Estate Planning 101 - Stone Arch Law Office, PLLC

Benjamin Franklin once said, “By failing to plan, you are preparing to fail.” This applies to a lot of things in life, especially estate planning, which is one of the biggest things that people have to do.

Estate planning, which involves putting documents in order to dictate what happens to certain assets, debts, etc. when one passes away, can be intimidating. With the complex process involved and all the work that needs to be done, a lot of people never go around doing it.

But planning an estate is absolutely essential. The good news is that it’s not as hard as most people think. Here’s estate planning in a nutshell and what people should know about it.

What is Estate Planning?

To put it simply, estate planning is the process of creating a cohesive and value-driven way to prepare for death. It takes into account a person’s values, goals, priorities, physical possessions, money, and family, among others, to create a plan that will bring security and peace of mind.

Four Focuses of Estate Planning

Estate planning can get complex, but it’s essentially focused on these four things.

Intestacy Statutes

Even without an estate plan, a person’s assets can still get divided following the rules of intestacy statutes. These are default rules created by the legislature that dictate to whom the deceased’s belongings should go in the absence of a will.

The problem with intestacy statutes is that they’re standardized with provisions that applied to an early 20th-century farm family. They’re not exactly applicable or at least, favorable, in the modern age. Specifically, the default rules prioritize keeping the property going in a certain line, making the spouse and kids the primary beneficiaries.

Intestacy statutes don’t take remarriage, blended families, half-siblings, etc. into account. And the court is not going to adjust those rules to suit the unique needs of different families. But a will can overwrite those default rules.

The first decision to make in estate planning, therefore, is whether or not one wants to overwrite those rules and create a plan so things happen according to their terms, values, and unique family situations.

Probate

Probate is an administrative court proceeding where the estate is divided according to the provisions of the will. It starts with the appointment of the executor, who ensures that the deceased’s debts are paid, bills are accounted for, and the right people get things in the right proportion. A will controls probate, guides the judge in deciding what to do with the estate, and overwrites the default rules of intestacy statutes.

With preliminary planning, however, it’s possible to avoid probate altogether. This can be done through a private family entity called a revocable trust. In place of a will, a person can put all their assets in the trust to be controlled by a private family agreement. In effect, this bypasses the court system and the assets can be divided automatically without the need for probate.

The issue with a revocable trust, however, is that it’s expensive. According to the University of Minnesota Extension Office, building a revocable trust can cost up to 3% of an estate. However, considering that it avoids the probate process, is a private document, and can get things distributed much faster, some people do think it’s a meager price to pay.

Unique Family Dynamics

Generally, people distribute their assets equally among family members. But an estate plan also allows them to consider and plan for their unique family dynamics. Some kids, for example, may need a bigger inheritance than those who are financially stable.

Uneven distributions are very much doable with an estate plan. But this also comes with the responsibility of preventing problems among family members. A lawyer can help ensure that uneven distributions are done in a logical way that has an explanation and that’s understandable for the family.

Tax Worries

Because estate planning mainly deals with money and assets, tax is another thing that people have to worry about. There can be significant tax issues in an estate, depending on what one has and what they’ve done with their assets during life.

Retirement accounts like IRAs or 401(k)s are a good example. These are usually tax-deferred, so when the beneficiary takes them out, they have to claim the money as income and pay taxes at the applicable tax rate.

There are also rules on how quickly the money should be taken out. Spouses can take little by little over their lives, as provided by the required minimum distribution. Adult children, on the other hand, can take all the money out in 10 years.

From estate tax to capital gains tax, income tax, etc., there are a lot of considerations to be made and these must all be accounted for in an estate plan.

When to Get Started on Estate Planning

A lot of people have the notion that estate planning can wait until they’re 80 when their lives have come full circle. But this is a very risky mindset. Life is unpredictable — and it can be lost in the blink of an eye. Hence, estate planning is something that should be done early on.

The most important time to get started on estate planning is the moment a person either has assets or people for whom they are responsible. This can be right after marriage or having young children. These are significant milestones in life that call for the need to plan.

But that’s not to say that people who are in their 80s should no longer plan their estates. It’s never too early or too late for it.

Another important thing to note is that estate planning is not a one-time thing. The documents need to be revisited every now and then to make sure that the decisions made can still apply. Relationships change, assets appreciate, and families grow — an estate planning document should be updated to reflect these.

How to Get Started on Estate Planning

For one to get started on estate planning, the first step is for them to know what it is they have and who the people in their lives are. They also need to outline their goals and priorities in order to create a plan that reflects their values and wishes.

It’s highly recommended to contact a professional to kick-start estate planning. Lawyers can provide assistance and guidance, ensuring that the whole process makes sense and is done correctly.

Tips for Successful Estate Planning

There are things a person can do to better ensure they plan their estates properly. These are the following.

Create an Asset and Beneficiary Inventory

Before a person can say which assets should go to whom, they must first understand what it is they have and to whom they can give. That can be done through a full, detailed inventory of assets and beneficiaries.

Instead of simply listing money and property, as well as the people who should receive them, the inventory should also reflect the things that are important for the person creating the estate plan. For example, they should leave directives about things that are important to them, such as charities, education for their children, guardianship, etc.

This inventory basically kicks off the whole process. An estate planning attorney can take it from there, sit down with the client, go through the estate planning process, and make some recommendations to create a successful plan.

Prepare Backups

One of the biggest mistakes that people make in will documents is failing to provide backup beneficiaries in case their first options are unable to accept the inheritance for whatever reason.

There should be a waterfall of distributions, which means that every gift made in the will has solid backups. If the beneficiary initially named cannot receive it, there should be other levels that tell the court to whom the asset should go next — up until the very last resort.

Understand the Documents

Because an estate plan contains documents made for the court system, they’re going to have a lot of legalese that may be difficult to comprehend. That stresses the importance of working with an attorney who can help make the complex language digestible. They’re not going to use legalese with their clients and instead ensure that they understand all aspects.

Can You DIY an Estate Plan?

There are many DIY estate planning options out there — there are even tools people can use to generate a full-blown will. However, it’s important to know that estate planning is not a one-size-fits-all process. There are a lot of things that can come up — things that most people don’t realize.

Hence, it’s very much recommended to work with a professional. By working with an estate planning attorney they trust, people can have more security that their plans were done correctly and that things will happen the way they want them to.

The biggest value that a legal professional can bring is making sure that a client is thinking about the things they need to and in doing so, are complying with the estate laws in Minnesota — which, by the way, are different compared to other states’ laws. They can ensure that the client’s wishes are represented in the document in a way that’s doable and workable.

Learn More About Estate Planning

Anyone who wants to learn more about estate planning can visit stonearchlaw.com and get access to free resources, e-books, and a ton of informational videos. Stone Arch Law also has a team of compassionate, kind, approachable, and experienced attorneys who help make estate planning accessible and understandable to all families.

Estate planning can be complicated if you don’t know where to start. Many people should get professionals to help them with their estate planning to avoid unnecessary burdens and take advantage of Minnesota-specific laws. Estate taxes can quickly add up and be a financial obligation for loved ones, so it’s important to use tax-efficient tools and strategies when creating an estate plan. Stone Arch Law can help people create an estate plan that minimizes unnecessary taxes and maximizes the gifts they leave behind.