Super Easy Ways to Understand Basic Estate Planning Terms

Welcome Back!

           In Estate Plan?! I Ain't Rich! we covered the idea that estate planning is for everyone, not just the very wealthy. Once you come to grips with the idea that you need to take control of your own plan, you are faced with another road block.

          Estate Planning Terms! What are these words? Is this a new language? It looks like English, but doesn’t read like English. What does it mean? (And these were just the first thoughts I had when I opened my first Wills, Estates, and Trusts textbook.)

          With anything in life, to play the game effectively, you must understand the terms. I’ve found that a basic understanding puts people at ease and an attempt at advanced understanding puts people to sleep (except for your friendly family advisor who geeks out on this). So, what you need to know to fake until you make it; probate, last will and testament, trust, power of attorney, and health care directive.

           Probate. This is an often misunderstood proceeding. Generally, this a court proceeding where one person is asking the court to determine how someone else’s property should be distributed after the second person passes away. The goal of probate is to get an order from court allow for distribution of the property. This is either done according to a will or the state’s law of intestate succession. That is you die without a will or trust and the state attempts to guess at how you would distribute your property. Often, it guess incorrectly and family rivalries and old bitterness arises. 

          Last will and testament. This is a document prepared by you which distributes your property according to your wishes, allows you to select someone to represent your estate before the probate court (this person is usually called a Personal Representative), and allows you to nominate the guardians for your minor children. One drawback is that this document is not controlling until you pass away. But it is an invaluable document to have. Instead of the court guessing what it should do, a will allows you to tell the court exactly what you would like to happen with your children and property. Don’t like people making decisions for you? Me neither.

          Power of Attorney.  A document where one person gives power to act (called an Attorney in fact) on behalf of another, when that person cannot act for themselves. Generally, this requires a doctor’s determination of incapacity. The use of this document hopes to avoid Guardianship court proceeding. A power of attorney can be active as soon as it is signed, or it can spring into action with a physician’s determination of incapacity. There are legitimate reasons for either option.

          Trust. - A document which contains all of your assets and provisions for distribution of your assets. Trusts are controlling and active as soon as you sign it, unlike the will which only takes effect after you pass away. A trust allows you to manage property while you are alive and also allows for distributions while you are alive as well when you pass away. Trusts allow for some pretty cool and specific distributions which can be used to help impart your values and beliefs unto your beneficiaries.

           An additional benefit of a trust is probate avoidance. If all of your property “held” in trust, there is no need for probate. This provides access to assets immediately after someone passes away.  Probate often requires a waiting period to allow the probate court to issue an order appointing someone as personal representative before assets are available for use (this is a law that many people unintentionally break).

          Health Care Directive. Also called a Living Will or Advanced Directive. I like to refer to it as a health care directive because the terms living will and will are easily misused but have very different responsibilities. This document nominates someone to act on your behalf for healthcare purposes and allows you to make your own end of life decisions (ie life support, nutrition and hydration). With a health care directive you get to decide how your care is handled. The person appointed by you is guided by what you put in the health care directive. Your “agent” works with the doctors and helps to interpret your wishes.

           Wow! Even the basics can get heavy. But there you have it, a basic understanding of the pillars of estate planning and the court process associated with it.

Estate Plan?! I Ain't Rich!

         The term “Estate Plan” conjures up images of Scrooge McDuck swimming in his pile o’ gold or the rolling green hills of country club golf courses. So when people hear the term, have these mental pictures, realize that does not describe them, and they automatically dismiss the following conversation because it cannot possibly be relevant to them. They don’t even have a pool in their backyard, let alone enough gold to swim in.

          This is typical because the term estate planning is often misused. Not because people use it incorrectly, but because they use the most narrow interpretation of it. Generally, the most common misconception of estate planning is that it is only relevant to multi-millionaires who are planning for retirement and minimizing their tax liabilities. This description is not incorrect, yet it represents a very small category of estates.

          Estate planning is really planning for what you have, who you want to pass it to, and how you want to take care of those people you love after you pass away. A more appropriate image is that of a gift, with its own name tag of who you plan on giving it to. 

          But we already established that you ain’t rich. That’s fine, neither am I. You have much more to gift to your loved ones than just a bank account, home, or life insurance policy. What do people stand up to share at funerals? Life stories, adventures, lessons learned, and memories made with the individual that passed. Your assets are just a part of your whole estate plan. You can use an estate plan to share values, beliefs, dreams, aspirations, hopes, and stories. This sharing is usually done through one of two avenues, a living trust or a will. 

           A living trust is a document that comes into existence immediately after being signed and continues permanently, unless you decide to revoke it. It operates very much like a business as it has its own name, it can give and receive property, and after the creator passes away, it can get its own tax identification number. A trust’s key terms include who is in control of trust property, (if it is a revocable living trust, that is generally you the creator) and how to distribute your property once you pass away. This second aspect plays a huge part in sharing your values, beliefs, dreams, aspirations, hopes, and stories with the beneficiaries of your trust. Future posts will cover the different aspects of trusts in more detail.

          A will is also a document that is signed, but doesn’t come into existence until the creator passes away. This means that the demands made and the provisions contained in a will are not controlling until after death. The most common will is a simple will and unlike the trust it does not have the same characteristics of a business. A will is more simple to set up than a trust, but it is not as flexible. It is also simple to destroy, replace, or amend. Also unlike a trust, a simple will is limited in its ability to share ideas, thoughts, and values. It is more of a checklist of who gets what of your goodies. Future posts will cover the different aspects of wills in more detail.

           Estate plans are for everyone, especially people with young children. Many parents fail to plan because they falsely believe they aren’t rich enough to do so. If you pass before your children are able to know you, they won’t want the money you were able to give them. They will want the knowledge of who you were, what you believed in, and what your goals were. Do you doubt that?