What if I don’t have an estate plan?
Believe it or not, even if you haven’t intentionally created an estate plan, the State of Illinois has created one for you! If you die or become incapacitated without an estate plan, your estate will pass according to the laws of the State of Illinois – laws known as the Illinois Probate Act. Let me know if you can guess who stated the following:
“I want my estate planning to be done by the people I trust the most… the lawmakers of the State of Illinois.”
That’s right. No one has ever said that. However, if you die without an estate plan, Illinois says that your estate would pass according to the Probate Act – which goes to the following people in the following order: spouse and children first, siblings and parents second.
Sounds okay at first glance, but this may raise red flags for some people – especially those who may have estranged children, general family dysfunction, or want some special bequests to go to close friends. It also may alarm you if you don’t want your children to receive their inheritance when they turn 18 years old. If you are like me, I am not trusting an ordinary 18-year-old with everything I have spent my life building.
So where does an Estate Plan begin?
While Estate Plans often include different kinds of Trusts, Powers of Attorney, and other important forms, the foundation of any estate plan is a Will, formally called a “Last Will and Testament.” A Will is a legal document which states the wishes and desires of the person who has passed away. Because a Will comes into effect at your death, it is important to note that it has no legal bearing while you are still alive (unlike a Trust – more on that later). Basically, the Will takes care of three things:
- Which people get what assets from your estate (called your “Beneficiaries”)
- Who will administer your estate through the Probate process (called your “Executor”)
- Who will care for your minor children until they turn 18 years old (called “Guardians”)
Does everyone need a Will?
I like to illustrate this with a picture of a scenario that I have seen too many times.
Look familiar? Family strife is the #1 cause of problems after a parent or grandparent passes away. However, avoiding family strife is only one reason to have a will. The main reasons can be summarized in three points:
- You need a Will if you want to have your belongings distributed in a manner that reflects your wishes (as opposed to how the state will distribute them).
- You need a Will if you want specific guardians for your children (as opposed to various family members battling for them in court).
- You need a Will if you want a certain person to manage your estate after your passing (as opposed to having various relatives being appointed by the court).
Most people fit into one of the above categories and so don’t procrastinate, let’s get started now!
IS A WILL THE ONLY PLANNING THAT I NEED?
As mentioned above, a Will is the necessary foundation of every estate plan. In some cases, it could be the only thing that you need. However, for many people, it merely represents the all-important first step. Depending on your situation, it may be advisable to consider using a Trust to organize your estate. Before we get into the advantages of a trust – let me answer the question that has just popped into your head – “I know I have heard that word before, but what actually is a trust?” Most people don’t have a good understanding of a trust because it used to be a term that was only associated with the extremely wealthy. However, over the last few decades, trusts have become one of the primary and most helpful tools with regard to creating an estate plan. This is because they offer incredible flexibility, management during your life, and efficient disposition of your property upon your death.
Put simply, a trust is a written agreement between a Grantor (the person putting the property into the trust) and a Trustee (person who manages the property), giving direction for how the property should be managed for the benefit of the Beneficiaries (the people who end up with the property). In most cases, the grantor and the trustee are the same person. You can think of a trust this way – it is not a tangible thing that you can see and touch – it is a way of owning the property.
Here is an example: John is a bachelor and owns a home in Whiteside County. John, as part of his estate planning, has formed a trust and now he wants to place his house into the trust. To accomplish this, John deeds his house from himself (in his individual capacity) to himself as the Trustee. The house is still John’s property – but he owns it in a different way – a way which has many important benefits, as we will now explore.
WHEN DOES SOMEONE NEED A TRUST?
One of the primary benefits of a trust is that anything owned by a trust passes to the beneficiaries outside of the Probate process. This is a really big deal. In general, this means that things can be wrapped up in a more timely and efficient manner than in the case of going through Probate. However, the avoidance of Probate is generally not enough in and of itself to justify a trust. A trust comes into the picture anytime the Will is not an effective tool by itself to manage your assets. Here are some examples of situations where a trust is almost certainly necessary:
- Privacy. This may shock you, but a Will is not a private document. When a Will is probated, it becomes part of the public record in your local courthouse. This means that anyone can access your Will and see who you gave property to. If you are like me, that doesn’t sound very appealing. If privacy is a concern, then consider the benefits of a trust.
Example: John is an avid collector of firearms. He wishes to give his collection of firearms to his hunting buddies upon his demise. He provides in his Will by specific bequests which gun goes to which friend. After John passes away and the Will becomes public record, anyone snooping around can discover not only that John had a significant amount of firearms, but also who got his limited edition Perazzi MX8, worth about $10,000. I’m guessing John would rather this information be kept private.
- A Will only becomes effective upon your death. This means that it does not provide for management of your assets while you are still alive. Another benefit of a trust is that it provides for continual management of your assets in the unfortunate case of your disability or incapacity. If you are a farmer, a business owner, a landlord with several rental properties, or someone with significant assets, this is extremely important.
Example: John is a farmer who farms about 500 acres in Whiteside County. The land and everything in his farming operation is owned in his individual name. John is fixing his combine one day and has a stroke and becomes incapacitated, i.e. he is unresponsive and unable to make decisions. John had been planning to sell a few loads of corn in the next couple weeks to pay some bills and his mortgage. Because everything is in his individual name, the corn is not able to be sold and the bills are unable to be paid. If John had a trust, this problem would not occur and the trust would provide for someone to manage his affairs in the event of this disability.
- Faster Distribution of Assets. Depending on what you have when you pass away and how you left your affairs, Probate can be a long and frustrating process. It is not uncommon for Probate to last for more than a year and this means that your estate will generally not be able to be distributed during this period. Due to restrictions on the actions of an Executor and the fact that everything must go through the Court, Probate is anything but quick. A trust, on the other hand, does away with the formality and restrictions of Probate. While your successor trustee (the person who manages your trust after you pass away) still has a duty to manage the trust fairly, they have much more freedom to do this in an efficient and timely manner. It is not uncommon for a trust to be able to make initial distributions to the beneficiaries within the first few months.
WHAT ABOUT POWERS OF ATTORNEY?
A “Power of Attorney” (POA) is a legal document that gives a designated “agent” the legal authority to act on your behalf in certain situations. There are two types of POAs that are used in estate planning today – one for Health Care decisions and one for Property management. These documents are increasingly important – especially with the rising rates of dementia, Alzheimer’s and other diseases that affect the mind. Who is going to make important decisions when you cannot?
A POA for Health Care allows your agent (a spouse, parent, sibling, child, close friend, etc.) to make health care decisions for you if you are unable to make these decisions for yourself. While it handles many things such as access to medical records, it most frequently comes up in “end of life situations”, i.e. whether an individual should be taken off life support. It may seem ridiculous to you, but because of increasingly rigorous health care laws – a spouse is not necessarily allowed to make these decisions for you. While some hospitals are more understanding than others, the general rule is that the only person allowed to make this decision is your designated agent under your Health Care POA.
- EXAMPLE: John is a widower and has three children. He is working one day and has a stroke. He later slips into a coma and in unresponsive. After a few days of trying to bring him out of the coma, the doctors inform his children that there is nothing else they can do for him, other than keep him in his current state. This would be indefinite and could cost an extraordinary amount of money to keep him alive in this state. His oldest son, Jim, is his designated POA for Health Care. Jim has a conference with his two siblings and they all agree that dad would never have wanted to be kept alive in such a state and at such a cost. Jim exercises his POA and orders the doctors to take John off of life support.
The other Power of Attorney – one for Property – allows the designated agent to handle all financial affairs on your behalf. Whether it is because of disability or choice, having the ability to have a trusted individual manage your finances can be hugely important.
DO I NEED AN ATTORNEY TO DRAFT AN ESTATE PLAN?
We live in a world full of “do-it-yourselfers.” You can go “online” today and see lots of websites and templates that promise to be able to achieve your wishes for a “fraction of what it would cost to hire an attorney.” Is this true? Yes and no.
Sure, it would be cheaper to pay under $100 for a generic template that was created to fit a variety of people and lifestyles. However, the reality is that a “one-size-fits-all” approach never actually accomplishes that. I have never found a one-size-fits-all hat that actually fits me comfortably. A hat is supposed to fit your head just right – not too loose, not too tight, because every head is a different size and shape – just like every estate.
There are huge risks associated with the do-it-yourself approach to legal work. For instance:
First, all the online templates in the world simply cannot give you feedback or advice that a professional estate planner can. One more metaphor, then I am done, I promise. The legal world of estates and Probate, with its intimate connection to tax matters among other things, is a very real jungle. It is a jungle that you generally have only one shot at walking through (if your estate plan isn’t correct and effective when you die, you certainly can’t change it later!). It is also a jungle that is filled with booby traps and pitfalls. So – what kind of guide do you want to hire? Do you want someone who claims to be a guide, says that he has heard of this jungle, has never been there, but can draw you a map? Or… do you want a guide who lives in that jungle and has successfully guided many people through it before. For me, that’s an easy choice. I’m sure you would agree.
Second, when a dollar amount is actually considered carefully, the cheap patchwork job that an online template is going to accomplish for you will be much more expensive down the road when its flaws are exposed in court, by rival heirs, or by the IRS. Consulting with a professional estate planner, in all likelihood, is much more affordable than you may realize – especially considering that your initial consultation with us is always free.