Especially for younger adults, it can be very difficult to even think about planning for the worst. But when you own a home and/or have children, it’s truly important to have a plan in place for the unthinkable: the death of you or your spouse.
I recently talked with J. Aaron Byrd, an attorney from Greenbaum Doll and McDonald PLLC, whose practice focuses on estate planning and administration. We discussed estate planning — arranging what happens to your assets if you and/or your spouse dies. It’s not something that any of us want to talk about, but it is also not something any of us should put off. I find younger clients have a tendency to think of estate planning as something they “don’t need to worry about now.” This is not always an assurance. What follows is an informative Q&A about why and how to take the steps for your estate plan.
Q: What happens to your assets if you die without an estate plan?
A: If you do not create an estate plan during your lifetime, the state in which you live has a default plan that will control how your assets are distributed. Depending on the state in which you reside, your marital status, the number of children you have, and your family relations, state law will determine who receives your assets at death. The individuals who receive your assets at death under state law may be vastly different from those individuals you wish to receive your assets at your death. Thus, it is important to undertake a proactive approach and make a plan for such a situation.
Q: What legal advice would you give a couple with a child?
A: The most important legal consideration parents of a minor child should undertake is designating who would take care of their child if something were to happen to the parents. Although many parents believe that “someone” in their family would step up and take care of the child, such a void of direction and guidance from the parents can create an ugly custody and guardianship fight between family members where the child is caught in the middle. Each parent of a minor child should have a Will in order to name both primary and alternate guardians of their minor child. Without a Will in place to name a guardian, it is up to a Court to determine who would be the best person to be the child’s guardian and the person chosen by the Court may not necessarily be the person a parent would choose as their child’s guardian.
Q: What should young couples know about life insurance?
A: Life insurance is an important aspect of an estate plan as life insurance can be used to provide benefits to those you leave behind. The proceeds form a well-structured life insurance policy can provide a number of benefits for your family upon your death. Most young couples with children have a need for life insurance as income replacement or financial support of a surviving spouse or children. I often recommend that my clients meet with an insurance advisor to ensure that they and their families are adequately protected.
Q: What item do many people miss when trying to put together their own estate plan?
A: Certain assets, such as life insurance, IRAs, and 401(k)s, have a beneficiary designation, which is simply a contract between the institution holding those funds and the owner of the account or policy. These assets will pass to those individuals named on the beneficiary designation and generally will not be distributed according to an estate planning document. Many times, we see clients who completed a life insurance beneficiary designation form or an IRA beneficiary designation form many years ago. Often, these individuals have had a change in life circumstance, such as a marriage, divorce, or birth of a child, since that beneficiary designation was last completed.
For example, take a situation where Bob, as young single individual, set up a 401(k) plan at age 23 when he began working, but Bob is now 30 and is married with a child. It is possible that the beneficiary designated on that 401(k) plan is one of Bob’s parents or Bob’s sibling, not Bob’s wife or child. If Bob were to die, his 401(k) would pass to his parent or sibling, not his wife, thus creating a difficult family situation. Therefore, it is crucial in a well-structured estate plan to ensure that all beneficiary designations are updated to avoid any issues.
Q: What is one of the biggest misconceptions people have about estate planning?
A: Many people believe that revocable or living trusts are only needed if you have a great deal of money and I do not believe that this belief is accurate. I believe that a trust is very beneficial for protecting assets for the benefit of a minor child. For example, let’s assume that Carol dies leaving a minor child. Carol’s Will designates her sister, Nicole, as the guardian for the child, so the child is cared for and has a place to live. However, Carol’s financial resources that she wishes to leave to her minor child must be placed in a guardianship account and Nicole must file an annual report with the Probate Court each year detailing how much was in the account at the beginning of the year, everything that was spent during the year for the benefit of the child, and the ending balance of the account.
In addition, once that child reaches age 18, Nicole must turn over all of the remaining assets over to that child and the child can now spend those assets in any manner the child sees fit. Carol’s child could take these funds to buy a car, go on a trip to Europe, or otherwise quickly spend those funds Carol intended her daughter to use for her lifetime. Instead, Carol could set up a trust agreement in her estate plan that is funded at Carol’s death by life insurance proceeds or her other assets. Nicole could use those trust assets to care for the child including education, medical, and support costs. At an age that Carol believes is appropriate, Niccole would no longer be in control of the trust and the child could take over the management of the trust. Such an arrangement allows Carol’s child to grow and become more mature before having the responsibility to deal with a large sum of money.
Q: Do you feel there are any websites (or other methods) that are appropriate for helping people who are ready to plan for their estate?
A: The best initial step in setting up an estate plan is for the person to sit down with an attorney who focuses their practice on estate planning and administration matters. Fees for an estate plan will vary on the client’s individual situation, the complexity of the plan, and other factors. Some estate planning attorneys will sit down with a potential client and do an initial meeting free of charge.
There are many self-help and individual how-to books out there, but their quality varies greatly. I cannot recommend any particular book or website as every person’s situation is different and those individual needs are best examined by a licensed attorney.