are handled if you are incapacitated and during end-of-life care. You can name a person to make medical decisions on your behalf. The same person or a different person could also be assigned to make financial decisions for you. You decide. Also, you can pre-determine whether you want to be kept on life support.
All these decisions can be made ahead of time while you are in a stable mental and emotional state. Otherwise, your family members will be left to make these decisions for you when emotions are running high. The decisions they make on your behalf may not be the same choices you would choose. And, your family members may not all agree on everything, which will complicate things even further.
To schedule a meeting to discuss your overall financial situation in more detail and items you may want to consider with your estate plan, visit our website to request an initial financial consultation.
What Happens if I Die Without an Estate Plan?
A number of things could happen and typically, this depends on what state you live in. When you pass away, your estate goes through a process called probate. Probate is a public process where a judge in a courtroom sifts through everything you own and distributes it according to state law.
There is an order of operations to how your assets are passed on. Generally, your spouse will inherit all your assets. If you do not have a spouse, the court would look for adult children, parents, siblings, and continue outwards until they find your closest living relative.
In some states, like Oregon, where I live, things are relatively straightforward (or so I have been told) and may play out as outlined above.
In other states, such as California, expect to have your assets held up in the court system for years and your family will be lucky if they ever get anything.
Now, keep in mind, I am not an attorney, so you will want to consult with an attorney who specializes in estate planning in your specific state for clarification on the matter.
What Happens to My Children if I Die Without an Estate Plan?
Good question. Again, this depends on where you live. The courts will assign a guardian to look over your children. The system may follow a similar order of operations as outlined above to find a living relative who is willing and able. Or your children may be held up in the court system for years until the state can get around to their file. Bottom line, the courts decide and they may not pick the person who would be your first choice.
What if My Heirs Disagree With What the Courts Decide?
This is where it gets exciting (sarcastically)! Your family gets to fight over it! They can fight over your assets. They can fight over your children. Attorneys get involved and most of the money will go to the attorneys by the end of it.
This is why you need an estate plan.
What About My Debts?
Once the banks get wind that you passed away, you can expect them to start calling your family asking for their money back. One of the first things that happens after someone passes away is they start getting bills and notices to pay up.
Your mortgage will come due immediately. Car loans. Federal student loans are forgiven, but some private loans may not be forgiven on death. Any other creditors you owe money to will want the outstanding balances paid in full immediately.
See, dead people are not allowed to take out loans, so even if your spouse is on loan with you, the bank will want the balance paid. Or your spouse will need to refinance the loan into his or her name. Depending on your spouse’s income and credit history, this may or may not be feasible.
This is where having a plan in place can be helpful and often life insurance can be a very useful tool here.
If you have questions on the importance of life insurance and its importance in estate planning, read our recent blog going over life insurance in detail.
So, How Do I Get an “Estate Plan?”
I recommend meeting with an estate planning attorney for this. A good estate planning attorney will get to know you and your wishes and help construct a legal document for a plan that meets your goals. Then, when you die, the courts will have an instruction manual to follow and it can make the after-death process more streamlined and efficient. Also, it will be harder for your family to fight over things because everyone can point to that legal document that outlines what you want.
For more material on estate planning, listen to our recent podcast discussing similar topics on estate planning for personal finance.
Some Preliminary Steps
Again, the first step should be to set up a meeting with an estate planning attorney. In advance of that meeting, it will be good to think about what you would like to happen when you die.
Do you want your spouse to inherit everything if you pass away? Do you want a portion of your assets to go to someone or something else?
If both spouses die, who do you want to take care of your kids? It will be a good idea to talk to that person ahead of time to make sure they are on board with inheriting your offspring. It is also smart to have one or two backup people in case your first choice is unable or unwilling when the time comes. Things also might change between now and when the day comes. Or, things might change in the future where you will want to amend your estate plan as changes occur.
How do you want your assets to be distributed? Do you want your children to get the money? Parents? Siblings? Charities?
If you have minor children, who do you want to oversee the money until the children become adults? This doesn’t have to be the same person as the guardian for your children. Maybe your sister is great with kids, but she is horrible with money. You may prefer someone else then to be handling the finances.
Also, do you want your kids to inherit all that wealth with no stipulations on their 18th birthday? If so, great. If not, you can slap some contingencies on the inheritance with a properly constructed estate plan. Maybe you want them to get a portion after they graduate college and another portion on their 30th birthday.
Who do you want to make healthcare and financial decisions on your behalf if you are incapacitated? You can name powers of attorney for these scenarios.
Wills and Trusts
Depending on your situation and your goals/wishes, a will might suffice, or trust may be necessary.
Wills are simpler. However, with a will, your estate will still have to go through the probate process as mentioned above. Depending on the state you live in, this may or may not be desirable. Remember, probate is a public process and not everyone wants their finances made public. Wills are also easier to contest. If you have a disgruntled family member that disagrees with the will, they could lawyer up and fight it in court.
Trusts are more complex (and more expensive). There are nearly infinite different kinds of trusts, all created to accomplish different things. Some can be amended over time. Others are set in stone and considered irrevocable. We won’t get into all of them here. We could dedicate an entire website to trusts and the content would be too dense for the internet to handle.
However, trusts avoid probate, which keeps your affairs private. Trusts also can streamline the passing of assets from your estate to your desired parties.
Due to the additional complexity, trusts are easier to screw up. For example, if you set up a trust to own your assets, but you do not change the ownership of your assets from yourself to the trust, the trust will not work. Also, unless you have a knowledgeable and dutiful trustee, the trust could potentially turn into a giant ball of confusion for your heirs after you pass away. This could actually make it more difficult for your heirs to inherit your assets.
Pros and cons to everything. This also highlights the importance of meeting with an estate planning attorney for recommendations on how your trust is structured and what steps you need to take to avoid these pitfalls.
As 2023 comes to an end, thinking about estate planning is a great financial year end step to take on your financial plan.
Review Your Estate Plan Periodically
Estate planning is not a one-and-done thing. It is prudent to review it every five years to make sure it still meets your needs. As life changes and as laws change, you may need to update your estate plan.
What To Do Now
Think about what you want to happen when you pass away. What do you want for your children? How do you want your assets to be handled and distributed?
Schedule a meeting with an estate planning attorney. It may take several meetings of discussion and revision before you have a final draft of an estate plan that meets your needs.
Make sure you update the beneficiaries on your life insurance and your retirement accounts to comply with your estate plan. If you want your kids to receive the money, but you still have your ex-spouse listed as the beneficiary, that could cause some problems.
Lastly, revisit your estate plan periodically. It is also good to inform the parties named in your estate plan of their roles and what you want to happen. Give them a summary of the game plan and refresh them every so often. That way, when it’s game time, they have a rough idea of what is supposed to happen. At the very least, they know where to find the document that outlines everything. If you create an estate plan, but are the only one who knows it exists, that probably won’t help.
Good luck and good planning.
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Corey Janoff is not an attorney and Finity Group is not a law firm, so this should not be construed as legal advice. Consult with an attorney who specializes in estate planning in your state for proper guidance and advice on estate planning.
