Many people often assume that they don’t have an “estate” worth planning or that their families will take care of everything when the need arises. On the contrary, everyone, regardless of their net worth, requires comprehensive estate planning in order to ensure that their wishes are executed and their families are adequately provided for. As unpleasant as it is to consider, death is inevitable, and some of us may become incapacitated. We have the choice of either ignoring this inevitability, or accepting it and taking the necessary steps to protect our loved ones and ourselves. Without an estate plan, the government and the courts decide who will inherit your assets, who will become the guardian of your minor children and who will make health care and financial decisions on your behalf in the event of your incapacity, without regard to your wishes. The statutes are designed to accomplish what the government thinks your estate plan should be and rarely matches your own vision for the disposition of your assets. For instance, in New York, if you do not have a Will and you are married with children, your spouse will receive $50,000 plus one-half of the remainder of your estate, with your children receiving the other one-half of the remainder outright, even if they are minors, have a disability and/or are unable to properly manage money. The consequences of this scenario become even more complicated when one or more spouses have children from prior marriages. Thus, if you want control over these important decisions, you need an estate plan.
1: Designating Beneficiaries of your Estate. Many individuals have not considered who will inherit their assets if they do not have a Will. If an individual dies without a Will or "intestate", the courts will take control of the individual's estate and distribute his or her assets according to the intestacy laws of the state in which the individual resides at the time of his or her death. In other words, the government becomes an individual's estate planner when he or she dies intestate, through statutes which provide for the administration and distribution of the individual's estate. A client may be surprised to learn that his or her spouse, parents, children and/or siblings will share in the inheritance under New York law, depending upon the relatives that survive the client. Very often, those who ultimately share in a decedent's inheritance under the intestacy laws are not the same people who would have otherwise inherited the property had the individual died with a Will.
2: Appointing Guardians and Trustees for Minor Children. Clients with minor children should execute Wills in order to name guardians for their children. When appointing the physical custodian of a minor child, clients should also designate the trustee to manage the child’s inheritance. Without a Will, the court would appoint a Guardian for an individual's minor children. The court may not name a person who the decedent would want to take responsibility for his or her children or feel would make decisions in the best interests of the children. Having a court-appointed Guardian can also result in complications in estate management. For instance, any money used to pay for your children's education, clothing and living costs would require prior approval of the court, even if your spouse is appointed Guardian. Furthermore, law requires annual accountings of income and expenses to the court, and investment of the funds by the Guardian will be limited to choices approved by the court. If the Guardianship lasts for any significant length of time, the investment limitations imposed by the court may prevent the children's funds from growing at an acceptable rate.
3: Appointing a Health Care Agent. Clients need to consider both who will make medical decisions in the event the client is incapacitated and whether the client wishes to remain on life support. Without a health care proxy, New York state law dictates who the decision maker will be.
4: Appointing Agents and Trustees to Manage Assets in the Event of Incapacity. In addition to considering who will manage and benefit from their assets after death, clients need to have a succession plan in the event of the client’s incapacity. This may take the form of a durable power of attorney, trust planning or a combination thereof. Clients with businesses may want to name different people for purposes of running their company and managing their personal assets.
5: Protecting a Beneficiary from Himself or Herself. A trust is an ideal tool for a beneficiary who is too young or does not have the proper investment skills to manage his or her inheritance. First, it can be used to name a person or institution as the investment trustee until the beneficiary is capable. Second, a trust can be used to distribute funds over time to protect assets from a beneficiary’s own misjudgment or spendthrift tendencies. Third, the trust can be used to provide supplemental benefits to a beneficiary with special needs, without disqualifying the beneficiary from government support.
6: Protecting Beneficiaries from Creditors and Divorcing Spouses. An irrevocable trust established by a third party either during lifetime or after death can provide asset protection. Clients who do not have any planning documents or whose documents distribute outright to their beneficiaries are foregoing the creditor and divorce protection that could otherwise be given to their beneficiaries. By providing in the Will or trust document that the assets are maintained in continuing trust (rather than making mandatory distributions of income or principal at certain ages), the trust assets can be protected from the beneficiary’s creditors or divorcing spouses.
7: Appointing an Executor. Under a Will, a client may designate an Executor who is responsible, upon the client's death, for taking inventory of his or her property; preserving the estate; paying creditors, administrative expenses and any death taxes; and disposing of the remainder of the client's property among his or her beneficiaries. Since the Executor is entitled to a fee, most people prefer to select someone they know and trust to oversee the administration of their estate, rather than having the court appoint an Executor of its choice.
8: Minimizing Estate, Gift and Income Taxes. Through appropriate tax planning, clients may prevent some or all of their assets from being subject to estate tax upon their death. This will allow more of a client's estate to be passed on to his or her loved ones, and less to be lost to taxes. Without a Will, an individual's estate will not have the benefit of any tax planning to minimize the often confiscatory effects of federal and state death taxes and income taxes.
9: Supporting a charity. A client may gift, during life or at death, money, securities or other property to charities or other worthwhile causes, while at the same time obtaining substantial income and estate tax benefits.
10: Avoiding probate. A client’s estate can be designed to avoid probate through the use of beneficiary designations and a revocable trust. Probate can be a costly and time consuming court proceeding and can often be avoided by establishing and funding a revocable trust during a client’s life. While a revocable trust is not always recommended over a Will, it may be appropriate in certain circumstances. For instance, the revocable trust is especially important for individuals who own real property in multiple states because, if the property is titled in the individual's name, ancillary probate proceedings are required in each state. A revocable trust outlines the client’s beneficiaries and provides asset management succession (in the form of a successor trustee in the event the client becomes incapacitated). A revocable trust can also be drafted to provide for the creditor and divorce protection noted above for a client’s beneficiaries upon the client’s death.