Goals of estate planning chart

For many clients and advisors, the central goal of estate planning it to pass as much wealth to the next generation as possible.  This thinking suggests that protecting assets is the solitary goal of an estate plan.  Unfortunately, this can be a misplaced emphasis.  Misplaced because it focuses simply on assets rather than family, structure over perspective and tax savings over family need.

Estate planning is not only about the dead and their assets.  Rather, the legacy left for the living should be an over-arching goal of estate planning.  The primary consideration should involve protecting and preserving the family – a focus that begins with the living, not the dead.  It’s not that tax planning and asset preservation are unimportant; it just pales in significance to protecting family.  Also, there seems to be a central truism in the passage of wealth.  “Every inheritance (or lack of inheritance) will effect the recipient” – Warren Buffet.  Often this effect will have a longer lasting impact on the family than ever imagined.

It might not be a surprise to you that most Americans haven’t made a simple will.  As well, most haven’t given consideration to a comprehensive plan to avoid probate or to save on estate taxes either.   Why is it that most people don’t consider estate planning as a critical aspect of their family and financial plans?  Perhaps having to face hard questions and having to face emotional complexities far outweigh a family’s economic reasons.  Maybe, also, many just don’t understand the basic reasons why they should!

Helping Your Understanding Of Some Fundamental Estate Planning Concepts

At Kaelber, Billmyer & Kaelber, LLC, we are committed to providing our clients and readers with every advantage when trying to preserve and grow their human, intellectual and financial wealth.  This article focuses on some fundamental estate planning concepts and considerations for some broad categories of household status and age.  The good news is that depending on your age, household status, health, wealth and level of caution, you may not need to do much in the way of estate planning at all.

Kaelber, Billmyer & Kaelber, LLC is a CPA firm in Charlottesville, Virginia, providing quality accounting & tax services for individuals, business, trusts & estates. We also offer business consulting services and private equity structuring support.

What Is a Simple Will and Why Might I Need One?

A simple will is a legal document that details your wishes regarding the distribution of your assets among your relatives, friends, and favorite charity upon your death.  Your will is also the place where you will identify people for important roles, such as:

  • The guardians for your minor children is the person who will care for and raise them.
  • The executor of your estate is the person responsible for ensuring and carrying out all of your wishes articulated in the will.
  • The trustee(s) is the person resposnbile for managing and administering any property held in a trust vehicle solely for the purposes specified.

The division of an estate after death comes with many emotions.  The slightest differences can result in hurt feeling and recriminations.  A will that clearly lays out your wishes may reduce conflict and speculation over what you “would have” wanted.   If you do not write a will, state law will determine what happens to your wealth.

In most states, if you have children but no spouse, the state will appoint a guardian who will be responsible for attending to their finances while they are minors.  If you have no spouse or children, if living, your parents will receive the inheritance.  If you have no surviving relatives, the state receives all of your assets!

This may be a lot to consider, but to ensure the safety and protection of your loved ones, make your wishes explicit in a written will.  Going without could be extremely hard on your survivors.

Trust that your most difficult decisions will involve whom you would like to ask to be the guardian of your children and the executor of your will.

Will I Ever Need to Change My Will?

You may think you’ve provided yourself great peace of mind and spared your loved ones from hassle after your death, but are you 100% sure your will is valid and correctly expresses your wishes?

Unfortunately, although many people believe they have executed a legal will that reflects their wishes, that’s not always the case.  Several common mistakes in making a will can mean that the document is invalid or does not accurately reflect the intentions of the person writing the will.

If the will isn’t valid, you would die intestate, or without a will, and state law would govern the distribution of your property with no regard for your wishes. Alternatively, some of your bequests could fail and/or land your family in probate court wasting time and money trying to correct your errors.

Even the best-laid plans and changes in your life affect what you include in your will and what laws will be applied to enforce it.  You may sell one house and buy another.  You may marry, divorce, have or adopt children.  Not all life changes require you to change your will.  However, significant ones often do.

Creating a Codicil

It’s not difficult to change a will.  You can amend, modify, update or even completely revoke your last will and testament at any time, provided you’re mentally competent.  You can make small changes to your will by creating a codicil.

A codicil is a way to amend a will by effectively “nullifying” certain portions of it.  This is an effective strategy when you only want to change a small portion of your will.  The requirements for drafting a codicil will mirror, in most respects, the requirements for drafting a valid will in your state.  The codicil should reference the old will and specify what specific clauses in the old will you are changing.

What Does Probate Mean?

After someone passes away, all of his or her possessions become part of the estate.  The process of transferring the estate’s assets to the beneficiaries is called probate.   Typically, probate involves paperwork and court appearances by lawyers.  The court validates the will and insures that the assets are distributed in accordance with the will.  The estate pays all legal and court fees from estate property, which would otherwise go to the people who inherit the deceased person’s property.

Often, probate of a will can take a long time.  If there are challenges to the will, the process can tie matters up in court for months or possibly several years.  As a result, probate can be somewhat costly because of court fees.  What’s more, papers must be filed in each state’s probate court if you have property in several states.  Then when the administration of the estate is complete, the will becomes a public document.

To avoid this time-consuming hassle, transferring assets to a trust can bypass probate.

What is a Trust?

In simplest terms, a trust is a legal agreement between at least three parties: the grantor, the trustee, and one or more beneficiaries.  The grantor is the person establishing the trust.  The grantor transfers property to the trust and the transferred property is the called the principal.  The trustee, then manages the property for the beneficiaries of the trust.  There are generally two types of beneficiaries to a trust.  An income beneficiary who has rights to the income that the trust assets generate; and, a remainder beneficiary who has an interest in the principal assets at termination of the trust.   Quite often, the property can remain in a trust for whatever length of time needed to meet your planning needs.

You don’t have to be wealthy to consider establishing a trust.  People of all income brackets can benefit from transferring property to a trust.

It’s often said that there is a trust for every occasion.  And, it is very easy to become confused by the jargon estate planning professionals use to describe them.  To help you through some of this legalese, here are some basic trust types:

  • Revocable trusts can be modified while the grantor is still alive, .
  • Irrevocable trusts cannot be modified while the grantor is still alive.
  • Testamentary trusts are established as part of a will and become effective at the time of the grantor’s death.
  • Living trusts are established during the grantor’s lifetime and become effective immediately.

Some Family Minded Uses

With certain kinds of trusts, there are several tax advantages associated.  Those advantages aside, here are some family minded uses for consideration:

  • Encouraging grandchildren to attend college by setting up education trusts.
  • Delaying access to the inheritance until the children become mature enough to manage it responsibly, or
  • Using a trust to create incentives and opportunities for heirs without supporting an unearned lifestyle.
  • Protecting an inexperienced heir from judgment errors by arranging an independent financial advisor and trustee.
  • Keeping private the contents of your estate and how your estate is being distributed.

Some Other Goal of Estate Planning Basics to Consider

There may be a time in your life when you are unable to make your own financial or healthcare decisions because of extreme illness, disability, incompetence, or even when on extended holiday.  At these times, it is important to legally empower someone you trust to make these decisions on your behalf.

Power of Attorney

Power of attorney is a document by which you, as principal, appoint a person to act as your agent or attorney-in-fact.  An agent is one who has authorization to act for another person.  If you have appointed an agent by a power of attorney, acts of the agent within the authority spelled out in the power of attorney are legally binding on you, just as though you performed the acts yourself.  The power of attorney can authorize the attorney-in-fact to perform a single act or a multitude of acts repeatedly.  You need to pick someone you can trust!

Many people are unaware that an ordinary power of attorney can become invalid.  Under an ordinary power of attorney, the agent’s power to act for the principal automatically stops if the principal becomes incapacitated.  However, a durable power of attorney allows the agents to continue acting on the principal’s behalf even if the principal becomes incapacitated.  A durable power of attorney simply means that the document stays in effect if you become incapacitated and unable to handle matters on your own

Sometimes called a conditional power of attorney, a springing power of attorney is a type of Durable Power of Attorney.  This is a type of document that only comes into effect after certain conditions are met.  Typically, when the principal becomes disabled or mentally incompetent.

For Healthcare Decisions

Most states have one set of laws governing financial POAs and second set of laws governing POAs for health care decisions.  Therefore, it is the common and recommended practice not to mix the two purposes into one document.

Living Wills and Medical Powers of Attorney serve different but complimentary purposes.  A Living Will sets forth the individual’s intentions in case of terminal illness or persistent unconsciousness.  A Medical Power of Attorney authorizes an agent to make health care decisions for the principal when he or she is no longer capable of making them.

What Makes Sense For My Household?

If you are a single persons under 30, unless you’re uncommonly wealthy, you’re better off concentrating on more enjoyable social happenings.  But, if you are financially secure, you might want to write a will so you can leave your possessions to whomever you choose.

If you’ve got a life partner but no marriage certificate, a will is almost a must-have document. Without a will, the law in most states will dictate where your property goes after your death, and unmarried partners often get nothing.

Having children complicates life — but then, you already know that.  Estate planning is no exception.   At a minimum, write a will that leaves your property to whomever you choose and names a guardian for your children.  The guardian will take over if both you and the other parent are unavailable.  This may be unlikely, but it’s worth addressing just in case.  If you fail to name a guardian, a court will appoint someone, possibly one of your parents.  Also, make sure you have adequate life insurance coverage.

Comfortable Time in Life; Elderly or Ill

If you’ve made it to a comfortable time in life, you will probably want to take some time to reflect on what you will eventually leave behind.  But given that you may well live another 30 or 40 years, there is no need to obsess about it.  Chances are your conclusions will be different in ten or twenty years, and your estate plan will change accordingly.  Review again what I’ve written above and consider saving your family the cost (and hassles) of probate.  If you have enough property to worry about estate taxes, think about tax avoidance as well.

If you are elderly or ill, now is the time to take concrete steps to establish an estate plan.   First, consider a probate-avoidance living trust and, if you’re concerned about estate taxes, a tax-saving trust.   Also, write a will, or update an old one.  Then, although no one wants to do it, take a minute to think about the possibility that at some time, you might become unable to handle day-to-day financial matters or make healthcare decisions.  If you don’t do anything to prepare for this unpleasant possibility, a judge may have to appoint someone to make these decisions for you.  No one wants a court’s intervention in such personal matters.  But someone must have legal authority to act on your behalf.

We’re At Your Service

Whether you’re an estate planning professional or a client undergoing the process, we’re happy to help.  When going through the process, we can help you through some of the hard decisions that will confront client participants.  And, our accounting firm is more than capable to assist with you tax and administration needs.  We’re at your service!


About the Author

Henry V. Kaelber, CPA, CFP®, CGMA