These FAQs are provided as an overview of estate planning basics. We also offer a package of information which provides basic information and some worksheets to get you started.You can download this package as a PDF* document, or contact us and we'll send you one free of charge. (*Viewing a PDF document requires PDF viewing software; you can download it here for free.)
Answers to the following questions are not intended as legal advice, but are provided in the spirit of educating consumers for estate planning legal services. If you require legal advice for a particular situation, you should consult an attorney in your state. Please do not rely on this or any other website to make decisions about your own important financial and estate planning affairs.
What is an estate plan?
What happens if I die without an estate plan?
What is a will?
What is probate?
What are the advantages and disadvantages of joint tenancy?
What is a trust?
Why do you need to know my assets and their value to prepare an estate plan?
How much does an estate plan cost?
Estate Planning Documents to Consider
Developing an Estate Plan
What is an estate plan? An estate plan is a written expression of how you want your assets to be owned, managed and preserved during your lifetime (including, during your lifetime after disability), and how you want those assets distributed upon your death. Often an estate plan is designed to incur the least possible taxes and other administrative costs.
Estate plans involve the use of several different documents to achieve your estate planning goals, including: a Declaration of Trust, Powers of Attorney for Health Care and Property, and a Will.
What happens if I die without an estate plan? Since you failed to leave written instructions, state law determines who will receive your property and in what proportions. Your "heirs" are determined -- and may include estranged relatives -- and each of them receives an amount based on the state law perception of what you "would have wanted". Under Illinois law, if you die with a spouse and children, the estate is divided among them (1/2 to spouse and 1/2 in equal shares among the children) -- even if the children are very young or incapacitated, and even if this causes estate tax problems for your family. If you do not have children, the estate is distributed among your closest blood relatives -- so that it may end up going to a fourth cousin, rather than to your spouse's niece (she is not a blood relative, and so may be disinherited, even if you felt very close to her). This result may differ in other states, but is almost never necessarily what you would have intended.
What is a will? A will is a written expression of your plan for your individually owned property to be distributed after your death. A will has no effect on joint tenancy property (unless you are the sole surviving joint tenant) or on property as to which you have signed a beneficiary designation (like life insurance, or IRAs or other retirement benefits). A will does not affect property held in a trust (but it may be used in conjunction with trust planning to assure that the property passing under the will is added to the trust). A will is also used to designate guardians for your minor children. In Illinois, any child under the age of 18 is a minor and cannot take legal title to property or sign legally binding contracts.
If the only document you have used in your estate plan is a will, your heirs and beneficiaries are guaranteed a trip to probate court. The document you signed does not take effect automatically at your death, but must be "admitted to probate" by a judge who then and "issues letters of office" (sometimes called "letters testamentary") to your executor.
What is probate?Probate is the court proceeding whereby a judge examines your will to see if it meets the proper technical requirements for a will, and appoints an executor (who you have named in the will) to administer the will. The executor then (1) marshals your assets -- collecting together all the property held in your name alone, (2) pays your creditors, and (3) distributes the balance of your property to the beneficiaries you name in the will.
Requirements vary from state to state, but in Illinois a probate must remain open for six (6) months after the will is submitted to the judge and the executor is appointed. This is the time period given to creditors to bring their claims to the attention of the executor. Because of this six-month delay in the executor being able to distribute assets to the beneficiaries, and because a probate is a public court proceeding with attendant lack of privacy and court costs, most of our clients wish to avoid probate.
What are the advantages and disadvantages of joint tenancy? Joint tenancy is a way of owning property -- whether real estate or personal property -- in the name of two or more people. When one person dies, the survivor(s) become the sole owners. The advantages of joint tenancy are: (1) Simplicity; and (2) Avoidance of probate court proceedings -- because the property, whether real or personal, automatically passes to the survivor. The survivor does not need to go to probate court or obtain a judge's approval, all he/she has to do is show a death certificate in order to have control of the property. Possible disadvantages include (1) If one of the owners has a debt, a creditor of that owner may force a sale of the whole property. (2) All parties must join to make transfer or conveyance of the entire property. Joint bank accounts and co-owner U.S. Government Savings Bonds are not strictly joint tenancies and are subject to the special rules under which they are created. (3) Unless the bank system card states otherwise, one joint tenant can withdraw the entire account. (4) Placing property in joint tenancy may disinherit children or others since property held in joint tenancy passes to the survivor regardless of what the deceased joint tenant's will directs and regardless of who the decedent's heirs are under state law. (5) Placing property in joint tenancy or making major improvements to property already in joint tenancy may cause gift tax liability unless the joint tenants are U.S. citizens who are married to each other. (6) Placing property in joint tenancy can result in unnecessary estate tax. (7) Any co-owner can change the nature of his interest into a "tenancy-in-common" and may then sell or give their interest at any time during life or at death.
The foregoing discussion should make clear that, while joint tenancy works relatively well between spouses, it is a bad idea to make joint tenancy ownership the centerpiece of your estate plan.
What is a trust? A trust is a written expression of your estate planning wishes expressed in a contract form which avoids probate, and which has effect both during your lifetime and after death. A trust is a private document and property held in the name of the trust does not have to go through probate.
When used as the centerpiece of an estate plan, a declaration of trust (sometimes also called a living trust or an inter vivos trust) is signed by you "declaring" yourself as the trustee of the property held in the trust.
The trust then goes on to describe your power and authority over the trust during your lifetime (usually your power over this type of trust is absolute), and to name a successor trustee to act to carry out your wishes if you become disabled or after your death. After your death, the trust carries on but the beneficiaries of the trust change to the persons you name. You can make very elaborate provisions for these beneficiaries lasting for generations or can provide for distribution of your property outright as soon as possible after your death.
If you prefer to use a will as the centerpiece of your estate plan, your will can provide for trusts for beneficiaries to be created after your death. Such trusts are called "testamentary trusts" because they are created under a "last will and testament". You can also create trusts during your lifetime which are designed to make gifts of your property. See our discussion regarding advanced planning techniques.
In short, a trust is a written expression of your financial parenting for your family which is designed to provide flexibility and privacy, and to provide as much control as you deem necessary over your property for a term as long or as short as you wish.
Why do you need to know my assets and their value to prepare an estate plan? Despite years of uncertainty regarding the future of the federal estate tax, the estate tax has not been repealed and is still with us. The good news is that the estate tax exemption was increased to $5,000,000 in 2011, and is indexed for inflation. Three years later in 2014, the estate tax exemption is now $5,340,000. What this means is that the estate tax will only be imposed on the most valuable estates. However, estates in excess of $5,340,000 are in need of special planning to reduce, if not eliminate, substantial taxes from incurring at death.
In addition, some states impose their own estate tax. For example, the State of Illinois imposes its own estate tax on estates in excess of $4,000,000. Because of the difference between the federal and state estate tax exemption levels, proper planning is necessary to correlate the reduction or elimination of both estate taxes. If proper planning is not utilized, there is the potential that an estate will incur unnecessary Illinois estate taxes in the amount of $382,000.
Notice that the exemption applies for each taxpayer, so that a married couple can double the amount they pass tax free to their heirs, but only if they have a property drafted estate plan which takes advantage of both exemptions -- as joint tenancy does not. Moreover, you may own an asset that requires special planning. Closely-held businesses, life insurance, and retirement plan assets all require us to ask additional questions so that we can be sure that your assets pass to your beneficiaries with the least transfer tax possible being paid by the family.
Additionally, you may have a beneficiary with "special needs". We also ask you questions about your beneficiaries to make sure that any trust we might draft protects a disabled beneficiary or a spendthrift beneficiary to the maximum extent possible.
We ask these questions so that we can make a careful analysis of your assets and how they are owned (real estate, securities, business interests, life insurance, retirement plan benefits and other property) in order properly to counsel you on your options, and to minimize various taxes and the costs of administering your estate upon your death. With a properly designed estate plan, you can be assured of the welfare of your family, but we can only do a proper job if we know the nature and extent of your assets and your plans and dreams regarding them.
How much does an estate plan cost? Please contact us to receive a free package of estate planning information, including a list of fees for estate planning.
Estate Planning Documents to Consider:
Declaration of TrustSometimes also called a "Living Trust" or "inter vivos Trust") is a document with a settlor (the person who creates the trust), a trustee (the person who administers and manages the trust), a trust estate (the property held in the name of the trust) and a beneficiary. In a declaration of trust the settlor, trustee and beneficiary usually are the same person. The trust takes effect during the lifetime of the settlor/beneficiary, and becomes the titleholder of assets. A Declaration of Trust is very useful in the event the settlor becomes disabled: the Trust continues without interruption for the benefit of the settlor, with the nominated successor trustee stepping in to act for the settlor.
The Durable Power of Attorney for Property is a document which appoints an agent, or attorney-in-fact, to act for you with respect to your property. Your agent has the power to make decisions for you regarding your assets and liabilities; the power of the agent does not, however, extend to assets in a living trust (if you are unable to act, your designated successor trustee will administer those assets held in your trust). Even with a living trust, however, there may be assets not yet been transferred to the trust, or other actions which a trustee cannot take (for example, dealing with the IRS regarding your tax returns). If you are unable to act with respect to the management of your financial affairs, it is generally preferable that a person you name under a Power of Attorney act for you, as opposed to having a court-appointed guardian named to take over your affairs. Successor agents may also be named. The existence of a Durable Power of Attorney for Property plus a revocable living trust can allow for probate avoidance as to all of your assets.
The "Living Will" is a statutory form in most states that directs that "death-delaying procedures" be withheld or withdrawn when death is imminent and there is no hope for recovery. The Living Will is of limited usefulness since is merely expresses your intent, and is not binding on anyone: it is useful primarily in indicating the wishes of the person who signs it.
The Durable Power of Attorney for Health Care (sometimes also referred to as a "patient advocate designation" or similar name) is a document through which the principal appoints an agent to make health care decisions for the principal. The Power of Attorney is much broader and more useful than the statutory Living Will. The Principal may indicate which of three levels of intervention he or she wishes used in the event of disability, and the agent must follow those directions. The agent can also direct that food and water be withheld, can permit all types of medical care, and inspect medical records. The Health Care Power of Attorney can save the expenses of a court-supervised guardianship.
Why Both Documents Are Necessary? The Living Will is effective only if you are in a terminal condition. In most of the cases that come to the attention of the courts, the patient is not in a terminal condition, and will not die unless a respirator, IV's, etc. are removed. In these cases the Living Will is not effective. It is important to note that in most cases a Living Will is not sufficient to authorize the removal of the medical support which the patient is currently receiving. The Health Care Power of Attorney is the broader and more flexible document, and specifically deals with the issues of withholding or continuing food and water when a patient is in an irreversible coma, etc. The Power of Attorney gives the agent medical and health powers as broad as those of the patient. Obviously, this power should only be given to an agent whom you trust with regard to such matters (such as a spouse or other close family member). Both the Living Will and the Durable Power may be necessary in order to deal fully with the entire range of medical issues.
Irrevocable Trusts For Insurance, as well as other types of Irrevocable Trusts, may be implemented to "remove" assets from an estate (and thus avoid estate tax), while at the same time making sure those assets are being managed for the family's benefit in the future, and are not dissipated or lost.
Death Planning The following is a description of some documents or methods of holding title to property that you may want to use to pass title to property after your death.
Joint Tenancyproperty passes by operation of law to the surviving joint tenant(s). (Between husband and wife, some states recognize "tenancy by the entirety", which has the same effect of passing title to the survivor at the death of the first to die, but which has greater creditor-protection features during life.) Joint tenancy does have some problems, however. Will the order of deaths be as expected, and what will happen at the second death? There may then be no surviving joint tenant, and a probate of the property would then be necessary. Unless the survivor is going to do some serious (and immediate) estate planning at the death of the first to die, joint tenancy addresses only a few of many concerns. Further, joint tenancy between non-spouses may expose property to creditor claims of the joint tenant who did not contribute the property.
AWill becomes operative only at death. The will operates only on probate property - that is, property titled in the decedent's name alone. The will has no effect on: (a) joint tenancy property, (b) contract property (e.g., life insurance, retirement benefits, etc.), or (c) property titled during the decedent's lifetime into his or her Declaration of Trust. Probate is a streamlined court procedure in many states today (if there is a Will); nevertheless, probate proceedings still require surviving family members to deal with the downside factors of (i) additional expense, (ii) delay, (iii) aggravation in being required to comply with fixed court rules and procedures, and (iv) loss of privacy regarding the nature and extent of assets, and the distribution provisions set up by the decedent.
Contract Property describes certain types of benefits and property that pass pursuant to contract following death. The classic examples of contract property are insurance and retirement beneficiary designations. Each of these types of property call for the insured (or plan participant) to sign a contract (beneficiary designation) with the insurance company (or the retirement plan administrator), indicating who will receive the benefits after death. Unless no beneficiary is designated, the insurance company or plan administrator will, once presented with a death certificate and directions on how to pay the assets over, will pay out the benefits without need for court intervention or other documentation. Some other examples of these types of assets are annuities or pay-on-death accounts. A will and trust have no effect on these assets - the beneficiary designation or the contract provisions control the assets.
Declaration of Trust contains provisions that take effect after the settlor's death (as well as containing directions on how to deal with the property during the settlor's life): this is the only document that really is effective both during lifetime and after death. The trust is a blueprint for what will happen to the settlor's assets during all time periods that the settlor specifies: during the life of the settlor, after the settlor's death but during the life of specified survivors, and if the trust so provides, for some time after death as additional trusts are created to hold title to assets for the benefit of identified beneficiaries (a spouse, children, grandchildren, aged parents, a charity, etc.). A Trust is the only estate planning tool that can incorporate provisions which can be either very simple, or as complex, flexible, and all-inclusive as the estate planning client cares to make them. Please note that the only document to appear on both the Life Planning and the Death Planning lists is the Declaration of Trust. The Declaration of Trust, which you create and manage for your own benefit, is the most powerful and flexible financial tool available to you.
Developing An Estate Plan By definition, your estate is your property or possessions. Your house, car, securities, insurance, cash, business interests, retirement plan assets - anything you own that can produce income or be converted into cash - make up your estate.
If you don't have an estate plan, there is no time like the present to develop one. Estate planning is easy to put off; maybe "it's too early" or your estate is "too small". Here are some good reasons why you should plan your estate now: Without an estate plan, state laws determine who inherits your assets: they could pass to an estranged relative. With an estate plan, you decide who receives a share of your assets. Without an estate plan, your beneficiaries receive their inheritance under terms and timing set by law: your 18-year old could be left with unfettered control of a sizable estate.
With an estate plan, you decide when and how your beneficiaries will inherit your assets. Without an estate plan, the court appoints administrators to manage and distribute your assets: administrators who may not share your ideals. With an estate plan, you decide who will manage your estate. Without an estate plan, administrative costs and unnecessary taxes can eat into your assets: leaving less to pass to your heirs. With an estate plan, you can plan to reduce or avoid taxes and administrative expenses. Without an estate plan, the court appoints a guardian for your child. With an estate plan, you select a guardian for your child.
Once you have planned your estate, you should also review and update your plan periodically - at least every 3 to 5 years, or whenever one of the following events occurs:
You have recently married. You are newly divorced. You have sold your home, or purchased a new home. You have moved to a new state. Your spouse or other close family member has died or become disabled. A new child or grandchild has been added to your family. A child has recently married or is newly divorced. You have purchased or are thinking of purchasing life insurance. You have acquired new assets of significant value. You have recently purchased joint tenancy property or created a joint tenancy bank account. You, or your spouse, have inherited valuable property, or received a substantial gift. You have made significant gifts to family members or charity, or are considering making such gifts. A fiduciary named in your current estate plan documents has died.
You have changed jobs or careers. You or your spouse have retired. You have started a new business. You have changed the nature of your business. You have formed a business partnership, or are thinking of forming a partnership. You have incorporated your business, or are thinking of incorporating. You have recapitalized your business. You have liquidated your business. A company officer or other key employee has died or become disabled. You have elected or terminated S Corporation status for your corporation. You have entered a buy-sell agreement that provides for the sale of your business interest when you die or if you become disabled, or you wish to consider implementing such an agreement. You have implemented or terminated a pension or profit-sharing plan for your business.
Most well-thought-out estate plans make certain allowances for potential changes in economic or family circumstances. But, unless you have a fool-proof method for seeing into the future, you cannot predict all the possible changes that might affect your personal and financial situation - and, thus, your estate plan. So a periodic review of your plan is essential if you want it to continue to meet your needs.
If your situation has changed significantly since the last time you reviewed your estate plan, you will probably want to make some changes - changes that may include: creating a trust; modifying your will and trust arrangements; implementing powers of attorney; changing the beneficiary or the distribution method for your retirement plan or IRA; purchasing additional life insurance to cover projected family costs or estate taxes; providing for the continuing operation of your business should something happen to you; or, if the tax law has changed since the last time you reviewed your plan, you may need to make changes to avoid or defer taxes. Please contact us if you have any questions.