Planning For Death

(Note: laws vary by state. All details here refer to laws in Arizona. Check laws in your state for applicability of this information. I am not an attorney. Due your own due diligence. Some assembly required. Your parents have to put it together. By Meco.)

No one likes to think about dying or making plans for what happens when you die, but as part of a sound financial life (see what I did there?), it is something that has to be done. After years of putting it off, my wife and I finally went to a lawyer and got an estate plan put together. If one or both of us dies, we’ve now got a solid legal plan for how our assets will be distributed, who will look after our daughter, etc.

There are many decisions to make when setting up an estate plan, not the least of which are what documents you need and who should create those documents.

Who To See

In Arizona, wills and living trusts (more on the difference between those later) can be created by two types of professionals: lawyers and Certified Legal Document Preparers (CLDPs). In general, lawyers are the more expensive of the two.

By law, CLDPs cannot give legal advice, only general legal information. They also cannot help you if you are already represented by an attorney. Basically, CLDPs make sure you fill out all the forms correctly and that’s about it.

Given the complexities of estate law, we opted to spend a bit more and go with a lawyer. The price was still reasonable. We got a living trust package that includes a will, financial and medical powers of attorney, and an advanced heath care directive for both me and my wife for about $1,500.

(I recommend shopping around. I found prices for lawyers providing the same package ran anywhere from $1,500 to $4,500. In fact, our lawyer's price was the same as some of the CLDPs we found.)

You can also find forms for wills online and you can create one yourself. I wouldn’t advise doing this. First off, laws vary by state, so you might use a form that is not legal in your state. Second, do you really want to risk your entire estate just to save a couple dollars? A simple mistake on your part could end up costing your spouse or heirs a lot of money and / or headaches.

Option 1 - A Will

Most people assume a will is all they need to distribute their assets after they die. This is true, but it’s not the whole story. A will does not go into effect until you die. If you end up in a coma, persistent vegetative state, or otherwise incapacitated but not dead, none of the provisions in the will are in effect.

People you specified to take care of your children when you die cannot legally do so. Medical and financial decisions cannot be made by others on your behalf unless they have received prior authorization from you.

What if both you and your spouse end up in a coma? Who takes care of your kids? Whatever you specified in your will has no legal standing because you are not dead.

Probate - A Place To Avoid

If you don't have a will or only have a will, upon your death, your estate will go into probate. Probate is the process of “proving” a will in court and getting it accepted as a valid legal document. The probate process also assigns an executor of your estate – someone who will dispose of your assets. (If your will doesn’t specify someone to be an executor, the court will pick someone.) Probate also makes your will public and allows anyone a chance to contest it.

As you might expect, probate can be a pain. It can also be expensive. All those court appearances cost money. If someone contests your will, that’s more court visits and more expenses. By some estimates, probate costs can eat up 3% to 7% of your estate’s value.

Many state have laws that allow “small” estates to skip probate, but the definition of “small” varies by state. If you own a home in a state with high property valuations, your estate stands a good chance of exceeding the definition of a “small” estate.

In Arizona, as of this writing, probate can be skipped if the value of all personal property in the estate is $75,000 or less or the value of real estate in the estate is $100,000 or less. That excludes most homeowners, at least in the Phoenix metro area.

Beside the expense, another problem with probate is time. It takes a long time for an estate to go through probate. It can take months for your estate to be disbursed. If you have a loved one that will depend on your assets to live on, they might have to go a long time before getting access to them. In Arizona, even if your estate qualifies as “small”, there is still either a 30 day or 6 month waiting period (depending on which of two methods you choose) before assets can be distributed.

In general, you want to avoid probate if possible. Enter trusts.

Option 2 - A Trust

There are many types of trusts – revocable living trusts, irrevocable trusts, and testamentary trusts. I’m going to only talk about revocable (changeable) living trusts. You may think only rich people need trusts, but this is not the case. They offer benefits to people with any size estates.

A living trust avoids probate altogether, so that’s a good enough reason to go this route. But a living trust does more. It specifies a disability management team - a person or group of people who can make decisions for you in case you become incapacitated.

The living trust is mainly concerned with financial situations, so you’ll still need a heath care power of attorney, which is why most living will packages include these in their cost. Remember Terri Schiavo? That's a (somewhat) extreme example of what can happen without a heath care power of attorney.

Living trusts can also be used for tax management or to protect property from creditors. Trusts are private, so your final wishes will not be made public, as they would with a will alone.

With a trust, you can not only specify who you want to raise your children when you die, you can also specify when they get access to your estate. I wouldn’t want an 18 year old to get access to a million dollar estate, even though at that age, the law considers them to be an adult. That’s a virtual guarantee that that money will be wasted. Instead, you can specify the child gets all of the money at a certain age, or when they graduate college, or a percentage of your estate every 5 years starting at a certain age. Whatever plan you come up with, you can implement.

A Trust Is Just A Box

Think of the trust as a box. Anything you put in the box is in the trust. If a part of your estate is not in the trust, that part will need to go through probate. For that reason, you’ll want to put all of your valuable assets, such as real estate, in the box.

When a trust is set up, you will sign a form that basically says any property that is not titled is part of the trust. Non-titled property includes things like your furniture, clothing, jewelry, etc. Basically everything inside your house.

Titled objects are property where ownership requires a publicly recorded title, such as vehicles, real estate, etc. These have to be specifically put into the trust via a change in title, which requires some paperwork on your part. It’s important to remember to do this or those items, which are usually high in value, will not be in the trust and will have to go through probate upon your death.

Learn More And Make A Plan

This just provides an overview and is not a full discussion of trusts and how to use them. The choices you make, specifically in situations such as how you designate beneficiaries for life insurance, retirements accounts, etc., can have legal and tax implications, both for you now and your heirs after you die. If you think a trust might be right for you, I highly recommend that you speak to a qualified attorney to discuss your particular situation.

Setting up a will or trust can cost some money, but the good news is that it usually isn't something that has to be done immediately. You can take some time to save up the money first. Just don't forget to get it done!