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Wills and estate planning information for wills, trusts, living wills, power of attorney and more.
Estate Planning: An Introduction
Look here for answers to your questions about planning for death, from writing a basic will to organ donation. Among the issues we cover are probate and the many ways to avoid it, methods for eliminating or reducing death taxes, funeral planning and choosing someone to handle your affairs if you can't. But first, information addressing some general concerns about planning your estate.
Do Your Family a Favor: Get Organized
After you've taken the important step of making your estate planning documents, you can help your family by addressing the practical issues discussed here.
Perhaps you've decided to make your will, and maybe you're even thinking about more complex estate planning strategies, including ways to pass your property without paying probate fees or estate tax. These are important steps to take, but don't overlook practical issues as well. After you die, your loved ones will have to cope with many things not covered in your basic estate planning documents. Among these are:
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Do you want a funeral or a memorial ceremony? If so, what type?
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Do you want people to send flowers, or would you prefer donations to charity?
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Who should be notified about your death and funeral?
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Did you prepare a will or living trust? Where is the original?
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Did you own a life insurance policy, pension, retirement account or annuity? Where are the documents stored?
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Where did you have bank accounts? Did you have a safe deposit box?
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Did you have stocks, bonds, or money in mutual funds? Where are the records?
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What real estate did you own? Where are the deeds?
Unfortunately, most of us carry this information around in our heads -- if we've thought of it at all -- and never discuss it with our family members in a comprehensive way. Our loved ones must do their best to sort it all out later.
Costly or painful losses can result from a failure to organize your affairs. Stocks, bonds, bank accounts, real estate, and insurance policy benefits may go unclaimed and be turned over to the state government. This happens surprisingly often. In fact, billions of dollars currently sit in state treasuries because the rightful property owners couldn't be found. Millions of dollars worth of unclaimed assets are added to these coffers each year.
On a more personal level, relatives or friends may not be promptly informed of a death, and valuable pieces of family history may not be passed down to future generations.
Fortunately, losses like these can be avoided with a little bit of advance planning, sorting and organizing. Making things easier for your family is not difficult, but it may be time-consuming. It's best to break the task into manageable sections and take it one step at a time. Start by thinking about some broad categories of information:
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Funeral plans (arrangements and whom to notify)
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Insurance policies
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Wills, living trusts, deeds and other important documents
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Pensions and retirement accounts
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Bank, money market and mutual fund accounts
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Items in safes, safe deposit boxes and other locked or hidden places
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Important information about family history, including the location of photographs, heirlooms and other irreplaceable items
Then think about organizing this information in a way that will help your family handle your affairs after your death. You can structure the information any way you like -- even some notes scribbled on a piece of paper and left in an accessible location are better than nothing. But if you have the time and energy for it, consider a more thorough approach.
To learn how to create a document setting out your desires for a funeral or memorial ceremony, as well as other final instructions after death.
To organize the rest of your personal information, you can turn to self-help products, One book, Everything Your Heirs Need To Know, by David S. Magee (Dearborn Financial Publishing), offers forms that prompt you to describe your family history and interesting information about your own life as well as the type and location of each of your assets. Or, if you want to use your personal computer, you can sort, store and change information quickly and easily. However you choose to organize your affairs, what's most important is that you create a clear, easily accessible system that will light the way for your family and friends.
When you've got everything in order, be sure to store your information in a safe place. You might consider keeping your papers or computer disk with your will in a fireproof metal box, file cabinet or home safe. and be sure to discuss your new records with those closest to you. All your careful work will help them only if they know where to find it when the time comes.
The Right Estate Plan for You
Is your estate plan in good shape? Here's what to consider.
Most Americans haven't made even a simple will, to say nothing of a more comprehensive plan to avoid probate or save on estate taxes. No surprise there -- we all have things we'd rather do.
The good news is that depending on your age, health, wealth and innate level of caution, you may not need to do much at all in the way of estate planning. and even if you do decide you need a will or a trust, you probably won't need a lawyer. Especially if you aren't dripping with Picassos or fat investment accounts, it is easy and safe to prepare most basic estate planning documents yourself. Just learn what you're doing by using good self-help materials.
We've sorted our tips into broad categories of family situation and age. But keep in mind that age is an imprecise proxy for life expectancy, which is affected by all sorts of other factors -- heavy smoking while participating in extreme sports and driving a motorcycle, for example. It's up to you to add or subtract a few years, based on your health and lifestyle.
You're 25 and Single
What are you doing reading about estate planning? You're supposed to be dancing until dawn. But you might as well keep reading; this won't take long.
At your age, there's not much point in putting a lot of energy into estate planning. Unless your lifestyle is unusually risky or you have a serious illness, you're very unlikely to die for a long, long time.
If you're an uncommonly rich 25-year-old, though, write a will. (Bricks can fall on anyone.) That way you can leave your possessions to any recipient you choose -- your boyfriend, your favorite cause, the nephew who thinks you're totally cool. If you don't write a will, whatever you leave behind will probably go to your parents. Think about it.
You're Paired Up, But Not Married
If you've got a life partner but no marriage certificate, a will is almost a must-have document. Without a will, state law will dictate where your property goes after your death, and no state gives anything to an unmarried partner. Instead, your closest relatives will inherit everything.
Other options to make sure that your partner isn't left out in the cold after your death is to own big-ticket items, such as houses and cars, together in "joint tenancy" with right of survivorship. Then, when one of you dies, the survivor will automatically own 100% of the property.
You Have Young Children
Having children complicates life -- but then, you already know that. Estate planning is no exception. Here's what to think about.
First, write a will. Nothing fancy -- just a document that leaves your property to whomever you choose and names a guardian for your children. The guardian will take over if both you and the other parent are unavailable. That's an unlikely situation, but one that's worth addressing just in case. If you fail to name a guardian, a court will appoint someone -- possibly one of your parents.
The other big reason to write a will is that if you don't, some of your property may go not to your spouse, but directly to your children. The problem with the children inheriting directly is that the surviving parent may need to get court permission to spend or invest the money -- a waste of time and money in most families.
Second, think about buying life insurance to replace your earnings if that damn brick chooses you. Term life insurance is relatively cheap, especially if you're young and don't smoke. You can shop for the best bargain online by consulting free services that compare the rates of lots of companies.
You're Middle-Aged and Know the Names of at Least Three Mutual Funds
If you've made it to a comfortable time in life -- you've accumulated some material wealth and enough wisdom to know that other things matter, too -- you will probably want to take some time to reflect on what you will eventually leave behind.
But given that you may well live another 30 or 40 years, there is no need to obsess about it. Chances are your conclusions will be different in ten or 20 years, and your estate plan will change accordingly.
To save your family the cost (and hassles) of probate court proceedings after your death, think about creating a revocable living trust. It's hardly more trouble than writing a will, and lets everything go directly to your heirs after your death, without taking a circuitous and expensive detour through probate court.
While you're alive, the trust has no effect, and you can revoke it or change its terms at any time. But after your death, trust property can be transferred quickly according to the directions you left in the trust document.
There are other, even easier ways to avoid probate: you can turn any bank account into a "payable-on-death" account simply by signing a form (the bank will supply it) and naming someone to inherit whatever funds are in the account at your death. You can do the same thing, in almost every state, with securities.
If you have enough property to worry about federal estate taxes, think about tax avoidance as well. As of 2002, estates worth more than $1 million are taxed. If estate tax does take a bite, it can be a big one. Tax rates now start at 37% and rise to 50% for estates worth more than $3 million.
One way to reduce these taxes is to give away property before your death. After all, if you don't own it, it can't be taxed. Gifts larger than $11,000 per year per recipient are subject to gift tax, at the same rate as estate tax. Still, an annual gift-giving plan can reduce the size of even a big estate, especially if you have a covey of kids and grandkids. Gifts to your spouse (as long as he or she is a U.S. citizen), direct payment of tuition or medical bills, and gifts to a tax-exempt organization are exempt from gift tax.
Another way to cut taxes is with trusts. Many older couples use an AB trust to leave property to each other for life, and then to their children. The surviving spouse can spend trust income and in some circumstances, principal. An AB trust can shield up to $2 million from estate tax.
Charitable trusts, which involve making a gift to a charity and getting some payments back, can also save on both estate and income tax. There are many other complex trusts; learn about them on your own, and then have an experienced estate planning lawyer draw up the documents you want.
You're Elderly or Ill
Now is the time to take concrete steps to establish an estate plan pronto. First, the basics: Consider a probate-avoidance living trust and, if you're concerned about estate taxes, a tax-saving trust. (These devices are discussed just above.) Write a will, or update an old one.
Then, although no one wants to do it, take a minute to think about the possibility that at some time, you might become unable to handle day-to-day financial matters or make healthcare decisions. If you don't do anything to prepare for this unpleasant possibility, a judge may have to appoint someone to make these decisions for you. No one wants a court's intervention in such personal matters, but someone must have legal authority to act on your behalf.
You can choose that person yourself, and give him or her legal authority to act for you, by creating documents called durable powers of attorney. You'll need one for your financial matters and one for healthcare. In these documents you choose someone to act for you (called your agent or attorney-in-fact) and spell out his or her authority. You can even state that the documents won't have any effect unless and until you become incapacitated. Once signed and notarized, they're legally valid, and your mind can be at ease. |
