Read an Excerpt
We The People's Guide to Estate Planning
By Ira Distenfield
John Wiley & SonsISBN: 0-471-71667-7
Chapter OneWhat Happens When Somebody Dies?
Death is a costly event. Just when you think living is expensive, consider dying. Without going into the details of funeral preparations, burials, and the cost of getting a person to rest in peace-which generally costs more than $6,000-plus end-of-life medical care, death itself trips a sequence of events that can cause unnecessary agony and frustration for a family. If you die without a will (called dying intestate), or problems emerge understanding your will or living trust and the distribution of your assets, your estate (that is, your stuff or assets) will end up in probate, a court process of distributing those assets. The value of your estate will diminish considerably in this expensive and time-consuming process. And you won't have much left over to give to your family. You may have nothing to pass on to your survivors, even if you considered yourself rich before you died.
This scenario is one you want to avoid. We hope to show you through this book that no matter how much (or how little) you own or owe, wills and living trusts are useful family planning tools. Wealth is a relative term, and an inventory of how much you already own or are responsible for-including children under your care-might surprise you. If you die tomorrow, how well would your family be prepared? Death has both administrative and emotionalconsequences; by minimizing these inevitable burdens you can save your loved ones undue distress. If you have ever had to deal with a death in your family, you may know what we mean. Chances are, you have a lot to protect physically, financially, and emotionally.
Look around you and think about all that you have accumulated thus far in your lifetime. You have worked hard to get to where you are today. You continue to work hard for yourself and your family. You set goals and achieve them, and you keep planning for you and your family. But as much as you carefully plan your future every day on small and large scales, having a will or living trust in addition to these plans can significantly complement your life. Think of wills and living trusts as the master keys to your lifetime goals. They are the means by which you protect your most precious possessions, people included.
According to a national survey conducted by the AARP, probate costs run on average 2 to 10 percent of a person's estate. But on a $300,000 estate, that can still cost $6,000 to $12,000. And in some cases, the costs can go much higher. Large estates obviously have a lot to lose; but the smaller your estate, the more you have to lose-because less will be left to pass on to your loved ones.
An honest and revealing look at what happens when somebody dies, the focus of this chapter, begins our journey into estate planning (defined on page 12). While estate planning is generally a topic people don't like to discuss or think about, having the courage to plan for the what-ifs and sure things (because no one gets out of this world alive!) is the best way to make your family's future safe and secure.
The High Cost of Dying
Funerals and memorial services are daily occurrences. Unlike weddings and baby showers, however, they typically are not planned well in advance and are accompanied by grief, shock, and sometimes utter despair. But they can require the same amount of resources and effort as weddings and other grand events. You probably have an idea of what a wedding can cost these days (a lot!), but do you know how much it costs to die?
The average American funeral costs roughly $6,500. A full-service funeral with a viewing (a funeral service that allows survivors to see the embalmed body of the deceased, usually in an open casket) can cost upwards of $20,000. This does not include burial or cremation (nor the burial plot that can run more than $25,000 in some towns!). This does not include the emotional and physical cost of dealing with a death and moving the family forward. And this also does not factor probate fees into the equation, which can eliminate one's fortune-big or small-in a blink, but take years to resolve officially. So your family is left with nothing but expenses to pay for getting you to rest in peace.
To understand the impact of dying without a will or living trust, we want to show you how one family's arduous struggle through the probate process resulted in a devastating, almost unbelievable loss, to everyone. This is an unusual story that does not reflect most families' situations, but because of its extremes, it sets an example of what can happen when good plans go bad. The story starts with a very wealthy couple with riches beyond most people's dreams. The couple's family-including extended family-became so divided over the couple's dream-come-true assets when they died, that the litigation over the estate languished in the courts for more than a decade. Once the probate court took control to settle all the disputes involved, little remained to be distributed. The following is based on a true story:
Following the American dream, Willaim and Emma Banks bought real estate in Malibu, California, a long time ago-long before it became choice real estate. Their land covered 3.4 acres on beachfront property, and by the early 1980s, they believed it was valued at more than $10 million. In 1983, the Banks created a living trust funded by their Malibu property. Through this trust, they intended to leave $1 million to their daughter; $300,000 to a personal friend; $200,000 to a cousin; $100,000 to each of their seven great-grandchildren; and the remainder to the principle beneficiaries, their four grandchildren. The trust would not get distributed, of course, until all debts, taxes, and administration expenses related to the property had been paid.
Sounds like a lot of money. Sounds like the Banks could not have done better for themselves nor planned better for their family. Unfortunately, the story doesn't have a happy ending. After William and Emma passed away in 1987 and 1988 respectively, managing their estate and executing their wishes proved harder than they planned in their living trust. When complications arose out of the sale of the Malibu property, the beneficiaries of the trust got tired of waiting and took their frustrations to court. The only way to settle the disputes was to go to the probate court, which punctuated the beginning of a long and costly end.
How long did it take for the beneficiaries of the trust to get their money? By 2001-13 years after Emma died, lawsuits related to the estate were still moving through the probate court. All the meanwhile, the estate-which once had been worth millions-had dwindled to the point that there was not enough to distribute per the Banks's wishes. All that remained were angry family members (but happy lawyers) who never talked to one another again. Imagine how hard William and Emma must have worked their entire lives to maintain their land and prepare for its proceeds to benefit their descendants.
Bottom line: If you do not plan your estate as best you can with a will or living trust before you die, then your family may not receive all that you had intended them to receive. Your family may be left with hard decisions to make, more expenses to pay to help settle your affairs, and a long, drawn-out process that fails to distribute your assets in a timely manner. With a will, you can tell your family who gets what and when. You can also name guardians for minor children. You can do a lot more, however, with a living trust that is designed to avoid the probate process, distribute your assets quickly, and minimize taxes through built-in features (as we will see with an AB living trust).
You Don't Have to Be Rich
A huge misconception about wills and living trusts is that they are documents for wealthy people to worry about, but not for the average Jane and John Doe. As stories of heirs and heiresses splash the covers of magazines, you continue to make ends meet through hard work and deft planning. You worry about how you are going to send kids to college, pay for renovations on your house, stay healthy, finish paying off your car loan and mortgage, get out of debt, lose 10 pounds, and make enough money to retire someday. If you worry about these things, you are normal. But you do need to think about a will or living trust, too. Despite what you might think, a modest family with minimal assets has a lot to protect.
What Is Estate Planning?
In the simplest terms, estate planning involves two actions while you are still alive:
1) Putting in writing the names of the people you would want to take care of your children, your finances, and your health care if you couldn't do so anymore (and telling them what you would want them to do); and
2) Using the appropriate legal documents so that in case of death or complete disability, the money and things you've worked so hard to acquire go to whomever you wish instead of being divided among family according to state law.
Estate planning can be an extremely lucrative business for savvy attorneys, financial planners, accountants, and the like. It's lucrative for these professionals both before you die (fees for setting up wills and trusts) and after you die (fees for managing what you leave behind). If estate planning intimidates you because you picture suited professionals and believe only they can do it for you, reconsider this view. Minimizing the cost of your death entails doing as much planning as you can before you die, as well as being informed about your options and the ways in which you can plan successfully. There is nothing wrong with creating your own will or setting up your own living trust without the help of an attorney. An experienced legal document assistant can help you navigate the language and terms you need to use to create good documents. An expert in tax laws and accounting can help you deal with tax issues and planning your estate accordingly.
Gaining knowledge and seeking competent advice are the keys to good estate planning. The more you know and the greater your foundation in estate planning techniques is, the better you can seek outside help with confidence. You'll know what to ask and how to take action on any advice you receive. Estate planning you do on your own pays off when you seek the help or advice from a professional and can tell the difference between a good one and a notso-good one.
What Is an Estate?
The word estate confuses a lot of people. And the notion of estate planning leaves much to the imagination. Instead of picturing Beverly Hills and East Hampton mansions, butlers, and vast vineyards, think of your estate as everything you own and owe. Think of estate planning as financially preparing your assets and liabilities for when you are no longer alive. Everyone has an estate, no matter how big or small. Everyone has a right to set forth plans for his or her estate, too. Surprisingly, the least-complicated task to preparing one's death-the writing of a will, no matter how archaic-is only done by one-third of Americans. What happens to the other twothirds of Americans who die without a will? Their families hopefully work together to deal with their beloved's body as the deceased would have wanted and pray no disputes arise over their beloved's estate. Either way-disputes or not-the probate court may control the process.
The death of a loved one is always sudden. If you were to go today, your family would have to deal with a lot of logistical stuff before even getting to your last will and testament (assuming you have one). Such logistics can include notifying family members and friends, physically moving your body from the place of your death to a funeral home; planning a funeral and memorial service; and carrying out organ, tissue, or body donating arrangements. Finding your will or letter of instruction is farther down the checklist. (We'll see how letters of instruction differ from wills in the next chapter.) You should hope that your family members, and in particular your named executor, find your will and letter of instruction at some point, in case you've made clear how you want your final arrangements done and it's not too late to carry out those wishes. Examples: You want to be cremated and have your ashes scattered over the ocean. You want Uncle Emil to give a eulogy. You don't want your Chihuahua to get into the hands of little Susie.
What Is a Will?
Simply put, a will is a statement that indicates your desire about the distribution of your wealth following your death. Don't let the word "wealth" intimidate you, either. Wealth is a relative term and can mean whatever you want it to mean. Whatever you've accumulated in your life thus far-by inheritance, luck, or hard work-is your wealth. Your wealth can equal a few used books, $100, and a rock collection; or it can equal a 10-acre parcel of land, a million dollars, and a country home. Later in this book we'll help you take inventory of your wealth so you have an idea of what you need to divvy up for purposes of your will.
A will not only gives you decision-making control over who gets what, but it also gives you control over how and when they receive it. It conserves and distributes your assets and money according to your wishes, it names guardians for your minor children, and generally minimizes the chances that things get screwed up. Wills, however, could be subject to probate. In other words, having a will alone cannot protect your estate from the probate process. This is why living trusts are important vehicles for transferring wealth.
What Is a Living Trust?
A living trust is the alternative to a Last Will and Testament that must go through probate to be proved. The nature of a living trust eliminates the probate process.
Trusts in general can be difficult concepts to conceive because they are not easy to visualize. When you think of a will, you picture a piece of paper with instructions written on it. But when many people think of a trust, their minds draw blanks. Is it a piece of paper? A bank account? A safe deposit box? Something mysterious inside a safe deposit box? Can you physically touch a trust? People also wrongly assume that trusts are created for the purposes of financially protecting children or for setting up a child's financial cushion for his or her future (trust fund baby). Not so. Trusts are for single people and families alike.
In basic terms, a trust is a relationship between people and property. One person (the trustee) is given legal ownership of assets to be managed or invested for the benefit of someone else (a beneficiary). Trusts are private contracts or agreements but are recognized by the laws and courts as independent legal entities-like people or corporations.
There are many different kinds of trusts. A trust may be created when you die (through your will). Or, a trust may be created while you are alive (a living trust). You can be the trustee of your own living trust. This allows you to maintain control of your property. At death, most property must pass through probate before it can be inherited. However, property owned by the living trust does not. This is why most people prepare a living trust-to avoid probate.
While we detail some other types in Chapter 5, our focus remains on living trusts. When you set up your living trust, you transfer all or most of your assets into it, then administer it yourself as the trustee. It is a "trust" because it creates an entity into which assets can be placed for normal use during your lifetime (you can sell or paint your house) and then be available for distribution to anyone you select after your death. It is "living" because you set up the trust while you are alive and you manage it while you are alive. A living trust is active during your lifetime, unlike a will, which is dormant until you die.
A living trust should also include a will, which serves a particular function in the living trust package. You can have a Last Will and Testament, but not necessarily a living trust; on the other hand, a living trust provides for both a will and a trust. And, while living trusts don't prevent your family from paying any estate tax (an ugly topic we discuss in Chapter 6), living trusts can dramatically reduce that estate tax.
Excerpted from We The People's Guide to Estate Planning by Ira Distenfield Excerpted by permission.
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