Summary
- Estate planning is the process of planning what will happen to you and your estate after you pass away
- Your estate includes all your assets and debts
- Probate is the legal process of settling an estate
- There are common problems that arise when settling an estate,
- And Wills and Trusts are common tools used to address those problems
- You should consult with a legal professional to make your estate plan
What is Estate Planning
Estate planning is the process of legally planning what you want to happen to your estate in the event of your death. Estate planning involves
- Creating instructions for the distribution of your assets, property, and belongings
- Providing instructions related to your end-of-life medical care
- And declaring who will care for your minor children
The Basics of an Estate
Your estate includes everything you own, which may include:
- Real estate, including your primary residence if you are a homeowner
- Vehicles, jewelry, art, housewares, etc.
- Financial assets such as bank accounts and investments
- Any businesses you own
- Intellectual property
- Digital assets, such as domain names or websites
Your estate also includes your debt, for example:
- Your remaining mortgage balance(s)
- Personal loans (car loans, credit card debt, etc.)
- Business debts
The total net worth of your estate is the remaining value of all your property after subtracting all your debts. After debts have been satisfied, remaining assets are distributed to heirs according to instructions left by the deceased in their estate plan. Typically, the order in which debts are paid off after an individual’s death is:
- Court fees, executor fees, and other costs associated with settling your estate
- Secured debts like mortgages and car loans, often a home or car will be sold to satisfy the debt
- Funeral/memorial expenses
- Remaining debt, such as credit card balances, medical bills, etc.
If the value of the estate cannot cover the debt owed, the estate is considered insolvent. While any remaining debt is not inherited by heirs, an insolvent estate could mean there is little to no inheritance for heirs.
An Explanation of Probate
After somebody dies, their estate needs to be settled and distributed via a legal process called probate. Probate is the formal legal process that ensures the deceased’s estate is settled and distributed in accordance with any instructions left by the deceased and with state and federal law.
The probate process is public record, time consuming, and can be expensive for the estate. There are ways to avoid the probate process, more on that below.
Common Estate Planning Problems to Avoid
First, if you don’t arrange any estate plan prior to your death, your estate will be considered in a state of ‘intestacy’ when you pass away. Without a will or a trust in place to distribute your assets, they will be settled and distributed in accordance with the laws of intestate succession (which vary by state). This may result in:
- People receiving inheritances you did not intend
- Minor children being assigned a legal guardian that doesn’t align with your wishes
- Loss of tax strategies. There are aspects of estate planning that minimize or eliminate estate taxes, failure to plan may result in steep estate taxes after your passing
- Whenever somebody dies in a state of intestacy, their estate will go through the probate process, which can be time consuming and expensive, and is public
Even in scenarios in which the deceased has made estate plan arrangements, there can be problems. Thorough estate planning can mitigate or eliminate these potential problems:
- Potential for disagreements between heirs
- Heirs may act irresponsibly with their inheritance
- Appointed guardians of minor children may rely on inherited financial support
- Children (or adults) with special needs may need extra care from an appointed guardian – and funds passed to them may have unintended consequences on the dependent’s government benefits
- There may be expensive estate taxes
Types of Estate Plans
There are two common types of estate plans: wills and trusts.
A will is a legal document outlining how to distribute the assets of an individual’s estate after their passing.
- Wills allow for custom distribution of assets to designated beneficiaries or charities of your choosing.
- Wills also allow you to choose a specific guardian(s) for your minor children.
- When creating a will, you name an executor; an executor is somebody you trust to settle your estate and distribute assets according to your instructions.
- One advantage to a will is that you can update or change your will at any point while you are living and able to do so.
- One downside to a will is that they must be validated via the probate process. As mentioned above, the probate process can incur court costs and other legal fees which can reduce the value of the estate, and the details of the estate become public record.
A trust is a legal document outlining how one party (the trustee) holds and manages assets for the benefit of another (the beneficiary).
- Often used in estate planning, trusts can be used to distribute assets to beneficiaries after the trustee’s passing. Just like a will, a trust allows for custom distribution of assets to designated beneficiaries or charities of your choosing, with the added advantage that you can build in specific conditions for how and when assets are distributed. For example, you can specify that a minor child receives their inheritance when they reach a certain age or accomplish a specific goal.
- Trusts also allow you to choose a specific guardian(s) for your minor children, and allow for tailored solutions to provide for beneficiaries with special needs.
- Some types of trusts offer protection from creditors.
- One advantage to a trust is that trusts do not go through the probate process and are not made public record.
- One disadvantage to a trust is that it can be complex and costly to setup.
- Some types of trusts can be altered during your lifetime, others cannot.
There are also testamentary trusts, which is a type of trust that is created according to the instructions of a will when an individual passes away. They do not avoid probate the way other trusts do.
Whether a trust or a will is right for you, there are important considerations to be made. We recommend consulting with a legal professional in your state of residence to make your plan.
Important Disclosures:
LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A. an affiliate of LPL Financial.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.