Estate Planning Traps

Now that you' ve signed your will, trust, durable powers of attorney and medical directives, you're done with estate planning, right?

Wrong. There still is lots to do. If you created one or more trusts, you may have to fund the trusts, that is, transfer any assets into them that need to be put there. A trust is like a basket. When you first buy the basket, it's empty. Only when you put things into the basket does it do what it was meant to do. It may be that your trust is designed to remain unfunded (empty) until death, in which case you don't need to transfer anything to it. But if it was meant to be funded, you still have work to do.

Every year review your estate plan to make sure the beneficiary designations are correct and everything is as you want. Every three years you should sit down with your estate planning professionals (accountant, attorney, financial planner, etc.) and review your entire plan. If your situation changes drastically, such as a divorce, new child, sale of home, change of job, meet as soon as that occurs.

By doing these things, you can avoid the trap that your estate plan doesn't do what you intended it to do.

The Estate Planning Team

Estate planning isn't the sole province of lawyers or financial advisors or accountants or any one person. To create a solid estate plan, you need advice from people with training in the law, finance, taxes, and insurance, to name a few. For example, a lawyer can set up a trust, but a trust is just an empty basket into which you put things. Those things are financial assets. To know what things to put into the basket, you need help from financial planners (or you need to feel comfortable that you can do it yourself). What you put in the basket might have tax consequences, either now or when you die, which is why you might need an accountant or tax professional. You might also decide to make the trust the beneficiary of a life insurance policy, so you would need to talk to an insurance specialist. Don't make the mistake of thinking you can do it all yourself or even with the help of one or two advisors. If one of your advisors tells you he or she can do it all, maybe it's time for a new advisor.

What is Estate Planning?

Most people have heard the term "estate planning", but what does that mean? Is it only for the ultra-rich who need to protect their assets from the IRS? Does the average person need estate planning?

Estate planning is often defined as the process by which the assets that one has accumulated over his or her life are disposed of, either at death or during their lives, in a manner consistent with their wishes and in such as way as to minimize taxes, if any.

Everyone has an estate plan. If they don't have a will or a trust, the state has made a will for them. It's called the intestacy laws. "Intestacy" or "intestate" means simply "without a writing". A person who dies intestate has died without a writing (will) that disposes of his or her property. In that case, the laws of every state specify where the property goes. Sometimes, that might be to a place or person other than the person would have chosen. So everyone who owns anything should have a will.

A will is a writing document that conforms to certain legal requirements, such as being signed and witnessed and having the signer's and witnesses' signatures notarized. The laws vary from state to state. In the document, the person sets out how he or she wants her property to be divided. A will is effective only upon death and can be revoked at any time before death. After death, the will has to be probated, which is a legal process that determines what the person owned at death, who the person owed money to at death, and who is entitled to what remains after the debts are paid.

Many people want to avoid probate, which can be done by a variety of techniques. In later posts we'll consider some ways to avoid probate.