The topic of estate planning is one that I hold near and dear to my heart because it is a concept which is foreign to many people that look like me or those who grew up in neighborhoods similar to the one that I grew up in. It is the catalyst of creating generational wealth. It is a tool that has provided so many people with the opportunity to start a life without debt, to have funding for startup businesses, and to get an education without loans. It is something that I encourage so many of my peers to speak to their parents, spouses, and children about because I know how fundamental it is to providing our lineages with a “head start”. So today I want to focus on the topic of estate planning and things you should consider when desiring to formulate an estate plan.
Estate planning is the act of preparing for the transfer of a person's wealth and assets after his or her death. Think of it this way: it is the plan that you come up with, before death, to determine who will receive your property when you are no longer here to manage and/or benefit from it. Assets, life insurance, pensions, real estate, cars, personal belongings, and debts are all part of what you would consider to be an “Estate”. What estate planning anticipates, is what you would like to be done with your Estate upon death and how you plan to accomplish that objective.
There are some challenges associated with developing a comfortable Estate Plan. Some challenges include having to thoroughly identify which assets you have acquired in your lifetime; strategizing on who you would like to be responsible for disposing of/managing your Estate upon death; and deciding who you would like to benefit from your Estate. To alleviate some of your concerns, I will address some items you should consider before starting the estate planning process.
Why Do You Want to Develop an Estate Plan?
This is a very personal and subjective question. Some of the stories I’ve encountered in my experience have led to the following assumptions to answer this question:
1. You are concerned about making sure your minor children will be taken care of upon your death.
2. You are concerned about making sure relatives will be able pay outstanding debts that are left behind so that they can enjoy assets lien free.
3. You would like to leave your heirs the funding to start a business or obtain the education they always desired.
4. You want to make sure that the house that you purchased or the business you started will remain with a relative as the owner.
Regardless of your answer, you should always let your why serve as the main objective for disposition of your assets. If you go into estate planning with no clear objective, making decisions on who should benefit from your Estate may become more and more difficult with a larger number of heirs or a limited number of responsible executors/trustees you have to choose from. So all in all deciding the why can help alleviate confusion in your planning process.
What Is the Most Appropriate Route to Execute Your Plan?
Currently there are two means of establishing an Estate Plan. These two means consist of creating a Will or establishing a Trust.
A will is a legal instrument that permits a person, the testator, to make decisions on how his estate will be managed and distributed after his death. While the formalities of a will are determined by the state in which the will is created, generally there are three main requirements to the formation of a valid will. (1) The testator (party creating the will) should have the intent that the document constitute his/her will at the time it is executed; (2) the will must be executed free of fraud, duress, undue influence or mistake (meaning the testator should not be forced into creating the will); and (3) the will must have been executed through a proper ceremony (determined by each state). Once a will has been created, upon death of the testator, it must be enforced by a judge through a process known as probate. The downside to formulating an Estate Plan through a will is that during the probate process, creditors are given an option to file a claim against the Estate before any assets can be distributed to the heirs. The probate process can also take an upwards of 6 months to 2 years to finish depending on the number of claims, objections, and assets that are involved in the Estate.
A trust is a fiduciary relationship in which a person (settlor) gives property to another person (trustee) to hold for the benefit of a third person (beneficiary). A document called the trust agreement is the set of rules for the operation of the trust. It sets out who the beneficiaries are, who the trustees are, and how the trust will be administered. Trusts can hold assets, invest and borrow money, and operate businesses. To form a trust (1) a settlor must formally transfer title to property (2) to a trustee who will hold the title for the benefit of one or more beneficiaries; (3) the settlor must have had the intent to create a trust, (4) the intent to create a trust must be for a lawful purpose, and (5) the document embodying the trust must be validly executed. In simple terms a settlor must create a trust agreement, validly execute the trust agreement, and transfer property into the name of the trust to create a valid trust. The downside to a creating a trust is that as a settlor, you lose title to the assets you decide to transfer; meaning, you can no longer make decisions for those assets. Instead, the trustee decides how to manage the assets (in accordance with your trust agreement) for the benefit of the beneficiaries, even if you are still alive. What a trust does alleviate, however, is the need for beneficiaries to go through the probate process in the event of the settlor’s death in order to gain title/access to the property.
Both of these options are means to an end, but they do offer different benefits and burdens. What is most appropriate for you will vary according to what your ultimate goals are and the level of risk you are willing to take. Keep in mind you are not limited to one or the other. There is benefit to executing an estate plan that may be a combination of both of these options.
Do You Want to Implement Conditions on the Parties Who Will Manage or Benefit from Your Estate?
As weird as it may sound, establishing an estate plan does offer you a bit of control from your grave. Because transferring your assets under an estate plan are subject to instructions written by you or on your behalf, you will have the ability to set conditions before a beneficiary/heir can access the property you are willing to transfer or an executor/trustee can transfer the property. Whether you will want to take this approach, however, is completely up to you!
What I will say, is having the ability to set conditions is one of the benefits of establishing an estate plan because it can help you mitigate risks associated with what occurs to the assets you work so hard for during your lifetime. I’ve witnessed firsthand how heirs can mismanage funds, sell off property intended to be kept in the family, or completely disregarding obligations to care for other loved ones with the assets left behind. If these are risks you are concerned with, one thing you may want to consider is the ability of an Estate Plan to account for these conditions. For example, lets say one of your concerns is related to leaving a home for a child that has not reached an age of maturity: rather than passing away without a will and allowing the property to be passed through intestate succession (where your child can be taken advantage of by self-interested adults), leaving the home in a trust, with the condition that the home may not be sold unless the child declines ownership at the age of majority, might help mitigate the risk of a family member mismanaging the home before you child can actually make a decision. When considering whether or not you want to establish an estate plan, think about all of the many risks you are able to mitigate simply by forming a document that places conditions on asset transfer.
As I mentioned above, planning and strategizing on what to do with your Estate can be the single decision that changes the trajectory of your lineage. I hope that today’s blog was informative enough to equip you with the basics of what is involved in estate planning, different methods of achieving an estate plan, and various items you should consider in developing an estate plan.