What is an Estate Plan – and Who Needs One?
What comes to mind when you think of the phrase "estate planning"? You have probably heard the term, but it might not be clear what it entails or who should have one.
I'll admit to a fair amount of ignorance on the subject for much of my life: I used to assume that estate planning was something for rich people with mansions and sprawling properties, like the Biltmore Estate here in North Carolina or Hearst Castle in California. While people with significant wealth certainly use estate planning to avoid certain types of taxes, an estate plan is essential for anyone who wants to ensure their wishes are carried out after they pass away.
In simple terms, an estate plan is a set of legal documents and instructions that outline how your assets will be managed and distributed after your passing. Having an up-to-date estate plan can help ensure a smooth transition of assets to your chosen beneficiaries (and potentially avoid conflicts among family members). It can also help reduce complications for your loved ones at an already stressful time.
The central piece of any estate plan is a will, also called a last will and testament. A will designates how your assets will be distributed among your beneficiaries upon your death. It also allows you to appoint a guardian for any dependents like minor children or pets. Additionally, an estate plan may include other essential documents like a power of attorney, which designates someone to make financial and legal decisions on your behalf if you become incapacitated, and a healthcare directive, which outlines your medical wishes in case you cannot express them yourself.
For artists, writers, musicians, and creatives, estate planning takes on added significance. There may be unique intellectual property rights and creative assets that need special consideration, including protecting copyrights, royalties, unpublished works, and licensing agreements to help preserve your creative legacy. Without a comprehensive estate plan, there may be disputes over the ownership and distribution of these valuable assets, potentially leading to lengthy legal battles. As a cautionary example, Prince died without a will – and it's entirely possible that legal challenges will prevent his estate from ever being settled!
What is Estate Planning?
Creating an estate plan is not a one-time task: it requires periodic reviews and updates to reflect changes in your life, such as marriage, divorce, birth of children, or acquiring new assets. This is the difference between an estate plan (the documents you have in place right now) and estate planning (proactively monitoring & updating your estate plan over time). It is important to work with a qualified estate planning professional who can guide you through the process and help you customize your plan based on your needs and goals.
Estate planning includes determining how an individual’s assets – including both financial assets like bank accounts, investments, life insurance, and property, as well as more personal assets like family heirlooms, collectibles, or items with sentimental value – will be used, maintained, and/or distributed after death or in the event of incapacitation. It also includes deciding and documenting who should care for any dependents of the deceased, including minor children, adult children with special needs, aging parents, and even pets.
What about your intentions for the type of care you receive while living but no longer able to make decisions on your own? Naming legal & medical powers of attorney and documenting advance medical directives are also essential components of estate planning.
What is a Will?
Technically a will refers only to real property – physical parcels of land and anything permanently attached (like a house) – while a testament addresses personal property (like jewelry, automobiles, and heirlooms) & intangibles (like bank accounts, insurance, and investments). But these days we generally forgo the full title of "Last Will and Testament" and simply say "will". Your will allows you to specify who will inherit your property, such as real estate, investments, personal belongings, and sentimental items. It provides you with the opportunity to outline your preferences and ensure that your loved ones are taken care of according to your intentions.
The person responsible for administering a will is called an executor or executrix (yes, that is a real word) and is typically a family member, close friend, accountant, attorney, or financial institution. A guardian is someone named in your will to care for your dependents. Without a will, the selection of an executor or guardian may be left to the court, and the distribution of your assets may follow default rules that might not align with your wishes.
Regardless of age, wealth, or family structure, everyone should have a will in place. A will is a vehicle allowing you to express your final wishes and ensure that your assets are distributed according to your intentions. It is particularly essential for individuals with dependents: a will allows them to designate guardians for their minor children, ensuring their well-being and care. Additionally, people with specific preferences for asset distribution, charitable giving, or who wish to minimize potential conflicts among family members will greatly benefit from having a will. Regardless of your circumstances, having a will provides peace of mind, allowing you to have control over your estate and leaving a clear roadmap for your loved ones to follow after your passing.
What happens if you die without a will?
If you pass away without a will, you are considered to have died "intestate." That means the distribution of your assets and the settling of your estate will be governed by the laws of your state or local jurisdiction. These laws typically prioritize spouses, children, and other close relatives. Did you intend to leave a special heirloom to a specific relative or make a donation to your alma mater? Your state's intestacy laws might make that impossible. Without a will, you have no control over how your assets will be distributed, and it may not align with your wishes or the needs of your loved ones.
One consequence of dying without a will is that the court will appoint an administrator to manage your estate and distribute your assets according to the intestacy laws. This process can be time-consuming and costly, as the court oversees the entire process. It may also lead to disputes among family members, particularly if there are disagreements about how the estate is distributed or if certain individuals are excluded under the intestacy laws. As you can imagine, the process can be emotionally challenging for your loved ones at an already lousy time.
Furthermore, dying without a will can also complicate matters if you have minor children. Without a designated guardian named in a will, the court will have the responsibility of appointing a guardian to care for your children. Courts generally aim to act in the best interest of the children, but the appointed guardian may not align with your wishes or share your values and parenting style. By having an up-to-date will, you can ensure that your children are placed under the care of a trusted individual who understands your desires for their upbringing.
What is Probate?
Probate is the legal process through which a deceased person's assets are distributed and their final affairs are settled. It involves validating the deceased person's will (if one exists), identifying and appraising their assets, paying off any outstanding debts or taxes, and distributing the remaining assets to the beneficiaries as outlined in the will or according to the laws of intestacy if there is no will. There are specific courts just for this purpose called, not surprisingly, probate courts.
The probate process can be time-consuming, costly, and subject to public record. It aims to ensure that the deceased person's wishes are followed, creditors are satisfied, and the rightful beneficiaries receive their inheritance. However, it is important to note that wills may be contested. In some instances, a judge may agree that the terms of the will are unfair and distribute assets in a way that goes against the instructions in the will.
While the estate of every deceased person must be settled through probate, there are ways to transfer certain assets independently of the probate process. For example, life insurance proceeds bypass the probate process because they are contractually determined in advance. (That does not necessarily remove the life insurance from a deceased person's taxable estate, but it does avoid probate.) Similarly, jointly held accounts will automatically pass to the surviving account owners – thus avoiding probate. There is another tool that many people choose to keep assets out of the probate process (and sometimes out of estate taxes) called a trust.
What is a Trust?
While a will is essential for everyone, certain people may benefit from establishing a trust. A trust is a legal arrangement that allows you to transfer your assets to a separate legal entity and appoint a trustee to manage those assets on behalf of your chosen beneficiaries. It provides a way to protect and control your assets, as well as dictate how and when they are distributed to the beneficiaries. A trust allows you to set specific terms and conditions for the distribution of assets, ensuring that your intentions are followed even after your passing.
People with complex financial situations, significant assets, or a desire for greater control and privacy may decide that a trust is in their best interests. Business owners, professionals, and individuals with substantial investments can utilize trusts to protect their assets, manage their wealth, and minimize tax implications. Furthermore, families with special needs beneficiaries can establish special needs trusts to provide ongoing financial support while preserving eligibility for government benefits.
One key advantage of a trust is its ability to bypass the probate process. Assets held in a trust do not go through probate, which means the transfer of assets to beneficiaries can occur more quickly and with greater privacy. In some cases, a trust can help minimize estate taxes and provide asset protection from potential creditors or legal disputes.
There are many different types of trusts to suit a variety of objectives. A revocable living trust, for example, allows you to maintain control over your assets during your lifetime and make changes or revoke the trust if needed. On the other hand, an irrevocable trust, once established, generally cannot be modified or revoked, but it may provide greater asset protection and tax benefits. Other specialized trusts, such as charitable trusts or special needs trusts, cater to specific circumstances and objectives.
A testamentary trust is established within a will and comes into effect upon the testator's (the person making the will) death. Unlike other types of trusts that are created during one's lifetime, a testamentary trust is created through the instructions outlined in the testator's will. In other words, a testamentary trust does not avoid probate (since executing the will is part of probate), but it does allow for greater flexibility in what happens to your estate after you pass.
Assets designated for a testamentary trust will be transferred to the trust and managed by a designated trustee after the testator's passing. Testamentary trusts can be useful for individuals who want to provide ongoing financial management or protection for beneficiaries, especially if they are minor children, individuals with special needs, or individuals who may not be ready to handle their inheritance immediately.
Working with an experienced estate planning professional can help you determine the most appropriate type of trust for your specific needs and ensure that it is properly established and managed.
An estate plan is a vital tool for anyone who wants to ensure their wishes for the distribution of assets, care for dependents, and end-of-life health decisions are respected. Whether you have a modest estate or a complex financial situation, estate planning provides peace of mind and helps safeguard your loved ones' future. Consult with an estate planning professional to find out how to start the process or update your existing plans.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals reduce stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.
Investment advisory services are offered through Iseler Financial, LLC, a North Carolina domiciled registered investment advisor. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless the firm and the sender of this message are registered and/or licensed in that jurisdiction, or as otherwise permitted by statute. All views, expressions, and opinions included in this communication are subject to change. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. The contents of this communication and any accompanying documents are not to be copied, quoted, excerpted or distributed without express written permission of the author. This document is intended to be used in its entirety. Any other use beyond its author's intent, distribution or copying of the contents of this email is strictly prohibited. Nothing in this document is intended as legal, accounting, or tax advice, and is for informational purposes only.