An estate plan defines who you want to manage or receive your assets in the event of your incapacity or death.

Did you know that “estate” is a Middle English word derived from the Latin term for status? Since the 13th Century, this archaic word has been used to describe a person’s social standing or rank. Another definition for the word estate is a large house situated on an extensive area of land in the countryside. Maybe it’s these exclusive definitions for the term “estate” that mislead people into believing that estate planning doesn’t apply to regular people. The truth is that there is also a legal definition for the term “estate” and it simply refers to all the property you own.


What Documents are Included in an Estate Plan?

A comprehensive estate plan typically includes four important documents:

1. Revocable Living Trust

A revocable living trust is a legal document that includes two different plans, describing what you want to have happen: (1) to your property after you’re gone; and (2) to you, if you become incapacitated.

2. Pour-Over Will

A pour-over will is a legal document that ensures any remaining assets will automatically transfer or “pour over” into an established trust. If the creator of a trust forgets to title an asset in the name of the trust, the pour-over will informs the probate court that the asset should be distributed to the trustee and beneficiaries according to the terms of the trust.

3. Financial Power of Attorney

A financial power of attorney (POA) is a legal document that authorizes someone to act upon your behalf in financial matters.

4. Advance Healthcare Directive

An advance healthcare directive is a legal document that specifies what actions should be taken for your health if you are no longer able to make decisions because of illness or incapacity.

Do I Need an Estate Plan?

If you do not create an estate plan, the state has an estate plan for you.

The law of intestate succession is your state’s default estate plan for those who fail to plan ahead. According to the laws of your state, a court will distribute your property after death. State laws vary, but generally, the property will be passed to a surviving spouse and/or other bloodline relatives.

By failing to draft an estate plan, you may disinherit an unmarried partner, friends, and charities.

What is a Revocable Living Trust?

A will allows you to name who you want to receive your property after your death, so it is better than not planning at all. However, planning with a revocable living trust is ideal.

A revocable trust lets you define what you want to have happen: (1) to your property after death; and (2) to you, if you become incapacitated.  It is established during your lifetime, typically to avoid probate and conservatorship proceedings and to exert post-death control over trust assets.

Since a Revocable Living Trust is revocable, you can change it as your circumstances or wishes change. See What is a Trust?

What Is Probate And How Does It Affect My Estate Plan?

Probate is the court-supervised process of administering a deceased person’s estate. The primary purpose of probate is to distribute your assets to the correct people, beneficiaries identified in your will or heirs as determined by state law.

Probate has other purposes as well:

  1. Probate protects creditors by making sure all outstanding debts are paid before money is distributed to beneficiaries;
  2. Probate also ensures that the county and state receive their share of probate taxes and other fees.

Before the court distributes your estate, creditors and taxes must get paid. Many states require that the probate process lasts for a minimum of a year, in order to give creditors time to present their claims. In the meantime, your money will not be available to loved ones.

What Should I Know About Probate?

Probate varies by state and country, but the following factors are universally true:

1. Public Process

Your will is recorded in public records. If you don’t have a will, a list of your heirs is recorded publicly. Many jurisdictions require a listing of assets, so people can find out just how much your children will receive from your estate, putting them at risk for solicitation.

2. Time-consuming Process

Typically, probate is more time-consuming than necessary. Many jurisdictions require you to wait weeks or months for the appointment to open your estate. These jurisdictions also have set timeframes, often a year, that your executor must wait before distributing money to your heirs or beneficiaries. Courts continue to supervise the process through completion, which can add significant time due to the detailed requirements of estate accountings.

3. Expensive Process

Court fees and probate taxes are an extra cost to your estate. A probate tax of 0.1% may not seem like much in the abstract, but it would be calculated on your gross estate. For example, if your house is worth $500,000 and your mortgage balance is $400,000, your estate must pay $500 just to initiate probate. Often, your heirs or executor would have to pay out-of-pocket because they do not have access to your money until after probate has been officially started by the court. In addition, most courts impose various filing fees on the documents that your estate is required to file: one filing fee for your will, one for the list of heirs, one for the executor’s affidavit, one for the inventory of your estate, and one annually for each accounting until the probate is closed – totaling to several thousand dollars.

Assets owned by a trust are not subject to probate, which is one benefit of including a trust in your comprehensive estate plan.

What Else Does An Estate Plan Do?

You may want to consider creating an estate plan that includes a trust if one or more of the following circumstances or priorities apply to you and your family:

1. Preserve Family Harmony

By designating an objective third party trustee, you can relieve loved ones of the burden in dealing with legal complexity during a difficult time.

2. Benefit Loved One with Special Needs

A trust can provide an inheritance to a loved one with special needs while preserving his or her eligibility for government benefits like Medicaid and Supplemental Security Income.

3. Support Children From a Former Relationship

If you’re married with kids from a previous relationship, a trust can help you protect your biological children from potential disinheritance.

4. Cater to Financially Inexperienced Beneficiaries

By setting up a trust, you can restrict trust distributions, reducing the likelihood that your loved ones will squander their inheritance.

5. Include Distant Children

If you live far from loved ones, it’s important to plan ahead to ensure a trustee is designated to manage your financial affairs upon your incapacity or death.

Trust services provided by Members Trust Company, a federal thrift regulated by the Office of the Comptroller of the Currency. Trust and Investment products are not federally insured, are not obligations of or guaranteed by the credit union or any affiliated entity, involve investment risks, including the possible loss of principal. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant.