What comes to mind when you think of the phrase "estate planning"? You have probably heard the term, but it might not be clear what it entails or who should have one.
I'll admit to a fair amount of ignorance on the subject for much of my life: I used to assume that estate planning was something for rich people with mansions and sprawling properties, like the Biltmore Estate here in North Carolina or Hearst Castle in California. While people with significant wealth certainly use estate planning to avoid certain types of taxes, an estate plan is essential for anyone who wants to ensure their wishes are carried out after they pass away.
In simple terms, an estate plan is a set of legal documents and instructions that outline how your assets will be managed and distributed after your passing. Having an up-to-date estate plan can help ensure a smooth transition of assets to your chosen beneficiaries (and potentially avoid conflicts among family members). It can also help reduce complications for your loved ones at an already stressful time.
The central piece of any estate plan is a will, also called a last will and testament. A will designates how your assets will be distributed among your beneficiaries upon your death. It also allows you to appoint a guardian for any dependents like minor children or pets. Additionally, an estate plan may include other essential documents like a power of attorney, which designates someone to make financial and legal decisions on your behalf if you become incapacitated, and a healthcare directive, which outlines your medical wishes in case you cannot express them yourself.
For artists, writers, musicians, and creatives, estate planning takes on added significance. There may be unique intellectual property rights and creative assets that need special consideration, including protecting copyrights, royalties, unpublished works, and licensing agreements to help preserve your creative legacy. Without a comprehensive estate plan, there may be disputes over the ownership and distribution of these valuable assets, potentially leading to lengthy legal battles. As a cautionary example, Prince died without a will – and it's entirely possible that legal challenges will prevent his estate from ever being settled!
What is Estate Planning?
Creating an estate plan is not a one-time task: it requires periodic reviews and updates to reflect changes in your life, such as marriage, divorce, birth of children, or acquiring new assets. This is the difference between an estate plan (the documents you have in place right now) and estate planning (proactively monitoring & updating your estate plan over time). It is important to work with a qualified estate planning professional who can guide you through the process and help you customize your plan based on your needs and goals.
Estate planning includes determining how an individual’s assets – including both financial assets like bank accounts, investments, life insurance, and property, as well as more personal assets like family heirlooms, collectibles, or items with sentimental value – will be used, maintained, and/or distributed after death or in the event of incapacitation. It also includes deciding and documenting who should care for any dependents of the deceased, including minor children, adult children with special needs, aging parents, and even pets.
What about your intentions for the type of care you receive while living but no longer able to make decisions on your own? Naming legal & medical powers of attorney and documenting advance medical directives are also essential components of estate planning.
What is a Will?
Let's cut to the chase: you need a will.
Technically, a will refers only to real property (physical parcels of land and anything permanently attached like a house), while a testament addresses personal property (like jewelry, automobiles, and heirlooms) & intangibles (like bank accounts, insurance, and investments). But these days we generally forgo the full title of "Last Will and Testament" and simply say "will".
Regardless of age, wealth, or family structure, everyone should have a will in place. No really: everyone. Your will allows you to specify who will inherit your property and state your preferences for who you want to take care of your dependents after you're gone. You can have peace of mind now knowing that your wishes are spelled out, and it also means waaaay less stress for your loved ones later.
As discussed later in this post, probate is the process of legally settling someone's estate after they die. Part of that process involves executing the will, so having one does not avoid probate. However, an up-to-date will gives the court a framework for what you want to happen, and *most of the time* the court will honor those wishes.
If a person dies without a will (called dying intestate), though, it's up to the court to decide how best to settle the estate. That means the distribution of your assets will be governed by the laws of your state or local jurisdiction. These laws typically prioritize spouses, children, and other close relatives, and generally do a pretty good job of acting in the best interest of your survivors.
But what if you had specific ideas about who should have what? Did you intend to leave a special heirloom to a specific relative? Or make a donation to your alma mater? Did you want to omit a specific relative?!? Your state's intestacy laws might make that impossible. Without a will, you have no control over how your assets will be distributed, and it may not align with your wishes or the needs of your loved ones.
As you can imagine, the process can be emotionally challenging for your loved ones at an already lousy time.
Having a valid will is particularly essential for individuals with dependents: it allows them to designate guardians for their minor children, ensuring their well-being and care. It also lets you spell out who you want to care for your pets! Without a designated guardian named in a will, the court will have the responsibility of appointing a guardian. With an up-to-date will, though, you can ensure that your children and pets are placed under the care of a trusted individual who understands your desires for their care.
Regardless of your circumstances, having a will provides peace of mind, allows you to have control over your estate, and takes a lot of the burden off your loved ones after you die.
Want some budget-friendly suggestions for creating your own will? Send me an email and I'll share some suggestions.
What happens if you die without a will?
If you pass away without a will, you are considered to have died "intestate." That means the distribution of your assets and the settling of your estate will be governed by the laws of your state or local jurisdiction. These laws typically prioritize spouses, children, and other close relatives. Did you intend to leave a special heirloom to a specific relative or make a donation to your alma mater? Your state's intestacy laws might make that impossible. Without a will, you have no control over how your assets will be distributed, and it may not align with your wishes or the needs of your loved ones.
One consequence of dying without a will is that the court will appoint an administrator to manage your estate and distribute your assets according to the intestacy laws. This process can be time-consuming and costly, as the court oversees the entire process. It may also lead to disputes among family members, particularly if there are disagreements about how the estate is distributed or if certain individuals are excluded under the intestacy laws. As you can imagine, the process can be emotionally challenging for your loved ones at an already lousy time.
Furthermore, dying without a will can also complicate matters if you have minor children. Without a designated guardian named in a will, the court will have the responsibility of appointing a guardian to care for your children. Courts generally aim to act in the best interest of the children, but the appointed guardian may not align with your wishes or share your values and parenting style. By having an up-to-date will, you can ensure that your children are placed under the care of a trusted individual who understands your desires for their upbringing.
What is Probate?
Probate is the legal process through which a deceased person's assets are distributed and their final affairs are settled. It involves validating the deceased person's will (if one exists), identifying and appraising their assets, paying off any outstanding debts or taxes, and distributing the remaining assets to the beneficiaries as outlined in the will or according to the laws of intestacy if there is no will. There are specific courts just for this purpose called, not surprisingly, probate courts.
The probate process can be time-consuming, costly, and subject to public record. It aims to ensure that the deceased person's wishes are followed, creditors are satisfied, and the rightful beneficiaries receive their inheritance. However, it is important to note that wills may be contested. In some instances, a judge may agree that the terms of the will are unfair and distribute assets in a way that goes against the instructions in the will.
While the estate of every deceased person must be settled through probate, there are ways to transfer certain assets independently of the probate process. For example, life insurance proceeds bypass the probate process because they are contractually determined in advance. (That does not necessarily remove the life insurance from a deceased person's taxable estate, but it does avoid probate.) Similarly, jointly held accounts will automatically pass to the surviving account owners – thus avoiding probate. There is another tool that many people choose to keep assets out of the probate process (and sometimes out of estate taxes) called a trust.
What's Up With Trusts?
This month's Financial Planning Focus is estate planning. Today we'll look at trusts and some of the ways they are typically used in estate plans.
If you take nothing else about estate planning away from this month's newsletters, I want you to know that you should absolutely have a will and absolutely name beneficiaries on every account & insurance policy you own. Make sure you take care of at least those things.
But there are more advanced estate planning concerns that wills and beneficiary designations just can't handle and – for some of those – a trust provides a great solution.
What's a trust? It's a legal agreement between a grantor (the person who funds the trust) and a trustee (the person who manages the trust) to hold title to & manage property or assets for the benefit of a third party, called a beneficiary. Trustees have a fiduciary responsibility to beneficiary, which means they can be held responsible if assets are mismanaged or the trust agreement is not carried out correctly.
Trusts are separate legal entities, the same way that one person is distinct from another and corporations are distinct from their owners. That means that a trust can continue to operate even after the grantor dies, in some cases for decades.
Here are 4 common reasons why someone would want to establish a trust:
Avoiding Probate – remember that probate is the legal process of closing someone's estate and that executing a will is part of probate. So, while having a will is absolutely essential, it doesn't help avoid the probate process. In addition to being potentially slow & costly (due to legal fees), probate is also public. Anything contained in your will goes into the public record, which might rub some people the wrong way. Having a trust established and funded before death lets things move more quickly, privately, and potentially helps your survivors avoid extra lawyer's fees.
Caring for a Minor Dependent – again, the execution of your will is part of the probate process and once an estate is closed, whatever has been decided is a done deal. Just to underline the important part: your can't use your will to dictate what should happen over many years or decades. So what if you want to provide for a minor child or young adult, but don't want them to just receive a lump sum all at once? A trust can direct the trustee to provide funds to a specific person for a period of years, until a certain age, or for the rest of that person's life.
Leaving Money to Kids from A Previous Marriage – here's the scenario: you want your spouse to be provided for after you pass, but you also want your kids from a previous marriage to have whatever is left after your spouse dies. If you give all of your money to your spouse in your will, that person – even without any malicious intent – could decide after you're gone that maybe that money should go to someone else. To avoid that, you can set up a trust to make sure your assets are used to care for your spouse as long as he or she lives, then distribute the remainder to your children.
Avoiding Estate Taxes – the current estate tax exemption is $13.61 million for individuals ($27.22 million for married couples), so very few people will ever be impacted by estate tax. But, for those who are, estate tax rates are some of the highest that individuals ever have to pay. And you can't avoid estate taxes by just gifting all your money away (lifetime gift tax rates & exemptions are the same as estate tax rules). Since a trust is a separate legal entity, it is possible to transfer assets to a trust and have them removed from your estate to avoid paying estate taxes.
If you've read this far, let me make it clear: not everyone needs a trust. If you're not that interested, just skip to the next section. For everyone else, here are three of the most important distinctions among trusts:
Living or Testamentary – a Living Trust is one in which the transferred assets are used to support the grantor during his or her lifetime. Here's an example: let's say someone owns their home and wants to keep living in it, but then wants to sell it and distribute the proceeds after death. By placing the deed to the house in a living trust, the person could continue to live there indefinitely while also knowing that it won't be included in the probate process. A Testamentary Trust is created during the execution of a will (so, you know, definitely not while the person is alive) and specifies how the grantor's assets should be distributed after death. Note that a testamentary trust does not avoid probate (because executing the will is part of probate), but it does allow you to be very specific about what to do with your money after you die.
Revocable or Irrevocable – a Revocable Trust can be changed by the grantor during his or her lifetime and, for that reason, any assets transferred to a revocable trust are not considered to have been removed from the estate for tax purposes. The terms of an Irrevocable Trust cannot be changed once established and, since the grantor can no longer control the assets, they are considered to no longer be part of the grantor's estate. Note that a revocable trust becomes irrevocable as soon as the grantor dies.
Funded or Unfunded – this one is pretty easy to understand. A Funded Trust is one in which assets have been transferred during the grantor's lifetime, while an Unfunded Trust is basically just the trust agreement. Unfunded trusts can become funded as part of the execution of the will, which is a lot like a testamentary trust except that the trust is established while the grantor is alive. Note that if you fail to either fund a trust while you are alive or direct assets to the trust as part of the will, an unfunded trust is basically worthless.
Holy smokes, that's a lot! And there's tons more – it's a big topic. Hopefully this gives you a sense of the basic types of trusts and whether it makes sense for you to look into one. If you have any questions, please shoot me an email. I'd be happy to answer any that I can or direct you to a professional who knows more than me if I don't know the answer. Thanks!
An estate plan is a vital tool for anyone who wants to ensure their wishes for the distribution of assets, care for dependents, and end-of-life health decisions are respected. Whether you have a modest estate or a complex financial situation, estate planning provides peace of mind and helps safeguard your loved ones' future. Consult with an estate planning professional to find out how to start the process or update your existing plans.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals reduce stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.
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