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Today, let us look at Estate Planning, the third item on the personal finance checklist. This is one area that is neglected by many people. I will admit that I have not done it yet – however, it is on my to-do-list for this year.
Here is my intent with this post – to help you get familiar with the overall process at a high level and legal terminology, things to be aware of, things you need to consider, and the next steps you should be considering with the help of an estate planning attorney.
If you were to die today, everything that you own becomes part of your estate.
No Will Scenario
If there is no Will, the probate court process will oversee that your estate assets are used to pay off your outstanding debts. What is left remaining in your estate would be distributed to your family in accordance to the state law.
The probate court judge will decide who will get your property and who will get custody of your children if they are minors, according to the state law. You may not agree with either decision the judge makes. You could avoid both scenarios by writing a simple Will.
If you have a simple Will, the probate court process will oversee that your estate assets are used to pay off your outstanding debts. Whatever is left remaining in your estate is distributed according to your Will. If you have children that are minors, then the guardian listed in your will be given custody of your kids.
As I mentioned before, when you die, everything you own becomes part of your estate. If you have a Will, the probate court process will oversee that your estate assets are used to pay off your outstanding debts. Whatever is left remaining in your estate is distributed according to your Will.
With a simple Will, you can specify the following:
#1 Executor – person who would be your representative / administrator and works with the court through the probate process with help of an attorney, pays off outstanding debts, and distributes what is left as specified in the Will.
#2 Guardian for your children if they are minor
#3 Trustee – name person who will manage your assets until your children turn 18 and then hands it over to them. If you are not comfortable naming an individual, you could name a bank as a trustee. The guardian could be named as the trustee as well. Whether you name the Guardian and Trustee the same or keep them separate if purely a personal decision.
#4 Name who gets what from your assets
#5 Who gets your pets etc.
The best time to have a simple Will written is before 50 years of age. If you are healthy and doing well, a simple Will could take care of almost everything you intend for your family, with exceptions for unique circumstances, of course.
For about $35, you could create a Will online at Nolo. Nolo has been around for 40 years and has been commended for its excellence by NY Times, USA Today, and Yahoo!
It would be prudent on your part to use Nolo to create a draft of your Will and then consult an estate planning attorney to review it before you finalize it.
Here is an important thing you need to know – a Will does not bypass the probate process. Your estate will still need to go through your state’s probate process – so the assets may be frozen up to six months or a year until the probate procedures are completed. Probate process expenses typically wipe out about 5 to 7 percent of your estate.
As stated earlier, a simple Will does not bypass the probate process. So your assets are frozen for anywhere from six months to a year and probate costs wipe out about 5 to 7 percent of your estate. A living trust helps you completely bypass the probate process.
You can set up a living trust and bypass the probate process – this means your beneficiaries get access to your assets faster in most cases rather than waiting for six months or longer without probate court costs.
Generally speaking, Living Trust is a more efficient way to distribute your assets than a Will.
Here is the basic outline how you go about it:
#1 Trustor – if you are creating the trust, then you are the trustor; also referred to as Grantor or Setler.
#2 Trustee – if you are going to be managing it, then it is obviously you.
#3 Successor Trustee – this is the person who becomes the trustee when you die and will be the one who distributes your assets. Typically spouse or a responsible son / daughter who is an adult, or a close and trusted friend is named as Successor Trustee.
#4 Name the beneficiaries and what they would receive from your trust.
#5 Name the person who would manage properties for your minor children until they become adults.
#6 Notary Public – once the Living Trust document is prepared, it must be signed in front of a Notary Public.
#7 Transfer – for the trust to go into effect, all the assets / property should be transferred into the name of the trustee using the proper documents – you can transfer property, bank accounts, brokerage accounts etc. into the trust as well by using the right set of documents.
For about $55, you could create a Living Trust at Nolo. The best route to take would be to use Nolo to create a draft of your Living Trust and then consult an estate planning attorney to review it before you finalize it.
For estate planning, I recommend that you go through an attorney. It is always a wise thing to do your own research and get all your basic paperwork draft done by using something like Nolo and then meet with an attorney. This way you are familiar with the process and the money paid to an attorney is well spent.
One of the main things that a Living Trust does not do is allow you to name a guardian for a child. You would still need a Will to do that.
To be clear, a Living Trust is not a replacement for a Will. A Living Trust provides a way to transfer property to your beneficiaries privately bypassing the probate process.
One thing to note is that you are never going to be able to transfer everything you own into your trust – that almost never happens. You may buy something right before you die.
Once the Living Trust is set up, it is good to back it up with a simple pour-over Will. Whatever property you own that wasn’t transferred to your trust before your death will be poured into your Trust. The main thing to note is that the pour-over property must go through the probate process.
As mentioned earlier, if you have minor children, you will need a Will to assign a Guardian. A Living Trust does not allow for assigning Guardians to minors.
Start out with a Simple Will early in your life. As you age and accumulate assets, set up a Living Trust. Finally update your simple Will as necessary and add the pour-over clause to serve as a back up.
(I am not an attorney. This post has my thoughts and opinions and must not be considered legal advice. Always consult an estate planning attorney for advice.)