Basic Estate Planning Concepts
What is an estate?
There is a common misconception that “estates” are exclusive to
multimillionaires. For example, a residence, no matter how large or small, is part of an
estate. Therefore, an estate is everything a person owns in their own name or jointly with
others. So an estate encompasses assets of every kind, like real estate, cash, stocks,
bonds, retirement plans, life insurance, businesses, personal property (furniture, art,
antiques, cars, collections, other treasured items, etc.) and any other kind of investment.
What is estate planning?
The definition of estate planning adopted by the National Network of Estate
Planning Attorneys is: “I want to control my property while I am alive and well, care for
myself and my loved ones if I become disabled, and be able to give what I have to whom I
want, the way I want, and when I want, and if I can, I want to save every last tax dollar,
attorney fee and court cost possible.” Therefore, a good estate plan will meet this
definition of estate planning.
Is estate planning just having a will?
For centuries, wills were just about all that comprised “estate planning.” Today,
the field of estate planning has grown to be one of the most technically demanding and
comprehensive areas of the law.
Estate planning is ensuring that your hopes, dreams and concerns for yourself and
for your loved ones will be accomplished if you become incapacitated or die. It is
protecting you and those you love by keeping you, your family and your sensitive
business information out of probate court when you become legally incapacitated or die.
Estate planning is designing a plan (usually in a trust agreement) which contains
some carefully thought through instructions of love for your family’s continued well-
being after your death and also contains provisions to eliminate estate taxes.
Estate planning can also include planning for redirecting what would have been
paid in estate taxes, and instead redirect them to useful charitable projects, at no net cost
to you or even at a net gain, so that you and your heirs may have more money for
yourselves than would be the case if you had left nothing to charity.
Estate planning, for a business owner, is planning for the survival of that business
long after your death – or – the efficient disposition of that business in order to use the
proceeds to care for and educate your loved ones.
Estate planning should also consider and include protection from potential
creditor attack(s). In this day and age, you never know when you might be sued or what
the result might be, even if you have done nothing wrong.
Estate planning can also help you unlock the value of highly appreciated assets
which have a built-in capital gain liability and devise retirement vehicles which have the
benefits of qualified plans without the restrictions.
What are the traditional methods of basic estate planning?
There are six techniques that are traditionally used in basic estate planning.
Everyone, in some way, shape or form, is using at least one of these techniques. They are:
INTESTACY A majority of Americans die without a will or a trust. This is called
intestacy. Intestacy is considered a method of estate planning because by leaving no will,
a person has given the state the right to decide who will receive their property. Assets
that pass by intestacy go through a probate process called administration which is almost
identical to the probate process of administering a Will.
WILL-PLANNING PROBATE A “last will and testament” is essentially a legal
document that states how a person has decided how they want their estate distributed
upon their death. Many people plan their estates by creating a “last will and testament.”
Unfortunately, wills have major disadvantages: (1) A Will does not control how
or when all of the will-maker’s property is distributed. Property owned jointly with other
people, life insurance proceeds, and retirement benefits – all pass outside of a will. (2) A
will is not effective until the death of its maker, so it is of no value or help with any kind
of lifetime planning, such as disability. (3) Upon the maker’s death, the will must be
filed with the local county probate court where the decedent died, where it becomes
absolutely a public document and is available to anyone who wants to read it.
Death probate is a court and administrative proceeding. It is required to manage
and distribute a deceased person’s estate at death. Once a will enters the probate process,
a person’s estate is no longer controlled by their family. Instead, it becomes controlled
by the court and the probate attorneys. Because a will guarantees that a decedent’s estate
will go through probate, it is a very poor estate planning document for families who want
to maintain control. However, as you can read in other parts of this web site, this may be
the only option available to some individuals needing to qualify for Medicaid, which a
totally different area of discussion for various differing reasons.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP There are different forms
of how people hold title to property, one of which is joint tenancy with right of
survivorship. The right of survivorship means that the survivor acquires the entire
interest in the property upon the death of the other joint tenant. Because a joint tenant’s
interest automatically passes by law to the surviving joint tenant at death, its ownership is
not controlled by the deceased joint tenant’s will.
BENEFICIARY DESIGNATIONS At the owner’s death, some types of property pass
to those listed in the beneficiary designation section of the policy or contract. Life
insurance policies, annuities, IRA, 401(k), pension plans and other qualified retirement
accounts, are some examples of these types of property.
The advantage of having named beneficiaries is that the property avoids property.
The disadvantage is that since the proceeds from the beneficiary-designation property
pass direction to the named beneficiaries and are not controlled by the terms in a will, the
proceeds may not pass to whom the owner intends or desires in the way they want.
GIFTS Giving assets away can be a valuable part of an estate plan, but it should not be
done without professional advice.
REVOCAVBLE LIVING TRUST Finally, many people have living trusts, but these
documents are often “bare-bone” living trusts. Bare-bone trusts often do not achieve
basic estate planning objectives and may fail to avoid probate because their makers failed
to transfer their property into their trusts. Bare-bone living trusts are usually sterile
documents written in legalese and devoid of meaningful instructions for loved ones.
They seldom reflect the hopes, concerns, dreams, values and ambitions of their makers.
However, when someone has a properly drafted and funded living trust, they can be
confident that the many disadvantages of the five preceding traditional forms of estate
planning have been eliminated.
What are some of the most common misconceptions about estate planning?
Here are some of the “Great Myths” as we call them:
Myth 1: “I’m too young to worry about estate planning.”
Reality: If you are young, you especially need to map out an estate plan to help protect
your loved ones, most often children and spouses.
Myth 2: “My estate is not large enough to need estate planning.”
Reality: If your estate is fairly small, it will likely suffer a greater percentage of
shrinkage from final expenses, probate costs, and so on, than will a larger estate.
Myth 3: “My estate won’t be taxed, regardless of its size, because I can use the
unlimited marital deduction to transfer all of my assets to my spouse tax-free.”
Reality: True, but a poorly planned usage of the unlimited marital deduction merely
postpones the estate tax problem until your spouse’s death, and does not avoid the tax.
Without the proper use of estate planning, your estate shrinkage at that time could be
substantial, with your children and/or grandchildren feeling the losses.
So how much property can I leave to my spouse without my estate having to pay estate taxes?
The federal estate tax law permits leaving an unlimited amount to one’s surviving spouse
without incurring the immediate obligation to pay tax. However, to the extent that the surviving
spouse owns this property at their death, it must be included in the surviving spouse’s estate. If
the surviving spouse is not a U.S. citizen, the unlimited marital deduction is available only for
property that passes by way of a qualified domestic trust.
Then why can’t I leave everything to my spouse and not worry about tax? If you rely upon the
unlimited marital deduction without thought, the applicable exclusion amount for the first of you
to die will be wasted and result in unnecessary taxes. This happens because the marital
deduction “swallows up” the deceased spouse’s allowable exclusion amount. If you take
advantage of both the allowable exclusion amount and the marital deduction through proper
estate planning, it is not difficult to save additional taxes. This amount of savings varies
depending on the year of death.
Myth 4: “Most people just have a will, which is all I really need.”
Reality: Depending upon whose statistics you read, only about 40-60% of the population
has a will, and it is true that a will is a must in every estate plan. But please understand
that a will guarantees the probate process. To avoid the probate process, use a funded
revocable living trust as the centerpiece of any estate plan with a pour-over will as a
supporting document to be used as a safety net, and not the actual primary focus of the
What are the origins of the probate process?
In our country’s earlier times, a person would homestead a particular piece of land
and obtain a document called a “patent” from the president of the United States, which
proved that the homesteaded land was theirs. As the people who held these patents died,
a question arose as to how to remove their names from the patents and put the names of
living persons on them. State legislatures had to create a system for transferring property
from a deceased person to a living person, while protecting family members who might
have a claim or interest in the property, and giving them opportunity to be heard. The
“probate” process was invented to accomplish such transfers in a fair and orderly way.
Probate also addresses the claims of a decedent’s creditors. The process gives
creditors an opportunity to make and prove their claims so that valid claims can be paid
out of the assets of an estate before they pass to the decedent’s heirs and/or beneficiaries.
What is probate?
Probate is the court-supervised administration of your estate. It generally has
1. To marshall all of your assets.
2. To pay your bills and resolve disputed creditor issues.
3. To oversee distribution of your estate as you directed.
In general, what are the mechanics of the probate process?
If you have a will, filing a petition to admit your will to probate is usually the way
to initiate the probate process. If you die without a will, a petition to appoint a personal
representative (called an administrator), is filed with the court. In either case, notice to
all of the decedent’s heirs and beneficiaries is required before the hearing (published in a
newspaper of general circulation within the county of the decedent’s residence). As a
practical matter, this means a delay of approximately 30-90 days between filing the
petition for probate and having the will allowed and the executor/administrator appointed.
Until official, the executor/administrator is not empowered to deal with the estate affairs.
Probate also involves a particular process for handling creditors. This process is
designed to ensure that all creditors have notice of the death and have the opportunity to
file creditor claims. Practically speaking, the process is unnecessary in the vast majority
of cases since the bills and creditors could simply be paid as statements are received.
Even if all the bills and obligations of the estate are paid immediately,
Massachusetts probate law requires that estates remain “open” for a minimum time of
twelve months, to give all creditors time to file claims against the estate. During this
time, the law generally restricts the ability of the personal representative to make
distributions from the estate.
The personal representative is charged with gathering all the assets of your estate
so that they can be used to pay creditor claims and then the remainder can be distributed
to the heirs and beneficiaries. Assets held and titled in a living trust do not require
How is the “probate” closed?
Before an estate can be closed, the personal representative must file an inventory
with the court of all the estate’s assets with stated values of those assets. The inventory is
filed with the court as part of the public record. The intimate details of the estate are
open to anyone who cares enough to review the court file. There is no screen or
prohibition to ensure that the estate records are reviewed only for legitimate purposes.
Once the assets are collected and detailed in the inventory, and the obligations of
the estate are satisfied, when the twelve months have transpired, the personal
representative can then file a final accounting and petition the court for distribution of the
remaining estate assets. The details of distribution are also a matter of public record.
What goes through probate and what doesn’t?
Anything owned by the decedent in their individual name or as a tenant in
common with others is subject to probate and administration. Beneficiary-designation
property for which the “estate” is named as the beneficiary also goes through probate.
Property held in joint tenancy with right of survivorship, property held in trust, or
property distributed by beneficiary designations – do not go through probate. Property
held in a life estate also does not go through probate.
What are the disadvantages of the probate process?
Probate has been defined as “the lawsuit you bring against yourself with your own
money to benefit your creditors.” This description is quite accurate, but people usually
come to appreciate its veracity only after undergoing the probate of a family members or
The disadvantages of death probate proceedings include:
LOSS OF PRIVACY When your estate goes through probate, you lose all privacy. The
will, your assets and your liabilities all become public record just like any other litigation
at the courthouse. Con artists have been known to submit false claims against a probate
estate and use the probate record to target heirs and beneficiaries for their next swindle.
WILL CONTESTS Wills can always be contested and put aside – it happens all the
time. When a will is contested, the estate is frozen and the assets cannot be transferred to
loved ones. It is easy for any disgruntled heir to file a will contest since the will is
already in the probate court.
COSTS The court charges the estate a set fee for filing and a fee based on the size of the
estate for the final accounting. In addition, attorneys, executors, guardians, and any other
fiduciaries acting within the realm of probate (or administration) charge their own fees.
The total cost of probate can easily range from 3-10% of the gross estate – or more.
MULTIPLE PROBATES There must be a probate proceeding in every state in which
the decedent owned real property.
DELAYS Probate can last from several months to several years. This only adds to the
frustrations and anxieties of a grieving spouse and family.
Can my agent under a durable general power of attorney settle my estate without
probate? No! By law, all powers of attorney automatically terminate at the death of the
grantor of the power.
If I avoid probate, do I avoid estate taxes?
Nice try. No! Your taxable estate has nothing to do with probate. Your estate
will be taxed on anything owned at death – or – had control over, such as jointly owned