Estate Planning – An Overview
I’m often asked the question, “Who needs estate planning?” Regardless of the size of one’s estate, most everyone needs estate planning whether they have little in the way of assets, or a large estate that requires more sophisticated estate planning. The issues range from relatively simple to complex, financial and non-financial, and it’s easy for a person to become overwhelmed with all the decisions they have to make while planning for their death or incapacitation. To better understand the process and provide some clarity, it may be helpful to look at estate planning from a few different perspectives.
When the majority of people think about what it means to plan one’s estate, they think of how they wish to distribute their property, in the most efficient manner possible, to their loved ones, in addition to reducing, or eliminating completely, estate taxes. And while it’s true these two objectives are important components of estate planning, there are a number of other issues to consider, such as nominating a guardian for one’s minor children, planning and caring for a disabled child or one with drug or alcohol problems, protection from creditors, avoidance of ancillary probate, conservation of the value of your assets, the use of your assets as you desire during your lifetime, the determination of what should be done with the interest one may have in a small business, and planning for one’s incapacity, to name just a few.
When considering what can sometimes be complex issues in estate planning, one should consider both tax and non-tax objectives.
Objectives of Estate Planning
Couples and single parents with minor children will want to specify who will care for their children upon their death, as well as provide for that care financially. This is typically done by nominating a guardian and property manager in one’s will. Some people may also be facing more complicated issues such as planning and caring for a disabled child or adult, and will want to leave the disabled person some of their assets without jeopardizing the disabled person’s ability to receive government benefits. This can be accomplished through the use of a third-party special needs trust, which allows the disabled child or adult to continue receiving government benefits because the inheritance is held in the trust, and these funds are not considered a resource for purposes of SSI and Medicaid eligibility.
Couples and single parents with minor children may also want to begin planning for their child’s education by incorporating a qualified tuition plan, also known as a 529 plan, or a Coverdell Education Savings Account into their estate plan.
In some situations, it’s wise to protect certain beneficiaries from themselves by delaying or controlling distributions of inheritance which they might otherwise receive outright. The most basic of these arrangements is to provide assets to be placed in trust for minors and young adults, to be distributed in accordance with the trust provisions. This arrangement provides for a great amount of flexibility. A trust can also be drafted to provide for someone with a known problem such as drug or alcohol addiction, or overspending. A beneficiary can also benefit from the use of a continuing trust which can provide protection from creditors.
People who own property in multiple states will want to plan properly to avoid ancillary probate, which can be time-consuming and costly. A personal representative appointed by an Arizona court has only such powers in another jurisdiction as the law of that jurisdiction allows. Whether a personal representative appointed in Arizona can collect assets in another state, or whether ancillary administration with appointment of a personal representative by the courts of that state is necessary, will depend on the laws of the other state.
People who are in second marriages and who have children from a first marriage, or people in their first marriage who may have a child or children from when they were single, will most likely want to be sure their children are provided for while also providing for their spouse, who is not the parent of their child or children. If one is a member of a married couple and both he or she and their spouse have a child or children from a previous marriage, they might want to arrange things so that their children ultimately receive their assets and their spouse’s children ultimately receive their spouse’s assets. This can be accomplished with proper planning and proper drafting of a trust.
Small business owners must determine what should be done with their interest in the business upon their death. Small business owners commonly utilize buy-sell agreements to lay out the distribution of the business upon the death of one of the owners. Buy-sell agreements are often funded with life insurance to ensure that money will be available in the event of the death of an owner. In addition, many closely held business owners use life insurance proceeds to pay gift or estate taxes due upon transfer of the business so that they won’t be forced to sell the business when one of the owners dies, and joint-life policies are often used by business owners as a source of funds to be used to buy out the family members of the partner who died.
It’s a common misconception that those who have little in the way of assets aren’t in need of estate planning. Without a will, or an alternate means of automatic transfer such as joint tenancy with right of survivorship, community property with right of survivorship, payable on death accounts, or a beneficiary deed, to name a few, your assets will be distributed pursuant to Arizona’s intestacy statue. This may or may not be what you want. For example, let’s assume you are single and have no children. Regardless of the value of your assets, if you do not have a will, or an alternate means of automatic transfer, your assets will be distributed in equal shares to your parents if both are living, and to one if the other has predeceased you. You may have preferred that your assets go to your siblings, or to a favorite niece, nephew, or grandchild. Distribution of your assets according to your wishes can be accomplished with a will.
In addition, as I mentioned above, regardless of the size of their estate, if a person has a child or children, they will want to nominate a guardian for their child or children. This can also be accomplished with a will. Finally, regardless of the size of one’s estate, there are some important documents that everyone should have prepared, and can usually be done so at a reasonable cost, depending on the complexity of one’s estate. For most people, these documents will include a means by which their assets will be distributed upon their death, such as a revocable living trust, a beneficiary deed, a will, or a combination thereof; a general durable power of attorney; a health care power of attorney; and a living will.
These are just a few of the issues that come up when one begins to consider planning their estate. For much more information on the issues I have raised, please refer to the relevant sections of my website.