The Key Elements of an Estate Plan

Execute a plan that spares loved ones confusion

Why plan your estate?

The knowledge that we will eventually die is one of the things that distinguishes humans from other living beings. At the same time, no one likes to dwell on the prospect of his or her own demise. But if you, your parents or other loved ones postpone planning until it is too late, you run the risk that your intended beneficiaries – those you love the most – may not receive all you would hope.

We should begin a discussion of estate planning with a consideration of what “estate” and “estate plan” mean. An “estate” is simply everything a person owns: bank accounts, stock, real estate, motor vehicles, jewelry, household furniture, retirement plans, life insurance. 

An “estate plan” is the means by which the estate is passed to the next generation. This can be accomplished through a variety of instruments. Most retirement plans and life insurance policies pass to named beneficiaries, chosen when you take out the policy or at a later date. Property that is jointly owned passes to the surviving joint owner. Trust assets are distributed according to the terms of the trust. Property held in an individual’s name alone comes under the instructions laid out in a will, or in the absence of a will, under the rules of “intestacy” set out in state law.

Benefits of an estate plan and problems to minimize

Problems often arise when people don’t coordinate all of these methods of passing on their estate. To take just one example, a father’s will may say that everything should be equally divided among his children, but if the father creates a joint account with only one of the children “for the sake of convenience,” there could be a fight about whether that account should be put back in the pool with the rest of the property.

A well-drafted estate plan also permits you to save as much as possible on taxes, court costs and attorneys’ fees. Most importantly, it affords the comfort that your loved ones can mourn your loss without being simultaneously burdened with unnecessary red tape and financial confusion.

“Problems often arise when people don’t coordinate the various methods of passing on their estate.”

All estate plans should include, at a minimum, three important planning instruments: a durable power of attorney, a health care proxy and a will. A durable power of attorney allows you to designate someone to manage your property during your life, in case you are ever unable to do so yourself. 

wooded lake in northern michigan
Last Will & Testament

The will is for the management and distribution of your property after your death. A will needs to be administered by the probate court, making your affairs public and possibly increasing costs and delays.

If you do not have an estate plan, your estate will be distributed under the rules of intestacy. This is handled by the probate court like a will, but the state decides who gets your estate, not you. These direct that what you leave goes to your nearest relatives, whether that’s your spouse, your children, or your nieces and nephews. That works for most people, but not for a lot of people – and fewer every day. Less and less do we live in the standard family model of a mother, a father and two or more children. More and more children are raised by single parents, lesbian and gay parents, and by grandparents. Over the last few decades, the number of children living in a household headed by a grandparent has skyrocketed, and in 2010 was estimated to be nearly 5.4 million, or 7 percent of all grandchildren. Anyone in an atypical situation needs a carefully considered estate plan.

Durable Power of Attorney

For many people, the durable power of attorney is the most important estate planning instrument – even more important than a will. A power of attorney allows you to appoint another person – your “attorney-in-fact” – to step in and manage your financial affairs if and when you ever become incapacitated.

What happens if there is no durable power of attorney? Without it, a family must wait for a court to appoint a conservator or guardian to manage the incapacitated person’s affairs. That court process takes time, costs money, and the judge may not choose the person that the individual would have preferred.

In addition, once a guardianship or conservatorship is in place, the representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney. 

Health Care Power of Attorney

The health care proxy, called a durable power of attorney for health care in some states, appoints another individual to direct your medical care if you are ever unable to do so yourself. The health care proxy should include or be accompanied by a medical directive (also known as an advance directive) providing guidance to your health care agent.

Lake Michigan from Traverse City
Revocable Trusts (a/k/a Family Trusts and Living Trusts)

Revocable trusts allow you to retain control of your property during your lifetime and to distribute your estate as you choose after your death. A family trust does not have to go through the probate court, so the costs and delays are minimized. A living trust also keeps your affairs private. Creating a trust allows you to protect your estate for children who might be at risk of losing the benefits of your hard work. The most common problems are divorce, addiction, or simply poor financial management skills.

Most people will not need a trust for tax purposes. The amount that a couple can pass tax free is over $20 million. The tax free amounts were much lower two decades ago when I started practicing, they were less than $700,000, so many clients saw a significant tax savings. Now, the reasons for a trust are generally to avoid probate and to protect the estate for heirs.

Special Needs Trusts (a/k/a Supplemental Needs Trusts or Medicaid Trusts)

Special needs trusts are mostly used in two situation. First, a parent with a disabled child creates a trust to protect the child’s inheritance and to preserve the child’s government benefits; this is know as a third-party special needs trust. Second, a disabled adult receives assets that would eliminate eligibility for government benefits, so the disabled adult creates a special needs trust to hold the assets and prevent the elimination of government benefits; this is know as a first-party special needs trust.

The main difference between the two types of special needs trusts is that a first-party special needs trust must payback the government for benefits received by the disabled adult. The heirs only receive a share if the trust assets exceed the total amount of government benefits received; a rare occurrence. There is no payback requirement for a third-party special needs trust.

Lady Bird Deeds

Lady Bird deeds were created for a specific problem with Medicaid planning; a house in a trust would disqualify most applicants from Medicaid benefits. But, taking the house out of a trust forced the house through probate, which most people wanted to avoid. So, a transfer on death deed was created; this type of deed became known as a Lady Bird Deed because Lady Bird Johnson was used in an early example explaining the planning. It is an urban myth that Lady Bird and Present Johnson used a transfer on death deed in their estate.

Lady Bird Deeds are now commonly used in regular estate planning. They are simpler and cheaper than a trust. They also transfer the property faster than a trust. For clients whose assets consist of assets with beneficiary designations, joint assets, and real property, a Lady Bird Deed is often the right planning.

Lady Bird Deeds allow a home to pass to your heirs outside of probate, without the need for a trust. The deeds act like a beneficiary designation on a life insurance policy or bank account. When you pass away, your heirs file your death certificate at the register of deeds, and they receive title to the property.

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One size does not fit all

Estate plans change based on the different circumstances of each family. There is no universal plan that is best for every person. Because each family is unique, it is important to consult with an estate planning attorney to discuss your options.