The other day a friend asked me, “How much money do I need before I should get an estate plan?” That question indicates a common misconception that estate planning is only for the rich, or is only to avoid estate taxes. In 2014, an individual can pass up to $5,340,000 estate tax-free (for federal estate tax). If you have assets valued under that amount, there are plenty of non-tax related reasons to have an estate plan, and below is my top 3 list (of course, if you have, or one day might have, assets worth more than the exemption amount, these practical reasons also apply to you, but you should complete an estate plan for tax reasons as well):
1. You own real estate.
If you own a home (even with little equity), you should have a revocable living trust to avoid both the cost and hassle of your estate going through the probate process. Attorney fees and executor (or administrator) fees are granted by statute, and are based on the gross value of your estate, not the net value. If you own a home worth $1,000,000 and the balance of your mortgage is $900,000, your attorney and executor are entitled to fees based on one million, not the $100,000 of equity. For a home worth $1,000,000, that’s a minimum of $46,000 in fees ($23,000 each for the attorney and personal representative). Spending a few thousand dollars now to avoid probate is worth it!
Additionally, before a house can be sold, an executor must be appointed by a probate court judge in order to have the official authority to convey title, which could take months. In contrast, a trustee under a revocable living trust has the power to act immediately. You may think your estate is “simple” because it is not worth very much and merely being distributed equally to your children, but the cost and delay of having to go through probate is worth avoiding via a trust, even for “simple” estates.
2. You have minor children.
What happens to minor children (under age 18) if both parents die? The probate court appoints someone to care for them, called a guardian, and there are actually two types of guardians – one in charge of the day to day physical care and parenting of the children (called a guardian of the person), and one in charge of managing any money set aside for the children (called a guardian of the estate). Typically the same person serves as guardian of the person and estate, but I’m sure you know people who are great at raising children but horrible at managing money, and that is the reason for the dual roles if it becomes necessary to appoint different people.
How does having an estate plan affect this? You would have a say in who you want to be appointed the guardian of the person and estate of your minor children. If you don’t nominate someone in a will, then your parents, spouse’s parents, siblings, family friends, etc. all might potentially think that they are in the best position to raise your children, creating a rift among those who care deeply about your children. Although motivated by good intentions, a battle in the probate court for custody of your children is a guaranteed disaster. You have the power to name a guardian, and to specify how your assets are used to support your children. Completing an estate plan (a Will, revocable trust, or both) is the only way to ensure your wishes are carried out.
3. You have a non-traditional family.
Are you in an unmarried relationship (gay or straight)? Are you in your second marriage, with kids from prior relationships? Do you have a child with special needs? Are some of your children more responsible than others? Do you have siblings you wouldn’t want to inherit from you? Although I used the phrase “non-traditional,” a majority of people fall into this category.
You may not know it, but you already have an estate plan chosen by your state legislature. Every state has default rules for who inherits property if someone doesn’t have a will or a trust (in legal terms called “intestate succession”). Depending on your family situation and the type of assets you have, some of your property may go to your parents or siblings – even if you are married. In California for example, your separate property (acquired before marriage) does not automatically pass to your surviving spouse – instead, if you have no children, but one of your parents is living, then half of your separate property would go to your parent. For those in a long-term committed relationship that is not formally legalized, your parents, siblings or more distant relatives may inherit your estate. Even if you just have a few sentimental pieces of jewelry or artwork that you want a specific person to have, without a Will or a trust, the laws of intestate succession control everything.
Simply put, estate planning isn’t just for the wealthy. It just makes sense to recognize one’s own mortality and make plans so that your wishes are written down and legally enforceable for those you leave behind.