Estate planning is necessary for everyone. However, the tools used to plan for your estate should be unique to your situation. It is a common myth that an estate plan only designates persons who are to receive your property upon your death. A comprehensive estate plan allows you to delegate your personal rights (financial and/or medical) to others while you are alive and after you have passed. It ensures that your assets are managed and distributed according to your wishes along with protections for your assets and corresponding beneficiaries. An estate plan may consist of a Living Trust, Testamentary Trust, Irrevocable Trust, Pour-Over Will, Last Will and Testament, Living Will, Funeral Instructions, Burial Instructions, Financial and Medical Powers of Attorney, Non-Probate Transfers, Payable on Death Designations, Deeds, and other governing instruments. Some estates may need simple beneficiary designations on your financial accounts and deeds, while others may require a trust.
While at first glance, you may think that most of the aforementioned documents do not apply to your estate, but that may not be true. An estate plan is planning for the expected and unexpected events in your life. The hope is that some documents will never need to be used, but if a situation arises, you are prepared. Remember that the time when your delegation of authority is needed the most, it is usually too late.
Likewise, most married couples do not see the value of a Health Care or Financial Power of Attorney because his or her spouse can make those types of decisions for each other, right? But, what if your spouse has passed away before you? Who will make those decisions then? Your kids? What if your kids don’t agree on how you should be cared for? What if one of your children wants to keep you alive in a vegetative state and the other does not?
Also, what about probate? Do you want the administration of your estate to be part of the public record? Who is going to manage your estate after your death? Your spouse? What if your spouse died before you? Do you want your kids to fight in court over who is in charge or your estate?
Moreover, when you do not have a plan in place, Arizona law will set forth the guidelines for administering your estate regardless of your (verbally) known intentions. As you can see, if you do not take some simple steps to plan for your death, many situations can arise that will either cause altercations among your family members or achieve results that do not coincide with your wishes.
Below, I explain some common estate planning techniques including the function and benefit of each document. Should you have any questions about estate planning, I give free consultations and am more than happy to discuss them with you over the phone.
General Power of Attorney
A general power of attorney will allow you to not have to worry about your “financial life” while you are unable to make those decisions yourself. You may need your “agent” to act on your behalf if you are on vacation or in the hospital. For instance, you might suffer from a debilitating medical condition and become bedridden in the hospital for months. Your agent can then deal with others on your behalf, pay your bills, and take care of your banking needs.
You can either create a limited power of attorney that will allow your agent to temporarily act on your behalf or you can create a “springing” durable power of attorney which will allow your agent to act on your behalf only if you become incapacitated. Some examples of powers given to your agent are:
Ability to sell your personal property such as your car or jewelry;
Ability to sell and lease real property such as your home;
Deal with your creditors;
Obtain a loan for you; and
Almost anything else you desire.
If you do not have one in place, you could possibly lose the things you have worked very hard to obtain during your life.
Health Care Power of Attorney
Who do you trust to make medical decisions for you when you cannot? A health care power of attorney will allow you to appoint someone to make medical decisions on your behalf when you cannot. It is always best to have wishes regarding your care in writing, but sometimes unexpected issues arise. That is when you need someone to make those decisions for you based on his or her knowledge of you and your wishes.
Your medical records are protected by the Health Insurance Portability and Accountability Act of 1996. Your medical records and data are not to be shared with anyone without your consent. A HIPPA Release or waiver will allow you to designate a person who can obtain your records on your behalf and share them with who you choose. For example, your agent can obtain and share your records with your home-loan lender to possibly defer your house payment.
A living will is often confused with a Last Will and Testament. A living will states your wishes regarding your end of life care. You can choose to receive only “comfort care”; or make specific limitations on your treatment; or prolong your life to the greatest extent possible. The important thing is to have your wishes set in place, so your wishes are followed. You do not want to put a loved one in the position of having to make the decision for you. Most people do not want to be kept alive in a vegetative state; however, most relatives do not want to be the person to “pull the plug.” Put your wishes in writing so one of your loved ones is not filled with guilt by making the decision for you.
If you die, generally your children will be taken care of by the surviving parent. But, what if you and your spouse die in the same accident? Or, what if the surviving spouse is incarcerated? What if your parents are too old to care for your children? With an estate plan, you will designate who you wish to care for your children in the event that you pass. This can prevent a nasty court battle over who is going to serve as the children’s guardian and/or conservator. Also, it can prevent a family member taking custody of your children who have no business raising them.
Last Will and Testament
A will not only designates who is to receive property from your estate, but it also designates who is to be the personal representative (also known as an executor) and whether or not if he or she is to be bonded. It sets forth the powers of your personal representative, can state guardianship designations for underage children and create testamentary trusts for those minor children.
If you do not have a will, your estate is distributed according to Arizona’s laws of intestacy. This generally means that your spouse will receive your estate (unless you have kids from a previous relationship). If you do not have a spouse, then your kids will receive your estate. However, many unjust situations can occur under the law of intestacy. Below are a few examples:
If you are not married, your fiancé, life partner, boyfriend or girlfriend is not entitled to any portion of your estate. Under Arizona Law, your children are the heirs of your estate. If you do not have any children, then your assets go to your parents and then to your siblings. This can be very unfortunate for someone whom you dearly loved and can put them in financial ruin.
Many times, individuals raise step-children as if they were their own child. If this child was not adopted by you, that child is not entitled to receive anything from your estate after your death. Only your offspring and adopted children will receive a distribution.
If you are married but have children from a previous marriage, this WILL cause issues. For example, husband marries wife #1 and has two kids. Then husband divorces wife #1 and marries wife #2. Husband and wife #2 have one child and live a long and happy life of 30 years. Husband and his children from wife #1 have been estranged for 20 years. Husband dies without a will.
The law states that Husband’s children – including the estranged ones – are to receive half of Husband’s separate property and all of Husband’s community property. Depending on how property was titled between husband and wife #2, it is possible that the estranged children from wife #1 now have an interest in: the house wife #2 is living in, the husband’s car, half of his personal belongings, and half of his personal bank accounts, etc. I have seen estranged children force the sale of the surviving spouse’s home. That is why it is important to have a will (or trust) in place.
Further, what if your children from a previous relationship are underage? If they are, who is going to manage the money they receive from you? Your ex-spouse? Do you trust him or her to properly manage your child’s inheritance?
Also, it should be mentioned that a will does not avoid probate. Your estate will be part of the public record and its administration may be overseen by the court – which can be expensive and time-consuming. Although, it is a great way to ensure that the people you care about will receive something from your estate.
Tangible Personal Property List
A tangible personal property list works in conjunction with a will. The tangible personal proper list allows you to designate certain personal belongings to the people you choose. This list can be changed and updated from time to time without having to redo your will.
Revocable Living Trust
Trusts sound scary, but they are actually pretty simple tools to distribute property in a way that a will cannot. Most trusts are revocable at any time prior to your passing. A trust allows you to avoid probate (court hearings and public record), provide asset protection for the surviving spouse, avoid conservatorships for you and your minor children, protect your children from outright distributions at an age where they are not responsible to handle the wealth, and protect your child’s inheritance from creditors, bankruptcy, disinheritance (surviving spouse remarries), and divorce proceedings. For example:
When you pass away, hopefully, your children are grandparents and are well-established, responsible adults. But, what if your child is a minor? Then your child will likely need a conservatorship to control his or her money until your child turns 18. Conservatorships can be expensive because they are monitored by the Court. The Court charges filing fees, investigative fees and requires annual accountings. The conservator will probably need to hire an attorney to ensure that the conservator is doing things properly. All of these costs will be paid for out of your child’s inheritance.
Also, when your child turns 18-years old, your child will receive his or hers inheritance and he or she can use it with all of his or her 18-year-old wisdom. Do you think your child will be able to handle $10,000 responsibly? How about $50,000 or $100,000? Probably not. Moreover, there is nothing that can be done – it is your child’s. Also, what if your child is 30-years old when you die, but he or she has an addiction such as alcohol, drugs or gambling? They will get the money outright with no supervision.
Finally, what if your child has many outstanding debts? If your child receives their inheritance outright, his or her creditors can seize your child’s inheritance. Probably not what you intended to be done with the money you left him or her.
Besides protecting your children from themselves, trust can protect them from
All of the aforementioned scenarios can be avoided with a trust. Further, trusts can be used to limit tax liabilities, protect children from a previous marriage and protect your spouse. Most importantly the cost of a trust is likely to be cheaper than all of the fees associated with probating a will through the court.
An estate plan should also include instructions regarding your remains. Do you want to be cremated and have your ashes spread in a certain place? Do you want to be buried near another loved one who has already passed? Do you want to donate organs to help another? Do you want to donate your body to science? Many times after someone has passed, the surviving family members disagree about what to do with your body. Put it in writing, so you can prevent a fight between your family members and avoid contentious litigation.
A Beneficiary Deed is a great way to give real property (real estate) to someone after your death and avoid probate at the same time. This type of deed states that upon your death, the grantee is to receive your property - subject to its mortgage. The deed is recorded on your property but doesn't transfer any ownership until you die. The deed can be revoked at anytime and is a much cheaper way to gift real property than going through probate.
Remember, a good estate plan can be as simple as a will, Financial Power of Attorney, and a Health Care Power of Attorney. There are many more documents that supplement the ones mentioned on this page. You need to be proactive to prevent unfortunate circumstances. We never know what life is going to give us, so it is important to control the things that we can!
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