Logan K. Philipps
Principal

There is a common misconception that “estates” are exclusive to multi-millionaires. Most people do not realize what actually makes up an estate and only have an idea about estates from watching television reruns of Dallas, where they see the “Southfork Ranch” estate. A residence, no matter how large or small, is part of an estate. An estate is, quite frankly, everything a person owns in his or her own name or owns with another person, everything payable to his or her estate, and everything controlled by that person. Your estate can comprise your residence, cash, stocks, bonds, and other investments, as well as businesses that you may own. Your estate also comprises retirement plans, such as IRAs and Keoghs, and life insurance death benefits. It even includes personal property, such as vehicles, collectibles, and other treasured items.

The definition of estate planning adopted by the Wealth Counsel, a national organization of estate planning attorneys is: "I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and if I can, I want to save every last tax dollar, attorney fee, and court cost possible." A good estate plan will meet this definition of estate planning.

For centuries, that is about all it was. Today, the field of estate planning has grown to be one of the most technically demanding and comprehensive areas of the law. Estate planning is ensuring that your hopes, dreams, and concerns for yourself and for your loved ones will be accomplished if you become incapacitated or die. It is protecting you and those you love by keeping you, your family, and your sensitive business information out of probate court when you become legally incapacitated or die. Estate planning is designing a trust agreement which contains your loving instructions for your family’s continued well-being after your death and also contains provisions to eliminate estate taxes. It can include planning for redirecting what would have been paid in estate taxes to useful charitable projects, at no net cost to you or even at a net gain—you and your heirs may have more money for yourselves than would be the case if you had left nothing to charity. If you are a business owner, estate planning is planning for the survival of that business after your death or the efficient disposition of that business in order to use the proceeds to care for and educate your loved ones. In this day and age, you never know when you might be sued or what the result might be, even if you have done nothing wrong. For individuals who are particularly at risk from such lawsuits, estate planning can include increased protection from creditor attack. Through devices such as private foundations, estate planning can keep your family members together and involved for generations in community services while giving them entrée into influential circles they would not otherwise have had. Estate planning can help you unlock the value of highly appreciated assets which have a built-in capital gain liability and devise retirement vehicles which have the benefits of qualified plans without the restrictions.

Here are the “Great Myths,” as we call them: Myth 1: “I’m too young to worry about estate planning.” Reality: If you’re young, you especially need to map out an estate plan to help protect your loved ones. Myth 2: “My estate isn’t large enough to need estate planning.” Reality: If your estate is fairly small, it will likely suffer a greater percentage of shrinkage from final expenses, probate costs, and so on, than will a larger estate. Myth 3: “My estate won’t be taxed, regardless of its size, because I can use the unlimited marital deduction to transfer all of my assets to my spouse tax-free.” Reality: Poorly planned usage of the unlimited marital deduction can simply postpone estate tax problems until your spouse’s death. Without proper use of estate tax planning, your estate shrinkage at that time could be substantial, with your children and grandchildren feeling the losses. Myth 4: “Most people just have a will; that’s all I need.” Reality: Depending upon whose statistics you read, only about 40 to 60 percent of the population has a will, and it’s true that a will is a must in every estate plan. But understand, a will guarantees the probate process. To avoid the probate process, use a funded revocable living trust as the centerpiece of your estate plan with a pour-over will as a supporting document, not the centerpiece.

There are six techniques that are traditionally used in basic estate planning, and everyone, in some manner, is using at least one of these techniques. Let us briefly look at each one, along with its advantages and disadvantages. Intestacy. A majority of American die without a will or a trust. This is called intestacy. Intestacy is considered a method of estate planning because by leaving no will, a person has given the state the right to decide who will receive his or her property. Assets that pass by intestacy go through a probate process call administration which is almost identical to the probate process for a last will and testament. Will-Planning Probate. A last will and testament is essentially a legal document that states how a person wants his or her estate distributed at death. Many people plan their estates by creating a last will and testament. Unfortunately, wills have major disadvantages: (1) a will does not control how or when all of the will maker’s property is distributed. Property owned in joint tenancy with another person, life insurance proceeds, and retirement benefits all pass outside of a will. (2) A will is not effective until the death of its maker, so it is of no help with lifetime planning. (3) Upon the maker’s death, the will must be filed with the probate court, where it becomes a public document and is available to anyone who wants to read it. Death probate is a court and administrative proceeding. It is required to manage and distribute a decedent’s estate at death. Once a will enters the probate process, a person’s estate is no longer controlled by his or her family. It is in the hands of the court and the probate attorneys. Because a will guarantees that a decedent’s estate will go through probate, it is a very poor estate planning document for families who want to maintain control. Joint Tenancy With Right of Survivorship. There are different forms of how people hold title to property, one of which is joint tenancy with right of survivorship. The right of survivorship means that the survivor acquires the entire interest in the property upon the death of the other joint tenant. Because a joint tenant’s interest automatically passes by law to the surviving joint tenant at death, its ownership is not controlled by the deceased joint tenant’s will. For example, two brothers, Bob and David, own a piece of property as joint tenants. Bob dies and his will says that upon his death all of his estate should go to his wife, Pat; however, because the property passes automatically at Bob’s death to the surviving joint tenant, David will own the entire property and Pat will get nothing. This is only one of the many unforeseen problems that joint tenancy creates. Beneficiary Designations. Some types of property pass, at the death of their owners, to those listed in their beneficiary designations. Life insurance policies, annuities, individual retirement accounts, qualified retirement accounts, and pension plans are examples of these types of property. The advantage of having named beneficiaries is that the property avoids probate. The disadvantage is that since the proceeds from beneficiary-designation property pass directly to the named beneficiaries and are not controlled by terms in the will, the proceeds may not pass to whom the owner wants or in the way he or she wants. Like joint ownership, beneficiary designations supersede the terms of a will. Gifts. Giving assets away can be a valuable part of an estate plan, but it should not be done without professional advice. Revocable Living Trust. Finally, many people have living trusts, but these documents may be “bare-bones” living trusts. Bare-bones trusts often do not achieve basic planning objectives or avoid probate because their makers failed to transfer their property into their trusts. Bare-bones living trusts are usually sterile documents written in legalese and devoid of meaningful instructions for loved ones. They seldom reflect the hopes, concerns, dreams, values, and ambitions of their makers. However, when someone has a properly drafted and funded living trust, he or she can be confident that the many disadvantages of the five preceding traditional forms of estate planning have been eliminated.