An Introduction to Estate Planning

Estate planning is a subject that traditionally incites images of stuffy topics that require obtuse attorneys who spend all of their time fascinating over abysmal tax implications.  While this assumption about the topic isn't unwarranted, it's a tad incomplete.  Estate planning is a subject that will infiltrate everyone's life and how you choose to address it will make a dramatic difference in the lives of those who have to deal with your matters once you have passed away.

Today I'm not all that interested in detailing depth, as much as I'm interested in presenting a few key concepts that will hopefully adjust some thinking and make everyone realize that like it or not, all roads lead to estate planning.

It's Really Not What You Think

Contrary to the TV drama scene with which we're mostly familiar, it's rarely the case that when someone dies the family gathers in an ornate attorney's office to open up the deceased's Last Will and Testament to doll out the proceeds of his or her estate.  In fact, traditionally the attorney who probates the Will (if there is one) will communicate with beneficiaries to the estate either by mail or phone–office visits really aren't all that common (I had the privilege of working in an attorney's office for 3 years where a lot of probate work was completed and I never once witnessed a gathering to read a Will; sent plenty of mail out to inform beneficiaries of their status).

The other point that is important to make here is that Wills aren't really the power document our friends in Hollywood make them out to be.  The best description I've ever hear from someone is “a Will is merely a list of suggestions for what you'd like to see happen to your stuff.”  That's a pretty spot on observation from my experience.  As the dreadful re-run we in the insurance and finance world find ourselves uttering more times throughout the year than we'd care to, “no the Will does not supersede beneficiary designations on a legal contract (i.e. life insurance, IRA, 401k, etc.).”

It's Not Just for Rich People

A few years ago, a small business owner in the Central New York area whom I tried unsuccessfully to turn into a client but kept in contact with just the same found himself in a truly dreadful turn of events.  His mother passed away and despite her being financially indigent, he discovered the hard way how a lack of estate planning can be hugely bothersome to those you leave behind.  Mom owned a small house purchased years and years prior to the real-estate bonanza that classified the last decade, but was a recipient of state and federal transfer payments due largely to the expenses associated with he poor health.  When she died, all of her assets where owned solely be her, and she had done zero to plan for this event.  Several months (actually close to a year) of sorting through the details he lamented to me “I never knew someone with so little, could involve so much stuff, makes you realize how important this is to address when you actually have stuff.”  I'm not above telling people “told you so” and that's more or less what I said at that precise moment.

So What do You Need to Do

Be well aware of the fact that life doesn't just figure itself out when you die.  Understand that Wills are not all they are made out to be.  If you have at least some assets (a bank account, real estate, a general investment account) having a Will to explain where those should go is extremely helpful.

Life insurance, annuities, and qualified plans have no need to end up in your Will as they are designed to bypass probate and go directly to your beneficiary.  This doesn't mean it's all automatic.  If you neglect to name a beneficiary this could spell huge trouble for moving the assets or life insurance proceeds to the intended people.  I once got my hands on an internal employee documents for a company that was warning its employees about not having named beneficiaries on a qualified plan they had.  The company's HR representative wrote up a small Q&A and addressed the absolute need to name a beneficiary.  She essentially told the participants in the plan that they did not have to name a beneficiary, but if they didn't the company wouldn't know where to the send the check if they died.  This is of course, false.  They know exactly where they need to send the check as they are legally required to send it to the deceased's estate if there are no named or surviving beneficiaries.  This can create all sorts of problems since the assets that could have bypassed probate are now included in the estate and are subject to creditor claim (anyone the deceased may have owed money) and included in the calculation used by the attorney to determine their fee for probating the estate (the traditional method used by attorney's to to charge a percentage of the estate assets, i.e. the assets that flow through the probate process).

On the subject of financial products that name beneficiaries, careful about naming children as beneficiaries.  This is an area that always get pushed to the back of the to-do list.  Naming children as a beneficiary is ok, but heed the warning that proceeds paid to children who have not reached legal majority cannot be in direct ownership of the assets.  If the money is left directly to them the proceeds will go a state managed trust that requires a court order petitioned by the child's legal guardian to withdraw money.  The quickest and easiest way to address this is through a Testamentary Trust (we will be coming back to this issue in a later post so we're a bit light on the details at the moment).

Plan for this.  I know its weird and no one like to think about their mortality, but coming to grips with it is a maturation thing and it'll make life for your loved ones incredibly easier than if you run away from it.  I've taken a few shots at Wills, but truth is they are certainly better than dying intestate.  Making use of trusts is another approach, that can even be a little stronger.  The big takeaway however, consult someone who knows this topic.  It's way beyond the grasp of average people, and even though information is out there, and we'll do our best to make information available to get you pointed in the right direction, you need someone who has experience working through these topics to guide you.  Making a mistake can be extremely costly.

 Estate Taxes

Traditionally this is the topic that is the topic that acts as the focal point of all estate planning considerations, and it will be a topic we'll be visiting a bit from time to time.  For now we're going to address the high points that everyone should know.  For starters be wary of the agent/broker or financial advisory who recommends a Irrevocable Life Insurance Trust (ILIT) and the purchase of life insurance merely because your assets exceed the Federal Estate Tax Exemption.  ILIT planning addresses the issue of paying taxes for a relatively illiquid estate, it does not prevent the payment of taxes.  There are other ways to avoid paying estate taxes that have nothing to do with life insurance and these methods should be entertained first.

Next, there aren't a lot of states that impose a state estate tax, but you should familiarize yourself with your state's laws.  It's also a good idea to consider the laws of any states you plan to move to once in retirement.  Most of the well known retirement hot spots in the south do not have state estate taxes, for a reason.

Make full use of your estate tax exemption.  This one is so easy and yet so violated when it comes to estate planning.  Everyone gets an exemption, and it's foolish not to use it.  Same sex couples are a little more tuned into this since they can't makes use of the spousal transfer heterosexual couples have available to them.   It's foolish for one spouse to own all (or almost all) assets and then transfer to his or her surviving spouse upon death wasting his or her exemption.  This is often easier said than done, but should be a topic for serious consideration for anyone who faces estate tax liability.

Much More on the Way

This is a massive topic and we're going to be discussing it in a lot more detail as time goes on as I mentioned in a post last week.  But hopefully this here can act as a spring board to get people focused on the topic and get them to understand the seriousness behind good estate planning.

6 thoughts on “An Introduction to Estate Planning”

  1. It is not a good idea NOT to have a will; as a practical matter, which your readers should take into consideration, if you’ve set up trusts to distribute your estate, most half-fast-decent attorneys tell you to write a pour-over will saying that whatever you die “seised of,” i.e. have a possessory right to, that is somehow NOT in the corpus of one of your trusts, is to go into whatever trust you designate and be distributed per that instrument. (And if they don’t, consider finding another attorney!) Your attorney can advise on what sorts of verbiage need to be included to make sure the will is “bullet-proof,” in terms of needing no long drawn-out “Jarndyce-v.-Jarndyce”-type litigation to effectuate it, and to be compliant with rules of heirship such that no one could possibly do better under intestacy than under the will, thus as a practical matter ruling out challenges. The pour-over will is the belt-and-suspenders strategy most lawyers advise, and it’s basically a pay-me-a-little-now-or-a-lot-later “insurance policy” of sorts to see to it that the estate is paid to the family or other heirs with a minimum of muss and fuss, although to some people it can seem like the lawyer is trying to nickel-and-dime them;that’s penny-wise-pound-foolish, to mix a metaphor. Of course, the obligatory disclaimer: Always discuss these matters with an attorney before doing anything of this sort

    • I’m not convinced based on your comment that you’re following the intent of my down playing Wills. This is not to champion intestacy–far from it, as that’s a huge PITA. It’s rather a call to the fact that simply having a Will is not the guarantee a lot of people assume it will be. Also, it’s a call to action on the more active role one must play in ensuring their estate planning is adequate. The idea that one could make a Will bullet proof by language is a tad remiss, though noble in its pursuits.

      The notion that you can pay now, or pay dearly later is quite accurate. A cheap estate plan isn’t usually cheap once it’s time to put it into action.

      Keep in mind also that this post is an introduction, not an exhaustive attempt to explain the intricate details of estate planning in 1000 words or less.

  2. Here’s just one of the things I’ve learned since starting my estate-planning process. A 401(k) or 403(b) type retirement plan, in California, will default to spouse as beneficiary. If you are not married, do not have a will, and do not designate a beneficiary, the plan’s assets will be distributed by the state. So if you have a partner to whom you are not legally married in CA, for heaven’s sake, designate your beneficiary!

    • This is correct, and on the other side of the coin. If you are in the process of divorcing, it’s wise not to drag your feet as many states will require either written approval from a former spouse or a divorce decree to remove that spouse as beneficiary of a qualified plan.

      The need to name a beneficiary is crucial. If it isn’t done, the proceeds will be paid to the estate. This will force the heirs to open an estate, it makes the proceeds included in the any calculations for attorney’s fees to probate the estate, and if there are outstanding debts owned by the deceased, proceeds in the estate will pay off debtors before being distributed to heirs.

      If you don’t name your beneficiaries, “you’re gonna have a bad time.”

  3. Brandon,

    I realize this is an old post but I’ve been reading through everything from the beginning.

    Reading your post brought a tale to mind that underscores your point.

    My wife and I know a young lady from our church. She spent several years as a companion and caretaker for her grandmother. At the time we knew here she was battling over her grandmother’s will.

    The interesting point here is the will was supposed to be quite clear and specific – especially considering the grandmother in question was a former attorney who specialized in probate!

    Seems if anyone should have a ‘bullet proof” will, she would!


    • Hi Andy,

      Thanks for the story. Bullet-proofing a Will is a tough pursuit, if not impossible. And it’s a matter that depends on a lot of variables, or perhaps more on the probability of those variables turning badly. For example, the probability that one child/heir will dislike what the Will tries to accomplish or the probability of a rapid enough shift in your assets/financial situation to render the majority of your original Will useless.

      Truth is, people forget/get busy and such. The other problem is that of all the financial planning topics that exist, the least discussed in all circles (regretfully even ours, which we need to fix) is estate planning. If we flip through various financial media, we see numerous topics on general advice affecting your financial life while you’re alive and most about your life as you’re accumulation assets. But very few people ever address the topic of what happens after you die and how you should start to plan for that.

      Part of this is a regulation issue since a lot of the discussion is considered legal advice, so there’s a fine line we must walk. Still, there’s a lot more we can do as an industry to open up the discussion on this topic, and unfortunately it requires a little more discussion than what we can put into a neat 1 minute sound byte to distribute widely in an attempt to grab readership or viewership.


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