Estates and Estate Planning

The word estate has several meanings and connotations. When concerning land, an estate is that which comprises the houses, outbuildings, grounds, and surrounding woods and farmland of a very large property, usually with an opulent mansion at its center.

In law, an estate is the sum of a person's assets, interests, entitlements and liabilities. In other words, one's net worth at any point in time.

When a person dies, his or her "gross estate" is made up of everything that was owned by the decedent, either in whole or part, minus all obligations and debts. One's "probate estate" consists only of the personal assets, which will be distributed to beneficiaries, heirs, and/or creditors as directed by a will or directed by a probate court.

The probate estate does not consist of any asset or property that is exempt from probate administration, such as a home held in joint tenancy, a life insurance policy with a named beneficiary, property held in a trust, certain retirement and pension plans, a pay-on-death (POD) bank account, etc.

What Makes an Estate?

Items in one's gross estate – and perhaps in one's probate estate – may be assets in any or all of the three main classifications recognized by the probate court, i.e. real property, tangible personal property, and intangible personal property, including:

Real estate - primary residence, second home, rental property, time shares, family farm, etc.
Business interests – sole proprietorship, partnership, LLC, patents, copyrights, etc.
Liquid assets – savings and checking accounts, money market funds, certificates of deposit
Stocks, bonds and mutual funds
Motor Vehicles – automobiles, boats, mobile homes, aircraft, etc.
Personal property – household goods, sporting equipment, jewelry, fine art, etc.
Insurance policies, particularly life insurance
Retirement benefits – 401(k), pension, IRA, Social Security, etc.
Other assets – annuities, possible inheritance, lottery winnings, etc.

Debts and obligations that diminish one's estate may include:

A mortgage
Credit card debt
Outstanding medical bills
Court judgments such as alimony or child support
Student loans
Other secured or non-secured personal loans
Future settlement costs – hospital, funeral, burial, probate administration, etc.

What is Estate Planning?

In the broadest sense, estate planning is the process of arranging one's estate in the manner most likely to acknowledge and carry out a person's wishes after death. This includes recognizing the needs of survivors and minimizing as many legal impediments and negative financial outcomes as possible.

A good estate plan provides the practical mechanisms for disposing of an estate in the most desirable, orderly, efficient and inexpensive way possible.

Specifically, an estate plan can include instructions on:

How to provide for the guardianship of surviving minor children
How funds for their benefit can be managed and distributed
How to manage assets and  property
How personal and business affairs should be conducted after one's death or incapacitation
What end-of-life medical choices are most appropriate
How one's life may be memorialized with gifts and bequests to charities, schools or foundations

Without an estate plan and the legal documents enforcing it, there is no way for anyone to carry out a decedent's intentions legally. And the lack of an estate plan is the cause of many potentially undesirable consequences: survivors fighting over the estate; a court ordering an estate's disposition based on statutes alone rather than what the decedent may have wanted or his or her heirs require; and/or enduring a lengthy and expensive probate administration that eats up a good part of an estate's assets.

Because estate planning can be a complicated process, sound, professional advice is both worthwhile and, at times, absolutely necessary. A competent financial planner, a knowledgeable realtor, an accountant, an insurance agent, and an experienced attorney may all be part of one's estate planning team, along with family members and any other interested parties.

Estate Planning Basics – Wills

A will is a legal document directing how the probate property in one's estate is to be distributed after death. It becomes the road map that the probate court, and the person named as the estate's executor, follows in administering a decedent's estate.

One of the most important aspects of a will is the naming of an executor, sometimes known as an estate's personal representative. This is the person who will receive authority from the court to pay a decedent's debts and taxes, sell or distribute the estate property and generally wrap up a decedent's affairs according to the will's instructions.

A will is used to name specific bequests. For example: "Son Paul to receive my stamp collection; daughter Judy to receive the beach condo; The Red Cross to receive $5,000, etc."

A will can even designate the distribution of property not yet owned, but expected to be owned sometime in the future. Also, as life situations change, wills can be rewritten or revoked.

Estate Planning Basics – Trusts

Like a will, a trust is a useful instrument in estate planning. A trust is a legal relationship among three parties:

A grantor, who establishes the trust and decides what it contains and how it is to be managed
A trustee, who administers it according to the terms of the trust document
One or more beneficiaries, who benefit from it after a decedent's death.

A trust can be made up of any type of real or personal property: money, real estate, stocks and bonds, personal possessions, etc.

There are many kinds of trusts and serve different purposes. In some cases they can be utilized as will substitutes, allowing an estate to avoid probate. They can also be used to provide certain tax benefits, and/or protection of beneficiaries from certain creditors. They can be simple or complex, intended for limited purposes or spanning two or more generations.

Things to consider when weighing whether to create a trust include the size of one's estate and what choices one wishes to make in determining how assets will be distributed and supervised after death, etc.

As in all other estate planning decisions, the counsel of a qualified attorney is essential in making any trust work for the benefit of all three parties – grantor, trustee and beneficiary(s).

Trusts can be "living" (established during a grantor's lifetime), or "testamentary" (established by a grantor in a will). "Revocable" trusts are those that can be changed or revoked at any time by the grantor. "Irrevocable" trusts cannot be modified or terminated. Testamentary trusts are always irrevocable since they are not even created until after the decedent has died. Their terms are spelled out in a will, along with the names of the trustees and their powers, and how their beneficiaries are intended to benefit.

Other Aspects of Estate Planning

Though wills and trusts are the best-known estate-planning tools, others are worth considering. Among them are:

Durable Power of Attorney (DPOA):  authorizes an individual to act as attorney-in-fact, on behalf of someone who becomes disabled or incapacitated
Guardianship: provides for the care and custody of a person who needs protection, such as a disabled person or minor child
Advance Medical Directives (AMDs): address a variety of medical, legal and ethical issues related to serious illness and/or end-of-life situations
Directives concerning autopsies, burial and cremation
Ethical Will:  a non-binding document designed to pass on values, beliefs and lessons learned to one's survivors
Pre-nuptial Agreements: establishes binding contracts between spouses concerning the disposition of individual estates; generally employed by partners in second or subsequent marriages who have children from earlier unions
Life Insurance Policies: names beneficiaries who will receive pay-outs upon the death of the insured
Joint Tenancy: property that is owned with someone else who has rights of survivorship; can cover real, tangible and intangible property
Pay-on-Death (POD) or Transfer-on-Death (TOD) bank or brokerage accounts – makes assets available to a named beneficiary upon death of the owner

While very few of us live on estates, virtually all of us have estates that will live on after us when we die. To oversee their disposition, as much as possible, it is necessary to understand how they are comprised and how to plan for their funding and administration, both when alive and afterward.

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