Understanding the Basics of Estate Planning
by: Joshua P. Itzoe, CFP©, AIF®
The recent passing of “The Hardest Working Man in Show Business”, James Brown, provides us an excellent opportunity to discuss the importance of proper estate planning. While Mr. Brown was hard at work, he forgot to update his last will and testament leaving the affairs of his estate in shambles. Mr. Brown’s will was dated in the year 2000 and provided for his six adult children in some way, shape or form. However, the late singer’s five-year-old son and the boy’s mother (Brown’s partner and self-proclaimed widow) failed to be mentioned in the will and have even been locked out of the residence they shared with the singer because the house has entered the probate process!
What’s more, Brown’s adult children are disputing the validity of the woman’s marriage to their father. They have also filed an emergency petition in South Carolina, asking for the trustees to be removed, claiming mismanagement of the late singer’s assets. Now Brown’s estate will spend the foreseeable future dealing with administration expenses, probate costs, attorney’s fees, debts, claims, and state and federal death taxes before the property can be distributed to the appropriate beneficiaries. Not to mention the nasty publicity and court battles which will likely ensue. So much for resting in peace!
Everyone has a need for an estate plan, which can be simple or complex depending on the size of your estate. Proper planning can do several things including helping to provide for your loved ones, protecting your possessions, giving you control, minimizing the costs your estate will have to pay and/or protecting you business interests. Unfortunately, a surprising number of people have either done very little planning (which is often out of date like Mr. Brown’s) or no planning at all.
Listed below are the basic estate planning documents (with a short description) that every adult person needs, regardless of age, income or net worth.
- Will- A will spells out what you would like to be done with your assets upon your death.
- Living Will (Advance Directive) – A living will specifies what you want or don't want for medical treatment if you are unable to express those wishes.
- Durable Power of Attorney- This document names a person to make financial decisions for you if you are unable to make them.
- Durable Power of Attorney for Health Care- This document names a person to make medical decisions for you if you are unable to make them
Everyone needs a will and it is the most important document at your disposal to make sure your estate is divided, distributed and settled according to your wishes. Dying without a will is called
dying “intestate”, which means that your property will be divided according to your state’s intestacy rules. In plain English, this means that the state determines who inherits your property and it rarely matches your expectations or desires. Also, if you have children under 18, you should appoint a guardian in your will. If you and your spouse die at the same time without appointing a guardian, the courts will select a guardian to care for your children and manage their inheritance until they become adults. This may or may not be the person you would choose if it was your decision. In many states the surviving spouse receives one-half of all your property and the remaining amount is divided amongst your children and living relatives. In most states, stepchildren and non-married partners do not inherit at all under the rules of succession. Dying without a will also means that your estate must go through probate which is can be an expensive and time-consuming process.
A living will is a document that directs, in writing, the kinds of medical treatment you would or would not want in the event you are permanently unconscious or terminally ill and can no longer speak for yourself. Living Wills are used to make medical decisions only. It lets you express your wishes for certain types of care to be provided (or not provided) when you can’t make those decisions for yourself. For instance, do you want to be kept alive by all possible efforts or eliminate all life-sustaining measures if you are in a terminal condition or death is imminent? An example of the need for a living will is the Terry Schiavo case from several years ago. If she had had a living will in place, her wishes would have been followed and there would have been no need for a protracted fight between her husband and her parents.
A durable power of attorney (DPOA) is a critical document which appoints a person to act on your behalf and continues if you become incompetent or incapacitated. In effect, this person can make financial and other decisions for you if you are unable to do so. Wouldn’t you rather choose the person to serve in this capacity rather than letting the court do it?
A durable power of attorney (DPOA) for health care (also known as a healthcare proxy or medical power of attorney) works for medical decisions like a durable power of attorney works for financial decisions. It names someone to make medical decisions on your behalf if you are unable to communicate your wishes to your doctor or treatment team.
Like many things in life, people tend to procrastinate when it comes to dealing with important legal and financial matters like proper estate planning. Perhaps it is because of the perceived cost involved, the fear of having to think about their own mortality, a general lack of urgency or the always convenient excuse that they are “too busy”. However, putting these four basic legal documents in place is one of the most important things you can do for yourself and your family. It can typically be done within a matter of a few hours and for most people, is nowhere near as expensive as they think.
Just ask “The Godfather of Soul’s” family if they wish he had spent a little more time planning ahead.
The information in this article is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for financial planning or investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
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