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Do-It-Yourself Estate Planning

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Benjamin Franklin famously noted that “in this world nothing can be said to be certain, except death and taxes.” Death and taxes. Two of our least favorite topics — also two of the most inevitable.

In keeping with the generally upbeat mood at this blog, I rarely focus on either of these morbid subjects. But, last post, I broke with tradition and dealt with my income taxes. So, as long as we’ve tilted to the dark side, let’s get estate planning out of the way too!

Nobody enjoys thinking about the end of life, but death is inevitable, and thinking about it is, unfortunately, essential at times.

Recent passings in our family, along with other life events, have changed our estate picture substantially. Conclusion? Time for new Wills, which we hadn’t revised in over 6 years. And, while we are at it, it was time to review our Health Care Directives — much of which we hadn’t revisited in more than 20 years.

Now, if it’s true that I’m not a financial advisor — and you should take everything on this site as financial education, not advice — then that’s doubly true for legal advice. If you need legal advice, consult a lawyer. I have no legal training whatsoever, and have about as little interest in estate law as I do in the tax code, if that’s possible. But, sigh, both are necessities for modern life. So I’ve learned a bit, and will share that with you.

Why is estate planning important? Because, if you ignore estate planning altogether, you run the risk of reducing your family’s lifestyle, or worse, when you die. So the matter can’t be put aside if you’re a responsible parent or spouse.

There are plenty of attorneys waiting to assist in these matters, often for a hefty price. But, if you aren’t the type to turn to expensive, professional solutions, and your financial affairs are relatively modest, then “do-it-yourself” estate planning is entirely feasible….

Avoiding Probate

Probate is society’s legal mechanism for administering the assets of somebody who has died. It seems a necessary institution, to protect the interests of the deceased and their families who have made no other plans. But probate is a punishingly long, complex, and expensive process that is often not necessary. In one case that I’m personally familiar with, the transfer of assets will be delayed 6-12 months and reduced by as much as 10%, depending on how you count, solely to satisfy the institution of probate — with no value added whatsoever from the family’s perspective.

Wills have their essential purposes but, in my opinion, there are some steps to take on behalf of your estate that are at least as fundamental and necessary. In fact, because these mechanisms actually pre-empt your will, and can go a very long way on their own to keeping the bulk of your estate out of probate, I’m going to mention them first.

I’m talking here about beneficiary designations and Transfer on Death (TOD) or Payable on Death (POD) provisions, which apply to different kinds of accounts but all boil down to the same thing. By executing these simple legal provisions directly with your financial institutions, you arrange for certain accounts to go immediately to heirs without any need for those assets to pass through the complexity and cost of probate. It’s simple, it’s cheap, it’s nearly foolproof. I can’t speak to whatever legal situations might prevent you from using these simple mechanisms. But I can say that if you do use them for the vast majority of your financial assets, your life, and that of your heirs, will be far easier!

Another blessedly simple mechanism for keeping assets out of probate is simply to use joint accounts and joint titles. That way accounts and assets like vehicles pass to the joint owner — most often your spouse — on your death, instead of into your probate estate. This simple mechanism can also make sense for liabilities such as credit card accounts. If those aren’t joint, they are likely to be closed upon death. If that would be a hardship — because you have numerous automatic payments scheduled, for example — then consider joint credit card accounts instead, so they can stay open until survivors find it convenient to close them.

If you consult with an attorney, in many cases their tool of choice to avoid probate will be a trust. Trusts have many uses, including asset protection and caring for minors. But, as a tool for avoiding probate in otherwise simple estates, my opinion is that they are expensive and complex overkill. See if beneficiary designations and Transfer on Death/Payable on Death can do the job for you instead.

Avoiding Estate Taxes

The American Taxpayer Relief Act signed into law in early 2013 made important changes to federal estate tax laws. Importantly for this discussion, the estate tax exemption for 2014 is well over $5 million.

If that’s something you have to worry about then kudos on your success in life, but the vast majority of us won’t be paying federal estate taxes and won’t need to explore trusts for that purpose alone. (Be advised that state estate tax laws may differ widely, and I’m not going to tackle those here.)

Also related to estate taxes and the $5+ million exemption is gifting and gift taxes. Families often use gifting between generations as a way to transfer assets to younger generations before death and probate issues enter the picture.

I won’t get too deeply into this territory, except to point out a common misconception: It’s often believed that you can’t give more than some exclusion ($14,000 this year) annually. And this misconception may be conveniently promoted by some financial advisors — who don’t want to see their assets under management reduced when seniors gift to younger generations.

But the facts are that you can certainly gift more than $14,000 annually, and you most likely won’t have to pay any taxes (unless you are giving millions). You will, however, have to file a gift tax return (Form 709), and the gift will count against your ultimate estate tax exemption.

For more detail on this complex backwater of tax law, check out the excellent overview at Intuit.

Wills

Wills are essential documents for most of us, for several reasons. The most obvious is disposition of property after death, though as I’ve shown you may want to do that as much as possible via the beneficiary/TOD/POD mechanisms instead. Nevertheless there is property such as real estate and personal property that cannot be easily directed other than via a will.

Another traditional, and important reason for wills, is to specify a guardian for minor children. (It was the birth of our son many years ago that spurred us to draft our very first wills.) Once your children are grown, this purpose for a will usually fades away, while others take its place.

The last traditional reason for a will is to name your personal representative or executor — the individual who will be legally responsible for administering your financial affairs after your death. A good choice here can give you much peace of mind, and facilitate the implementation of your wishes. Note that, while this person has legal authority to implement your will, they don’t necessarily have to do all the mundane paperwork themselves. An increasingly popular option is to hire an independent or freelance paralegal who specializes in estate paperwork in a certain locality. Your executor retains authority, and the paralegal does the grunt work. (Note, in some situations, a supervising attorney may still be required or advisable.)

Wills are essential before death. Estate attorneys are not. To draft our most recent wills, I turned to the venerable company that helped me draft one of my first: Nolo. Their Quicken WillMaker Plus 2014 has little competition and receives generally strong reviews. For an online alternative, you can check out the offering from LegalZoom. Note the time constraints for each offering: LegalZoom gives you 30 days of revisions. WillMaker works on your computer indefinitely, but you don’t get updates to the latest legal language beyond the current year, without paying for an upgrade.

Having used previous versions of WillMaker, the program was a natural choice for me this time around. One of its greatest selling points is that Nolo’s team of attorneys stays on top of both federal and state estate law, ensuring that the will you generate stands up to scrutiny in your chosen state.

WillMaker did not disappoint. It has a clean, simple user interface that lets you work on 5 “Essential Documents” from the start, then create dozens of additional documents for more specialized situations later, if needed. Opening an individual document results in a step-by-step interview process driven from a master outline to which you can return at any time. You can proceed linearly or jump back to a previous point. The included online help, both for the software, and for the estate law, is excellent. When you are done you can proof the finalized will onscreen, print it, and generate a PDF if desired.

A final handy feature, offered for the will document alone, is the ability to duplicate it as the starting point for a spouse’s will. This saves some tedium for wills that are virtually identical.

WillMaker is so good at its job, that the final step in creating a will — witnessing and notarizing — becomes almost the bigger hurdle. Fortunately many banks offer this service, even if you aren’t an account holder. But, to be sure, it’s worth a phone call before you make the trip to a nearby institution.

Other Essential Documents

In addition to your will, WIllMaker includes four other documents in its list of “essentials.”

For starters there is the Durable Power of Attorney for Finances. This is an instrument for naming somebody to run your financial affairs, should you be incapacitated. I read over the scenarios and justification for this document and was not convinced it was absolutely necessary in our situation. If you are a couple that owns most of its assets jointly and shares electronic access to most of them, the need for a Durable Power of Attorney is not as compelling to me. Spouses generally have the right to manage jointly held assets. And if they have electronic access to linked accounts then they may have all the de-facto control they need. An exception might be for selling co-owned property such as houses and cars, which usually requires the participation of both owners. But since we don’t own a house at the moment, and our vehicles are a minor portion of our estate, this hardly seems like a life or death issue. I’ll revisit the need down the road, but the fewer legal documents in circulation the better, in my opinion.

The next two essential documents WillMaker calls Final Arrangements and Information for Caregivers and Survivors. My father and I long shared similar documents that we called simply “Executor Notes.” These are all the many details that an executor or personal representative must know, that would simply clutter up or confuse the will itself. In our generally amicable family we actually include a number of items in these informal notes to the executor that others might choose to embed in the will, just to keep that legal document extremely simple and less subject to court supervision.

Topics in my Executor Notes include, among others: the probate process, the locations of wills/important documents/valuables, final care wishes, bequests, computer and online account access, inventory of assets, account management and cash flow, insurance policies in force, business transition, investment management including lifetime income, and recommended contacts.

Health Care Directives

The final essential document is the Health Care Directive (which is composed of two documents in some states: a Living Will and Health Care Power of Attorney). This is the document you must prepare if you want to control how our very complex but far from omnipotent health care system will interact with you at the end of life. Why is this necessary? Because, if you don’t state your wishes in a legally sound manner, then doctors will likely be obligated to keep you alive at all emotional and financial costs, regardless of the quality of your life.

This document starts with the designation of your health care agent — an individual empowered to make health care decisions should you be incapacitated. It moves on to two critical matters: allowing your agent to withhold treatment and artificial nutrition/hydration if in his or her judgment that would be your wish.

The most common medical situations requiring such decisions are terminal conditions, or permanent unconsciousness. The fundamental issue you will have to grapple with in a Health Care Directive is whether you instruct others to sustain your body at all costs, or is there a point where it’s no longer worth it? Only your personal experiences, beliefs, and values can guide you there. And a Health Care Directive usually provides space for you to express those along with more specific wishes, so that others might be better able to navigate the complexity of end of life decisions in your best interest.

Nothing will bring you face-to-face with your own mortality like contemplating end of life care. This may not be the most pleasant task, but in today’s world it’s an essential part of living a good life.

Looking in the Mirror

…I have looked in the mirror every morning and asked myself: “If today were the last day of my life, would I want to do what I am about to do today?” And whenever the answer has been “No” for too many days in a row, I know I need to change something. Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure – these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.Steve Jobs

The co-founder of Apple, who died at age 56, helped to define our era. He is often numbered among the great inventors and thinkers of all time. History will tell. But his words capture the driving reason that I myself lived frugally, left my corporate job, and retired at age 50 to pursue other passions.

As mundane or unpleasant as estate planning might be, perhaps it serves a higher purpose. Of course it is an essential task for preserving your legacy and caring for your loved ones. But beyond that, an annual review of your estate plans can be a powerful reminder that none of us has unlimited time on this earth. So it’s important to make the best possible use of the time we’ve got.

Presumably that means engaging in the activities that are most meaningful to us, and most helpful to others. And, it probably means spending as little time as possible on estates and taxes!

Comments

  1. While I am not an estate planning attorney, I am a lawyer and this is, in very general terms, pretty good advice.

  2. So let’s see if I understand this correctly because it seems to good to be true. If 2 elderly parents want to decrease their assets in order to avoid the 5 year look back when applying for nursing home medicaid, I was under the belief they could only do it at a clip of $14,000 per year to each of their 3 children; and each parent could gift $14K to each of the 3. But you are saying they can exceed the $14K per parent per child gift, but that the amount over $14K will have to be counted against their $5.25 million lifetime amount (not a concern for us). So each parent could gift say $50,000 to each of 3 children in one year ($300,000) and not have to pay any taxes on it that year?

    • Joe, that is my understanding. It seems you don’t actually owe any gift tax unless you’ve exceeded the lifetime estate tax exemption. (Currently $5.25 million.) But I claim no expertise in this area, just what I’ve read repeatedly. See the Intuit link above for more detail. Also, I don’t know if the Medicaid look back rules could be different from those for the gift tax and estate tax exemption.

  3. Most Americans have a greater chance of becoming mentally and/or physically incapacitated than dying. I propose spending more time and effort thinking through the different scenarios to insure you are covered. Younger couples often assume that “the other spouse” can manage the finances “if something happens to me.”

    What I have seen many times is the couple wakes up one day and it much older. Possibly one spouse is deceased. Suddenly the “other spouse” can manage the finances plan is NOT an option.

    The other common scenario I have seen is that the “wrong” spouse becomes incapacitated/deceased first. We can assume that we know which spouse will live longer due to lifestyle/health habits/genetics. It might turn out to be a 100% incorrect assumption and the surviving spouse is NOT well equipped to handle the finances.

    In these cases, you need a well thought out plan that works regardless of death/disability of the other spouse. You do not have to have a high net worth for these problems to occur. Something as simple as paying bills can become a real challenge.

    • Thanks Greg, excellent points. This is especially important in relationships where the money management is done entirely on one side. I touch on my evolving solution in various posts, but it’s a work in progress. Simplicity is a starting point. Annuities are part of it. So is automating as much of our cash flow as possible. But the downside of automation is that there is less flexibility and, should something go haywire, it takes more knowledge to fix. I’m always interested in hearing about how other couples manage this issue. In one case I just heard of, he manages the investments, she pays the bills, so there is some division of labor and sharing of knowledge already.