Fundamental questions

Transferring property at death


Living trusts

Selecting an executor, personal representative or trustee

Selecting a guardian for your children

Planning for incapacity

Other facts about estate settlement

Updating your estate plan

Ensuring your wishes will be followed

When you hear the phrase “estate planning,” the first thought that comes to mind may be taxes. But estate planning is about more than just reducing taxes. It’s about ensuring your assets are distributed according to your wishes and your loved ones are provided for.

Fundamental questions

Before you begin estate planning, you need to consider three questions — or reconsider them if you’re reviewing your estate plan:

1. Who should inherit your assets? If you’re married, before you can decide who should inherit your assets, you must consider marital rights. States have different laws designed to protect surviving spouses. If you die without a will or living trust, state law will dictate how much passes to your spouse. Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law may allow the survivor to elect to receive the greater amount.

If you live in a community property state or your estate includes community property, you’ll need to consider the impact on your estate planning.

Once you’ve considered your spouse’s rights, ask yourself:

  • Should your children share equally in your estate?
  • Do you wish to include grandchildren or others as beneficiaries?
  • Would you like to leave any assets to charity?

2. Which assets should they inherit? You may want to consider special questions when transferring certain types of assets. For example:

  • If you own a business, should the stock pass only to your children who are active in the business? Should you compensate the others with assets of comparable value?
  • If you own rental properties, should all beneficiaries inherit them? Do they all have the ability to manage property? What are the cash needs of each beneficiary?

3. When and how should they inherit the assets? You need to focus on factors such as:

  • The potential age and maturity of the beneficiaries,
  • The financial needs of you and your spouse during your lifetimes, and
  • The tax implications.

Outright bequests offer simplicity, flexibility and some tax advantages, but you have no control over what the recipient does with the assets. Trusts are more complex, but they can be useful when heirs are young or immature or lack asset management capabilities. They also can help save taxes and protect assets from creditors.

Transferring property at death

There are three basic ways for your assets to be transferred on your death: the will, which is the standard method; the living trust, which offers some advantages over a will; and beneficiary designations, for assets such as life insurance and IRAs. If you die without either a will or a living trust, state intestate succession law controls the disposition of your property that doesn’t otherwise pass via “operation of law,” such as by beneficiary designation. And settling your estate likely will be more troublesome — and more costly.

The primary difference between a will and a living trust is that assets placed in your living trust, except in rare circumstances, avoid probate at your death. Neither the will nor the living trust document, in and of itself, reduces estate taxes — though both can be drafted to do this.

Who should draw up your will or living trust? A lawyer! Don’t try to do it yourself. Estate and trust laws are much too complicated. Seek competent legal advice before finalizing your estate plan. While you may want to use your financial advisor to formulate your plan, wills and trusts are legal documents. Only an attorney who specializes in estate matters should draft them.

Let’s take a closer look at each of these vehicles.


If you choose just a will, your estate will most likely have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. The probate process generally has six steps:

1. Notification of interested parties. Most states require disclosure of the estate’s approximate value as well as the names and addresses of interested parties. These include all beneficiaries named in the will, natural heirs and creditors.

2. Appointment of an executor or personal representative. If you haven’t named an executor or personal representative, the court will appoint one to oversee your estate’s administration and distribution.

3. Inventory of assets. Essentially, all assets you owned or controlled at the time of your death need to be accounted for.

4. Payment of claims. The type and length of notice required to establish a deadline for creditors to file their claims vary by state. If a creditor doesn’t file its claim within the applicable creditor claims period, the claim generally is barred.

5. Filing of tax returns. This includes the individual’s final income taxes and the estate’s income taxes.

6. Distribution of residuary estate. After the estate has paid debts and taxes, the executor or personal representative can distribute the remaining assets to the beneficiaries and close the estate.

Probate can be advantageous because it provides standardized procedures and court supervision. Also, the creditor claims limitation period is often shorter than for a living trust.

Living trusts

Because probate is time-consuming, potentially expensive and public, avoiding probate is a common estate planning goal. A living trust (also referred to as a “revocable trust,” “declaration of trust” or “inter vivos trust”) acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will.

How does a living trust work? You transfer assets into a trust for your own benefit during your lifetime. (See the Planning Tip “Title assets correctly.”) You can serve as trustee, select some other individual to serve, or select a professional trustee. If you choose to be the trustee, the successor trustee you name will take over as trustee upon your death, serving in a role similar to that of an executor.

In nearly every state, you’ll avoid probate if all of your assets are in the living trust when you die, or if any assets not in the trust are held in a manner that allows them to pass automatically by operation of law (for example, a joint bank account). The pour over will can specify how assets you didn’t transfer to your living trust during your life will be transferred at death.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.

The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust.

A living trust offers additional benefits. First, your assets aren’t exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate. Second, a living trust can serve as a vehicle for managing your financial assets if you become incapacitated and unable to manage them yourself.

Selecting an executor, personal representative or trustee

Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate — an executor or personal representative and, if you have a living trust, a trustee.

What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:

  • Administering your estate and distributing the assets to your beneficiaries,
  • Making certain tax decisions,
  • Paying any estate debts or expenses,
  • Ensuring all life insurance and retirement plan benefits are received, and
  • Filing the necessary tax returns and paying the appropriate federal and state taxes.

A trustee’s duties are similar, but related only to assets held in the trust — plus he or she would also serve should you become incapacitated.

An individual (such as a family member, a friend or a professional advisor) or an institution (such as a bank or trust company) can serve as executor, personal representative or trustee. (See the Planning Tip “Professional vs. Individual Executor, Personal Representative or Trustee.”) Many people name both an individual and an institution to leverage their collective expertise. Nevertheless, naming only a spouse, child or other relative to act as executor or personal representative is common, and he or she certainly can hire any professional assistance needed.

But make sure the person doesn’t have a conflict of interest. For example, think twice about choosing a second spouse, children from a prior marriage or an individual who owns part of your business. The desires of a stepparent and stepchildren may conflict, and a co-owner’s personal goals regarding your business may differ from those of your family.

Also make sure the executor, personal representative or trustee is willing to serve. The job isn’t easy, and not everyone will want or accept the responsibility. Even if you choose an individual rather than a professional, consider paying a reasonable fee for the services. Finally, provide for an alternate in case your first choice is unable or unwilling to perform when the time comes.

Selecting a guardian for your children

If you have minor children, perhaps the most important element of your estate plan doesn’t involve your assets. Rather, it involves who will be your children’s guardian. Of course, the well-being of your children is your top priority, but there are some financial issues to consider:

  • Will the guardian be capable of managing your children’s assets?
  • Will the guardian be financially strong?
  • Will the guardian’s home accommodate your children?

If you prefer, you can name separate guardians for your child and his or her assets. Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they’re still minors.

Planning for incapacity

Estate planning typically is associated with how your wishes will be carried out after your death. But it’s also important that your plan addresses incapacity due to an illness, injury, advanced age or other circumstances.

As with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it will be too late. Unless you specify how financial and health care decisions will be made in the event you become incapacitated, there’s no guarantee your wishes will be carried out. And your family may have to go through expensive and time-consuming guardianship proceedings.

Regarding financial decisions, planning techniques to consider include:

A durable power of attorney. This document authorizes the representative you name — subject to limitations you establish — to control your assets and manage your financial affairs.

A living trust. The same living trust that can help you achieve your estate planning goals can also be invaluable should you become unable to manage your financial affairs. If you become incapacitated, your chosen representative takes over as trustee. A properly drawn living trust avoids guardianship proceedings and related costs, and it offers greater protection and control than a durable power of attorney because the trustee can manage trust assets for your benefit.

Regarding health care decisions, planning techniques to consider include:

A health care power of attorney. This document (also referred to as a “durable medical power of attorney” or “health care proxy”) authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so.

A living will. This document (also referred to as an “advance health care directive”) expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, and invasive diagnostic tests. It also specifies the situations in which these procedures should be used or withheld.

Other facts about estate settlement

You also should be aware of the other procedures involved in estate settlement. Here’s a quick review of some of them. Your attorney, as well as the organizations mentioned, can provide more details:

Safe deposit box contents. In most states, once the bank learns of the death, it will open the box only in the presence of the estate’s executor or personal representative.

Savings bonds. The surviving spouse can immediately cash in jointly owned E bonds. H and E bonds registered in the deceased’s name but payable on death to the surviving spouse must be sent to the Federal Reserve to be cashed.

Social Security benefits. For the surviving spouse to qualify, generally he or she must be age 60 or older (but as young as age 50 if disabled) or care for a child of the deceased spouse who’s under age 16 (or disabled). Surviving minor children and certain other dependents may also be eligible for benefits.

Employee benefits. The deceased may have insurance, back pay, unused vacation pay, and pension funds that the surviving spouse or beneficiaries are entitled to. The employer will have the specifics.

Insurance they may not know about. Many organizations provide life insurance as part of their membership fee. They should be able to provide information.

Updating your estate plan

Estate planning is an ongoing process. You must not only develop and implement a plan that reflects your current financial and family situation, but also regularly review your plan to ensure it fits any changes in your circumstances or goals. You’ll also want to update your plan after any of the events in the Planning Tip “4 more reasons to update your estate plan.”

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