Lifetime and testamentary planning
Contrary to popular belief, estate planning typically involves more than just signing a Will. It generally involves two sets of considerations: lifetime planning and testamentary planning. Lifetime planning may involve choosing decision-makers to make health or financial decisions on your behalf should you become incapacitated. For higher net worth individuals, lifetime planning may also involve establishing tax-efficient gifting strategies during life.
A testamentary plan, on the other hand, will designate the individuals or charities who are to inherit your assets at death, and in what capacity (e.g., outright vs. in trust). In addition, a testamentary plan may appoint a guardian to care for your minor children, as well as an executor to administer your estate, and a trustee to oversee any trusts that may be created after your death.
What concepts and documents affect an estate plan?
Your personal situation will dictate what paperwork needs to be drafted and signed in order to implement the decisions discussed above. If you are a business owner, for example, business succession planning may necessitate the need for more complicated agreements. In general, the basic concepts and documents that can have an impact on your estate plan are:
- Title and Ownership (e.g., real estate, bank accounts)
- Beneficiary Designations (e.g., IRA, life insurance, 401(k))
- Financial Power of Attorney, Health Care Proxy and Living Will
- Will/Revocable Trust
What is the difference between “probate” property and “non-probate” property?
In order to understand how your estate plan works, it is important to understand the difference between “probate” and “non-probate” assets. In general, non-probate property is property that passes at your death, by operation of law, either to the joint owner of the property,[1] or to the individual named on the beneficiary designation form. For example, if you own real estate and bank accounts jointly with your spouse, those assets pass automatically to the surviving owner. Similarly, any retirement benefits or life insurance that you have will pass to the beneficiaries named on the beneficiary designation forms. The provisions of your Will do not impact the passage of non-probate assets at your death.
Any other assets not passing by law or beneficiary designation will generally pass pursuant to the provisions in your Will or Revocable Trust. Let’s use a simple example and assume that you own your home jointly with your mother, but that you are the sole owner of all of your bank accounts. Let’s further assume that your sister is the sole beneficiary under your Will. At your death, your home would automatically pass to your mother because she is the joint owner. But your bank accounts would pass to your sister pursuant to the terms of your Will.
It is important for you to be in the driver’s seat with respect to decisions affecting your estate plan. If you do not have an estate plan, the default provisions of state law will govern how your assets pass at death, which can result in unwanted consequences. In addition, even after you have created an estate plan, it is important to revisit it every 3-5 years or when a major life event occurs (such as the birth of a child, divorce, death of a family member). If you have any questions about your estate plan, please contact your advisor or attorney.
[1] The joint owner must have “rights of survivorship” in order for the property to pass automatically to him or her at your death.
