What is Estate Planning?

Many goals are accomplished through the estate planning process. The best definition for estate planning that we’ve discovered is “I want to plan for me to maintain control of my estate while I’m alive and well, make sure that my estate is protected if I should become disabled, and give what I have, to who I want, the way that I want, all at the lowest possible cost to me and those I love.”

What is an Estate Plan?

An estate plan is a strategy developed and customized through attorney based counseling to achieve various goals including the control, administration, and distribution of assets upon a disability or death. The strategy is implemented through the use of legal documents such as wills and trusts and maintained through consistent updating during life.

What is the difference between a Will and a Trust?

Most estate plans are either Will based plans or Trust based plans. A Will is simply a set of instructions to the court. If the probate court accepts the Will, a probate of the estate is administered by the judge. The Will may be useful in choosing a representative to administer your affairs, choosing a guardian for minor children, and for making distributions of your estate to named beneficiaries. The drawback of Will based planning is the estate having to go through Probate. In contrast, a Trust is simply a set of instructions to your loved ones. Assets that are titled in the name of the Trust are not probated, rather administered by an attorney through a procedure called Trust administration.   While Will-based estate planning focuses solely on death, Trust-based planning involves planning for incapacity as well as death.

The Estate Planning Pyramid

The estate planning pyramid gives a hierarchy of goals for estate planning. This pyramid is useful in developing an estate planning strategy based on specific client goals. At the bottom of the pyramid is the SELF. The most important goals are centered on maintaining our estate for our own protection and benefit. Likewise an estate plan should provide protection and benefits for the ones that we love, our FAMILY. The next goal is to have the estate plan structured to protect what we have or PRESERVE WEALTH. Beyond that, our estate plan needs to anticipate INCREASING WEALTH. The final consideration is to reduce TAXES AND PROBATE.

Traditional estate planning turns the pyramid upside-down. Taxes and Probate are important goals to be addressed in every estate plan, but goals at the bottom of the pyramid may be too important to sacrifice just to achieve this result. Modern estate planning weighs several considerations when developing an estate plan.

The Three-Step Strategy

Estate planning is a process, not a set of documents. For an estate plan to achieve all of a clients goals, a three-step strategy should be used.

1. Work with a Counseling Oriented Attorney
2. Use a Formal Updating System
3. Assure your Successors Utilize Fixed Fee Services after death

Working with a Counseling Oriented Attorney

Counseling is the process of tailoring a plan to meet specific desires and goals. Traditional estate planning services do not stress client counseling as part of the estate planning process. Rather, traditional estate planning is the creation of documents to meet general goals surrounding probate avoidance and estate tax reduction. Important goals such as protection for catastrophic disability, divorce protection, remarriage protection, protections for minor children, and catastrophic creditor protection are rarely if ever considered. In this light, much of what passes for traditional estate planning is nothing more than glorified word processing. Only by taking the time to thoroughly examine client goals and tailoring a plan to meet those goals will an estate plan truly “work.”

Use a Formal Updating System

An estate plan will have to be updated from time to time to reflect changes that may happen during the lifetime of the client. Three types of changes need to be planned for: 1) changes in the personal situation of the client, 2) changes in the financial situation of the client, and 3) changes in the law that affect the outcome of the plan.

First, changes in the personal situation of the client. Many things may happen during the personal lifetime of a client that will have a significant effect on the estate plan. Individuals that have been chosen to do certain jobs such as Trustees and Guardians may become unavailable, making it necessary to make new appointments. Families may be confronted with challenges such as a disability, addiction, divorce, etc. making it necessary to build additional protections into the plan. Clients also may desire to make adjustments in distribution patterns or add additional beneficiaries as time goes on. These types of changes would warrant changes to existing documents.

Second, changes in the financial situation of the client. For an estate plan to be effective, assets have to be properly titled to coordinate with the trust instrument for the plan to have any effect over such assets. It is rare that clients hold the same assets at death that were held when the plan was originally created. This means that plans have to be continually funded (assets coordinated with the trust instrument). Without the funding of assets, the estate plan is incomplete and may eventually fail.

Third, changes in the law that affect the outcome of the plan. There are several areas of law that effect an estate plan. Income tax law, estate tax law, property laws, and community property laws are a few. These areas of law are highly susceptible to the political winds of change and have changed drastically over the past few years. This is an area that also puts the client in the most vulnerable situation. Because most clients do not study these laws and would never know of major changes, they may never come back to get the much needed amendments that are necessary.

Generally speaking, clients can use one of two methods for updating a plan. The first can be referred to as “pay as you go.” This means that clients must initiate changes themselves and pay each time that the documents are altered. This system has a few drawbacks. The client may not know of legal changes that warrant amendments. Also, if plans are not updated regularly, larger amendments or a complete re-do of the estate plan may become necessary. This could become very expensive over time.

The second method is to use a formal updating system. Strategic Wealth Legal advisors will generally recommend this type of updating (referred to as our Legacy Legal Services). Clients pay an annual maintenance fee to have the plan updated regularly. This involves annual changes in the documents to reflect all of the changes in law that occurred the previous year. Some of these changes in the law may require minor amendments, in other years even more drastic changes may be warranted. Also, clients may make as many changes to their plan as desired to reflect personal or financial changes. All changes to the plan are covered under the annual maintenance fee. In addition, trust administration fees will be lower because the maintenance reduces the amount of time needed to wind up the affairs of the estate (see Fixed Fee Services Below). The average estate planning client will pay far less through annual maintenance fees over lifetime than they would for “pay as you go.” The greatest benefit is that a client with formal updating will always have a plan as current as the newest plan created by the firm, and always have the peace of mind that the plan will work just the way it was originally designed to do.

Assure your Successors Utilize Fixed Fee Services after death. Most estate planning does not take into consideration the services that are needed upon the death of the client. While it is generally possible to avoid probate with a good estate plan, the trust settlement or trust administration process is necessary to wind up the affairs of an estate after death. This process takes far less time than probate and is significantly less expensive. Probate fees in California average around four percent of the gross estate value while trust administration fees average about one percent. By using a formal updating system, the work needed to administer a thoroughly updated plan is reduced and so are the associated costs (down to one-half of one percent). Utilizing fixed fee services means that clients may lock in this fee before death by agreeing to update the plan through the use of formal updating. This is a milestone in the estate planning field.

Revocable Living Trusts

A revocable living trust is a set of legal instructions. The document will provide instructions for the management, administration, and distribution of assets controlled by the trust. Initially, the trustees of the trust will be the Trustmaker. Thereafter, the successor trustees will typically be family members or friends. The job of the Trustee is to manage trust property on behalf of the beneficiaries. Successor trustees take over the job of the initial trustees upon disability and death. Trust terms will instruct trustees of their duty with regard to particular assets and specific events. Restrictions on distributions contained within a trust add protections for the beneficiaries. Some of these protections include disability issues, guardianship issues, catastrophic lawsuits, keeping the estate in the bloodline, and remarriage issues. In addition, trust property passes free of probate and can be instrumental in reducing estate taxes.

Durable Powers of Attorney

Financial Powers of Attorney

A financial power of attorney allows a client the ability to appoint an agent to make financial decisions on behalf of the client upon disability. Disability in this context can be defined as the inability to manage ones own financial affairs as determined by two physicians. These powers are used most often to manage assets that are not titled in the name of the trust, including vehicles, retirement plans, and other miscellaneous financial matters.

Medical Powers of Attorney

A medical power of attorney is called an advanced healthcare directive or sometimes referred to as a living will. It will allow the client the ability to appoint an agent to make medical decisions on behalf of the client when the client is unable to do so. These decisions include the power to remove life support when death is eminent with no hope of recovery. It also includes decisions with regard to anatomical gifts, preferences for disposal of final remains, and the choice to use professional caregivers for a long-term care situation.