The ABC’s of Estate Planning

Estate planning is a tricky part of the law.   Insurance agents and financial planners love to call themselves estate planners.  Many of them will offer you “free estate planning forms,” just to get you in the door.  The sad truth is that if you settle for letting a non-lawyer do your estate planning in an effort to save money, you will probably get the same level of quality as what you pay.

Estate planning truly is “buyer beware.”  Educate yourself about what you need before you jump into something you will later regret. For instance a good estate plan requires more than one document.  If you only get a will or maybe a trust you are not getting a complete plan.  If your plan is incomplete, you will be required to pay for the rest of the forms you need to get a complete set of estate planning documents.

There are basically three stages of your life that need to be considered in a complete estate plan, I like to call them the ABC’s of estate planning.  Stage A is the first stage of estate planning.  Your Stage A estate plan must be designed to help you acquire, grow, and protect your assets while you are alive.  At the second stage, Stage B, your estate must be designed to enable someone to easily manage your assets and health care if and when you become incompetent.  Finally at the third and final stage, Stage C, your estate must be designed to seamlessly manage property at your death.  Many times unqualified estate planners only manage to make certain Stage C is take care of, unfortunately, there is no question that all stages of your life are important.

Since most people are just concerned about acquiring the assets, it is pretty easy to convince them that they should include Stage A in their estate plan.  They don’t worry about the other two parts.  However, if you think about it, wouldn’t you rather leave the assets you worked so hard for to your family rather than the lawyers and IRS?  That’s what I want to help you do.

ABC’s of Estate Planning should include Four Documents

The best estate plan should include four basic estate documents.   All four of these documents should be designed to help with Stage A of your life.  Two of those estate planning documents are for use in Stage B while you are alive; the other two estate documents are used in Stage C, after you die.  This article will concentrate on which four estate planning documents are needed for your estate plan.

Estate Document One – Make A Will

An estate plan usually begins when you make a will.   There are many different types of wills.   A testamentary will is one that your have probably heard of most.  It is the standard will most people think of when they hear the word will.  A testamentary will is the will that passes your property when you die.  It names your guardians and states your desires. The “standard will” or “testamentary will” is the will your grandparents had.  It disposed of their estate. It is the will the lawyers promote, because when you pass property to your heirs through a will, it will go through the probate.

Probate is the process where your family goes to court so the judge can read your will and determine what it says. The probate process can be very expensive, about 10% of the estate.   While it is true that states have tried to stream line the probate process, unfortunately, many  lawyers still use the probate process  to “take financial advantage” of the heirs.  I am sure you would be stunned to learn that many make a lot of money off probate.   Remember, the testamentary will takes effect when you die, but you must draw it (or make it) while you are living.

Another will you should be aware of is the pour over will. A pour over will is designed to work with a trust.  It is not the same as the standard testamentary will.  It doesn’t distribute your property.  It simply “pours” all your property over into the living revocable trust to be distributed.

The will forms your estate planning foundation.  Even if you have a living trust on your estate planning checklist, you will need a will. It will be called a “pour over will.”  (PS You should have a living trust on your estate planning checklist.)

Estate Document Two – Set Up a Revocable Living Trust

Every estate plan should include a revocable living trust.  The trust will manage your property while you are alive and then distribute your property after your death.  The major advantage of the living revocable trust is that it avoids probate, provided it is used “correctly.”

To use your revocable living trust correctly, you must get used to the idea that you are no longer an individual or a couple.  You are operating as a trust.  This may seem a bit dramatic, but too many people never come to understand this concept.  You’re wasting your money on a trust if you fail to understand this.

It takes some additional education to operate a living revocable trust correctly.  Your attorney might teach you, but you might have to ask him, and it might be expenseive. Remember, no matter how good the document is and how much you paid the attorney, if your trust is not funded correctly and continuously it will go through probate.

My father-in-law paid big money for a living trust many years ago, over $8,500 in today’s dollars.  Several years after it was written, I took a look at his trust and had to tell him his trust wouldn’t help him, because he hadn’t continuously funded his trust. There was still more work to do. Since that time I have seen many other trusts that would need to be probated.  One of the reasons that I wrote my book Protecting Your Financial Future was to help educate the public on how to use their trusts.

Only about 10% of the people who get a living revocable trust ever figure out how to use them.  So why doesn’t your attorney teach you how to use the living revocable trust when he is doing your estate plan?  It simple, they get the big bucks for writing the trust, and when you die, they get the probate, because the trust fails.  They profit twice.

Estate Document Three – Durable Power of Attorney

No estate plan should be without a durable power of attorney.  This is a document that you could need while you are still living, but incapacitated.  The durable power of attorney allows a family member to stand in and take over all of your financial affairs when you can’t handle them for yourself.  When you go down, the first thing a hospital or a rest home or long term care facility will ask for is your durable power of attorney.  It is the critical document to be used between the time you “go down” and later die.

You have a better chance of needing a durable power of attorney tomorrow than you do needing a will – a better chance by almost a factor of ten.  Yet many estate plans “overlook” this document.   Once you put a durable power of attorney in place, your family can take over your affairs without having to go to court and get a court order declaring you incompetent.  That’s a big deal when your family is helping you deal with major health issues!

Estate Document Four – Living Will

Your estate plan documents also need to include a third type of will.  Not a testamentary will, nor a pour over will, but a living will.  A living will is your directive to the medical profession, so doctors know what to do with you when you are critically ill – plug you in or unplug you.

Living wills are easy to get.  Your favorite hospital will give you one for free!  Just get it and use it.

These are the four basic elements that every estate planning checklist should include.  There are usually more issues than this that need to be addressed, but if you start with these, you will be ahead of the pack.

Don’t let making an estate plan weigh on your mind.  Consciously or subconsciously, you worry about it.  Lawyers don’t make a lot of guarantees, but I will make you an unconditional guarantee. If you follow the advice given in my book Protecting Your Financial Future, (and also listen to the information in my Free DVD, How to Use the Law to Make Money and Protect Your Assets), and if you do the estate planning for death that I will walk you through, I will guarantee it will be worth every effort you make and every dime you spend. This will give you great peace of mind. Sure the money is important and leaving your children with a better life is what you want, but just to relieve the subconscious worry will be worth everything you do.