The Basics of Estate Planning

Every now and again, it’s helpful to go back to the basics.  This blog will go back to the basics of estate planning to talk about how and why everyone should have an estate plan.  Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.

No matter how BIG or small your net worth is, estate planning is a process that addresses how and to whom you leave your assets when you die and names decisionmakers who will wind-up your affairs at death and make financial, medical or personal decisions for you if you cannot yourself.

An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:

  • Your car
  • Your home
  • Financial accounts
  • Investments; and
  • Personal property.

Part of estate planning is deciding which people or organizations are to get your possessions or assets after you’ve died.  This includes determining how to give it to them, and that plan addresses concerns such as marital status of the beneficiary, how they are with money, addiction problems, taxes and so on.

It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.

This is a very important aspect of estate planning, and you can learn more here:  https://galligan-law.com/power-of-attorney-why-it-is-important/

One of the biggest reasons people don’t have an estate plan is they assume they have no “estate” to be concerned with.  It might be true they don’t have much money, but everyone should consider naming individuals to act for them if they become incapacitated, ill or otherwise need help making decisions.

It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.

You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.

All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan covering these three basic areas.

Reference: Forbes (Nov. 16, 2022) “Estate Planning Basics”

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Is Spouse Automatically Your Beneficiary?

People make a grave error when they don’t have an estate plan because they think their surviving spouse is their automatic beneficiary.  The laws of intestacy work differently, as explained in a recent article “Estate Planning: The spouse doesn’t always get everything” from nwi.com.

The surviving spouse doesn’t always receive everything under the intestate laws. This often comes as a surprise to people. In estate administrations without a will, I’m often told the decedent didn’t have a will because “it all goes to the wife anyway” or sometimes even “it all goes to the kids” (but that’s a different blog).

In many states, one half of the decedent’s estate assets are distributed to the spouse and the other half are distributed to the decedent’s child or children.  Similarly, many states have provisions where some property is divided between spouse and decedent’s parents if there are no kids.

To make this a bit more complicated, Texas has community and separate property.  Community property is marital property, and separate property comes from outside of the marriage, such as inheritance from that spouse’s family, a gift or something they distinctly brought to the marriage such as their home.  Separate property is treated differently in intestacy.

If a married couple lives in the separate property residence of a spouse who then dies, the surviving spouse gets a life estate in 1/3 of the property and the children take the rest.  It basically means the spouse stays in the house, but the house ultimately goes to the kids.  This essentially creates a division in which the spouse is expected to pay for some expenses, and the children for the rest.  It tends to be an unhealthy dynamic, to say the least.

Bear in mind the intestate laws only apply to assets in an estate administration.   Assets that pass by contract, such as life insurance to a named beneficiary or an account titled as joint tenants with rights of survivorship pass to those individuals.  This solves part of the property, such as bank accounts, but won’t solve the problem for everything.

I should note too that many people assume everything goes to the spouse because that’s what most people choose in their estate plans.  Practically things do go to spouse, but it required the estate plan to make it happen.  People see the common result and make an assumption on the process.

If you’d prefer to leave more to your spouse, you need a will. Intestacy literally translates to dying without a will. If you have a will and then die, you haven’t died intestate, and the provisions don’t apply.

The key in estate planning is to recognize you have a choice.  If you want everything to go to your spouse, don’t assume it’ll happen. Make it happen in your estate plan.

As one final aside, people also assume spouses can act for them if they are incapacitated.  That also isn’t automatically true and may require guardianship if estate planning doesn’t address it, although a power of attorney may avoid that need.  See here for more:  https://galligan-law.com/do-you-need-power-of-attorney-if-you-have-a-joint-account/

Each state has its own laws of intestacy, so an estate planning attorney who practices in your state needs to be contacted to determine what would happen to your spouse if you didn’t have a will. Your best recommendation is to meet with an experienced estate planning attorney and create a plan to protect your spouse, your children or your chosen beneficiaries.

Reference: nwi.com (Oct. 23, 2022) “Estate Planning: The spouse doesn’t always get everything”

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Keeping Beneficiary Designations Up to Date

If you don’t know who your beneficiaries are, then it’s time for a beneficiary designation check. Even if you think you remember, every now and then, they should be checked, according to an article “Are your beneficiary designations up to date?” from Community Voice.

It has become very common for estate plans to be largely controlled through beneficiary designations.  Many people accumulate wealth in 401(K)s or IRAs which pass to named beneficiaries, or clients add named beneficiaries at the suggestion of a banker to avoid probate.  With so many beneficiary designations controlling so many accounts and so much wealth, it’s critical to make sure they reflect your wishes.

I even had a law school professor who suggested one of the worst estate planning mistakes was failing to address beneficiary designations!

Your choices may change with time. When did you open your very first IRA? Do you even remember when you purchased your life insurance policies? If it was back in the 1990s, chances are good the people in your life have changed, as well as your priorities. Your kids are likely grown, or maybe you have more of them!  Maybe one of your beneficiaries has developed some bad habits, and you want to control how the money will impact them.  There are lots of reasons beneficiary designations don’t fit anymore.

When we first filled out the beneficiary designations, we were all confident they’d be the same forever, but time and life have a way of changing things. In five, ten or twenty years, big changes may have happened in your life. Your beneficiary designations and your estate plan need to reflect where you are now, not where you were then.

The best way to address beneficiary designations is reviewing them with your estate plan annually.  If you’re still working, your employer may have changed custodians for your retirement plan and your insurance policy. When a new custodian takes over, sometimes beneficiary designations can get lost in the change, that has happened many, many times.  I’ve also seen companies say they won’t honor beneficiary designations because of internal policy changes.

Life events can also affect your beneficiary designations.  Did you get divorced?  I’d imagine you don’t want your ex as the beneficiary of your accounts.  Do you have minor beneficiaries?  You want to name a custodian of that money in the account plan as part of your designations, otherwise your loved ones are headed to guardianship court.

If you don’t have a beneficiary designation on these accounts, or any account where you have the option to name a beneficiary, you may have a bigger problem. The tax-focused part of your estate plan could be undone if you thought your 401(k) would go to your spouse but your spouse predeceased you.

What’s the best way to handle this?  Make sure your designations coordinate with your estate plan.  What most people don’t realize is that whatever choice you make on the beneficiary designation overrides anything in their estate plan because it passes right to that beneficiary.  That sounds good, but notice most of the problems I’ve recounted are because your circumstances change, or contingencies aren’t adequately planned for.  You also have no control over the contingencies if a named beneficiary should pass away and you failed to address it in the designations.

Your estate plan can cover all of this, which is why directing assets to your estate plan via beneficiary designations might be a great idea.  Everything will go to the persons you intended, but the estate plan will help bypass all of these problems.

Moral to the story, don’t rely on beneficiary designations and make sure you keep them up to date and coordinating with your estate plan to ensure your assets pass to your beneficiaries as you intended.

Reference: Community Voice (September 30, 2022) “Are your beneficiary designations up to date?”

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