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What is an estate plan?

An estate plan is a systematic process of planning for the accumulation, conservation, and distribution of an estate using the most efficient and effective methods for accomplishing the wishes of the owner. Tax considerations are usually a significant part of the effort. At the death of the owner, the estate plan functions to distribute the estate with minimum administration costs and taxes according to the wishes of the owner. Minimizing the cost of distributing an estate can only be accomplished by anticipating expenses and planning ways to avoid them before death occurs.

What questions should I ask someone I’m interviewing as an estate planner?

Questions should focus on knowledge, ethics/conflicts of interest, and competency. Examples include questions concerning (1) their education (law school), experience, licenses, credentials and professional designations, (2) any disciplinary actions, (3) the method of compensation, (4) a list of client references, and (5) their view of the most important aspects of estate planning.

How often do I need to review my estate plan?

Like financial plans, estate plans require periodic review to make sure they remain current and viable. According to "The Truth About Money" (Georgetown University Press, Washington, D.C.), "You should review your estate plan if your marital status has changed; your state of residence has changed; your income or net worth has changed; your health has changed; family members have died or been born, or five years have passed" since the last time you reviewed your plans. Also, you should update your estate plan whenever the laws governing estate tax are changed, for example President Bush’s new tax reform act of 2001(called EGGTAR 2001by some practitioners).

How will getting married affect my financial and estate planning?

Getting married will affect every facet of your life, especially issues that revolve around money. According to "The New Century Family Money Book" (Dell Publishing), "Everything from health, property, casualty and life insurance to checking, savings, investment, and retirement accounts will need to be revised. If children from a previous marriage are involved, tuition planning that was in the works will need to be revised and recalculated -- or begun. Devise a budget, based on your increased or decreased income, that spells out what percentage of whose paycheck goes to the paying of which bills "Your personal circumstances may have changed for the better, but be sure your financial circumstances don’t suffer as a result of marriage. Be certain that you and your spouse devise a budget for household expenses and a financial plan for the stages in your newly linked lives; purchasing a home, having children, paying for their education, and building your retirement nest egg." Make sure you and your spouse set aside enough time every year to review your long-term financial plans and make needed adjustments.

How will a divorce affect my estate planning?

If you are getting divorced, both you and your spouse should ask an attorney to review and revise your wills and related estate planning tools to account for your new status as single people. According to "The New Century Family Money Book" (Dell Publishing), "Most states will not allow couples who are in the process of divorcing but are still legally married to completely disinherit the spouse. During the period of separation preceding a divorce, you may wish to reduce your spouse’s bequest to the minimum amount required by law. When the divorce is finalized, you will probably need to redraft the will as well as other estate planning documents to change beneficiaries and trustees, at least. Pay careful attention to guardianship arrangements for children. "A number of estate and gift tax opportunities and pitfalls may arise as a result of a divorce. Certain trusts can protect a former spouse who is financially inexperienced and can protect the children’s inheritance in the event that the former spouse remarries and subsequently divorces." As with other estate planning issues, it’s imperative to get the help of legal and tax professionals.

What impact would a bankruptcy filing have on my estate?

If you are in a position to file for bankruptcy, chances are your net estate, your assets minus debts, is less than zero. Bankruptcy will likely increase the size of your estate because certain assets, such as your home, are protected from seizure by creditors. Bankruptcy wipes the slate clean of debt. By eliminating your debts and protecting certain assets, a bankruptcy filing may allow you to leave something to your heirs. Filing for bankruptcy protection isn’t something to be done casually, however. It remains a part of your credit record for up to 10 years. If your life expectancy is less than that, you may not care, but many of those who have declared bankruptcy often find themselves in the same debt problem in about five years.

When should I set up a trust? Do I need one at all?

It depends on the size of your estate and the purpose of the trust. For example, if you mainly want a living trust to protect assets from taxes and probate but your estate is under the current federal tax floor ($675,000 for 2001) and small enough to qualify for quick and inexpensive probate in your state, some lawyers would tell you it isn’t worth the cost. However, a trust can do a number of things a will can’t do as well unless the will establishes a trust or pours over into a trust. If you want to avoid a court hearing if you become incompetent or unable to provide for yourself, or if you want to provide for grandchildren, minor children, or relatives with a disability that makes it difficult for them to manage money, a trust has many advantages. If you have a trust, your trustee can manage assets efficiently if you should die and your beneficiaries are minor children or others not up to the responsibility of handling the estate. And a trust can protect your privacy; unlike a will, a trust is confidential.

Most married people plan to leave everything to their spouse, and if the spouse dies first, then it all goes to the children. Why is that a big mistake?

Many married people write a "simple will" that leaves everything to their spouse or, if the spouse dies first, leaves everything to their children. Unfortunately, such a will can cause huge problems later. For example, say John and Mary have two children. John dies, leaving everything to Mary. Mary later marries Bob, a widower with three children of his own. Then Mary dies, leaving everything to Bob. All of John’s assets now belong to Bob, a guy he never met, and John’s children get nothing. And when Bob dies, Bob’s own children will inherit his assets -- which would now include everything that John and Mary had spent their whole lives working for. Check with a good estate planning attorney to answer your estate planning questions in detail. The first half hour is often free and if you take action on the ideas presented, it will be time well spent.

I am planning to leave my entire estate to my spouse, but what would happen if we both died at the same time?

Many married people leave their entire estate to their spouse, or to their children if the spouse dies first. But that can create problems if the couple dies at the same time-for example, in an automobile crash-or if the two die within a very short time of each other. According to "The Wall Street Journal Guide to Planning Your Financial Future" (Lightbulb Press Inc., N.Y.), "To cover that possibility, you can include a simultaneous death clause in your will to pass your property directly to your surviving heirs. You can also require that any beneficiary survive you by a certain length of time-often 45 days-in order to inherit. This provision saves double taxes and court costs, and lets you decide who is next in line for your property." More importantly, you should meet with an attorney to help you and your spouse address all of the vital issues involved in estate planning.

Should two people be appointed as joint guardians of my child?

It’s perfectly legal to name a couple as guardians of your child, but some lawyers and financial experts suggest you name one particular individual instead. Why? "Because couples get divorced, or they can’t agree on how to raise the kids," according to The Five-Minute Lawyer’s Guide to Estate Planning (Dell Publishing, New York). "Name the person you want, the one you most trust to make the right decisions, and then the couple can work out their respective roles between them."

As a business owner, how can I use an unfunded buy-sell agreement for my estate planning?

An unfunded buy-sell agreement is a tool to help a business plan its future. According to "Wealth Enhancement & Preservation" (The Institute Inc., Denver), "Typically, an unfunded buy-sell agreement is used to satisfy the desire of key people to have the opportunity to buy the business at the owner’s death. However, an unfunded agreement may not be effective if the would-be buyers don’t have the funding necessary to complete the purchase. A prudent method to safeguard such an arrangement is to insure the owner’s life for the benefit of the owner’s family. Then if the buyout is not successful, the owner’s family will still be well cared for. If the buyout does occur, the owner’s family will be that much ahead." An unfunded buy-sell agreement can be combined with other tools, such as an irrevocable life insurance trust or a family partnership, to provide further protection to both parties.