1. Estate planning encompasses more than just taxes and asset distribution.
2. Failing to make your wishes known through legal documents increases the likelihood of unnecessary family conflict, costs and delays.
3. Having a proper estate plan ensures efficient estate administration.
There are certain things we are encouraged to consider when we have loved ones depending on us, such as saving for children’s education, purchasing life insurance and planning for retirement. Estate planning is a unique aspect of adulthood—one that is necessary for everyone but so easy to put off. Unfortunately, procrastinating on your estate planning can have significant costs and consequences.
Guardianship
For parents with young children, there is nothing more important than making sure that they are taken care of. If your children are minors, you can determine who will raise them in case both parents are unable to do so by naming guardians for them. Many people think this can be accomplished simply by having a conversation with the chosen guardians or by having a ceremony in which “godparents” are named, but the only way to name legal guardians in a manner that courts will recognize is by doing so in your Will.
Taking the responsible step of naming guardians for your children prevents conflict amongst family and friends.1 Without a Will, it will be left to the courts to appoint a guardian, which could lead to unnecessary litigation and expenses that will put the children in the middle of the conflict.
Guardianship is not only for minors. In a 2014 case, Terry Mace was incapacitated after a heart attack. Mace’s father, who wanted treatment to continue, and Mace’s estranged wife, who wanted to discontinue treatment, had to appeal to the court to be appointed Mace’s legal guardian. According to the father’s attorney, although the couple had been separated for five years, their divorce was not final and Mace’s last Will did include his wife, giving her a financial interest in his death. Within 48 hours of arrival, she had filed a “do not resuscitate” order and instructed the hospital to remove all nutrition and hydration tubes.
The court eventually decided in favor of the father and treatment was continued. However, the conflict and expenses could have been easily avoided if Mace had executed a current Power of Attorney for Health Care that appointed an agent to make medical decisions on his behalf in the event of his incapacity.
Delayed Distributions
Contrary to popular belief, naming a beneficiary in a Will does not allow that individual to receive your assets immediately upon your death. Assets passing by Will must go through probate. Probate is the burdensome process by which a court validates a decedent’s Will and supervises the payment of debts and distribution of assets.
Avoiding probate is an invaluable benefit of having a proper estate plan in place.2 A probate estate typically remains open for at least a year and costs far more in legal and court fees than having a full estate plan prepared. In addition to the unnecessary costs and delays, probate is a public process which allows creditors and other protesting parties to access documents and file claims against the estate.
When planned properly, an estate can avoid probate altogether, allowing the distribution of assets to be as efficient and expedient as possible. When a Revocable Living Trust is the owner or beneficiary of an asset, there is no gap in control or ownership. Typically, the creator of the Revocable Living Trust (the “grantor”) is the trustee and beneficiary of the trust. The trust document provides for one or more successor trustees to manage the trust in case of the incapacity or death of the trustee and, because there is no court involvement, there is no lengthy delay in distributing trust assets to the beneficiaries.
Unintended Distributions and Omissions
One of the most significant and devastating consequences of procrastinating on proper estate planning can be unintended distributions and omissions. This can happen in several ways and when it does, is typically irreversible.
First, outdated or poorly drafted estate planning documents can remain binding even after a significant change in the family. A few words can be the difference between an entire generation inheriting a portion of the estate or being completely disinherited. Whatever the individual intends, it is important that the documents accurately reflect his or her wishes.
Second, filing for divorce does not disinherit the spouse.3 In Illinois, an ex-spouse is deemed to have predeceased the creator of a Will or Revocable Living Trust.4 However, the Illinois laws do not affect the documents until the divorce is final. Therefore, as we saw in the case of Terry Mace above, when contemplating or filing for divorce, reviewing your existing estate planning documents or, if you have procrastinated, having proper estate planning documents prepared to fit your needs should be a priority.
The third incidence of unintended distributions or omissions occurs as a result of joint ownership. When an account is owned jointly with right of survivorship, the surviving owners automatically inherit the deceased owner’s share. Joint accounts are often used in situations where a parent wants to allow one child access to an account so that the child may pay the parent’s bills. However, the fact that the child will inherit the account balance at the parent’s death and other heirs will receive no share is commonly overlooked and can lead to a legal battle among siblings.5 There are far more efficient ways to achieve the goal of account access without such consequences.
Finally, incorrect beneficiary designations can lead to unintended distributions of assets that are often the largest in the estate—life insurance policies and retirement accounts. Beneficiary designations supersede the terms of a testamentary instrument, such as a Will. A bank or insurance provider will immediately distribute the account or asset to the named beneficiary without any court approval or review of the decedent’s estate plan. If the named beneficiaries are not living, then the account or asset will be part of the decedent’s estate and will have to go through probate. Accordingly, updating your beneficiary designations is an extremely important part of your estate planning.
What it Means to You
The most important question to ask yourself when it comes to estate planning is “What will happen to my loved ones and my assets if something happens to me tomorrow?” If you are unsure of or unhappy with the answer, then it is important to consult an estate planning attorney immediately. The process of getting your estate plan in order is far less painful than most people expect and once it is complete, can provide incredible peace of mind knowing that your loved ones are taken care of, both personally and financially.6
Footnotes:
1. Please see Naming Guardians for Your Children.
2. Please see Probate—What It Is and How to Avoid It.
3. Please see Divorce and Your Estate Planning.
4. This law does not apply to other trusts, such as Irrevocable Life Insurance Trusts.
5. Please see Issues to Be Considered Regarding Joint Accounts.
6. Please see Painless Estate Planning.