What is estate planning?
Estate planning is the method for the orderly transfer of wealth. It stems from old English law, when the King died his transfer of wealth went to the Prince. We now have methodologies, tools, and statutes that provide for orderly transfer of wealth so that when you pass away, your assets and tangible items that you own get distributed in accordance with your wishes.
Does the orderly transfer of wealth imply you have to be rich to do estate planning?
Absolutely not. People tend to think that you must be rich, but if you have anything of value such as a family heirloom, or a house that you lived in, or retirement funds that you worked for all of your life, you should have an estate plan in place. You might be a distinctly middle class, but those are the things that are important to you. How they get passed on is typically a choice that you need to make that reflects your wishes as opposed to leaving it to the government to decide – which is what happens if you don't do estate planning. Without estate planning, the government will step in and distribute your wealth in accordance with the laws of the state rather than your wishes.
Within estate planning is the term probate, which seems like a lot of people want to avoid for whatever reason. So, what does probate mean?
Probate is the legal process by which the court administers the transfer of wealth. In Montgomery County, that's done by the Montgomery County Circuit Court Probate Division. Probate looks at the deceased's assets and liabilities and compares what they have vs. what they owe to people or institutions they owe money to and pays them accordingly. The remainder is then distributed by the courts to the remaining family members of the deceased.
What's the difference between probate and non-probate assets, and the probate and non-probate process?
There's a lot of transfer of wealth that can take place outside of the courts which is called non-probate transfers. For example, your typical types of assets like real estate, if it's jointly owned with a right of survivorship, is inherited by the other spouse when one spouse dies by operation of law. This means it doesn't have to go through probate. Other typical things people might recognize are accounts that would have a pay on death specification, meaning that when the account owner passes away those assets are transferred to the person who is designated as the pay on death designee. Again, that happens without the involvement of the court. Then lastly, any type of account or investment product that has a beneficiary designation, those assets would be transferred to the beneficiary upon the death of the owner without the involvement of the probate court and probate process.
What are the typical documents you would draft for someone to assist with the estate planning process?
There are quite a few different documents that may be needed, but we'll start off with the two that I think are easiest to understand. One is the power of attorney, which is a legal tool or document that is drawn up to identify someone to make decisions for you in the event that you're unable to do so for yourself. That means if you're incapacitated due to injury or health issues, including dementia. You need someone to be able to make those decisions that you would typically make on your own, and a power of attorney gives that person the authority to do just that. Another document is what we call the advanced healthcare directive, and that's a similar product that names an agent who can make healthcare decisions on your behalf. It's sometimes referred to as a living will because you're specifying not only who can make the decisions, but what type of treatment you are willing to accept if you're not able to articulate those decisions on your own.
Other typical documents an attorney might use in estate planning after a power of attorney or advanced healthcare directive is a last will and testament, which is often referred to simply as a will. For most people, a will is sufficient. What a will does is specify someone to act as your Executor when you pass. That person then distributes your assets in accordance with the wishes you've stated in the will. For most people, a will is all they will need, but for others, there may be a reason to have something more, called a trust. A trust has its origins back in feudal times when knights went off to fight in the crusades. They would entrust their property to someone called a trustee to take care of it while they were gone. If they didn't come back from the crusade the trustee was charged with the responsibility of distributing their property in accordance with the owner's wishes. A trust is exactly that. It's a document you set up and into which you put all of your assets, with instructions on what to do with them when you pass. There are many types of trusts to choose from, and working with an attorney is the best way to determine which is right for you and your loved ones.
For most people, a Will is sufficient in estate planning, or for others, a Trust plus a Will Is needed. What are some of the reasons you might need one or the other?
When you have a Will, by definition you go through the probate process. Upon your death, your Executor will take the death certificate to the court and say “I'm the Executor and need to get the authority to do what this Will says.” That process is public and sometimes is a little more time-consuming. It can also be expensive.
A Trust skips that part. A Trust names a trustee or co-trustees and doesn't go through probate, and is not administered by the court. So you simply take the Trust document itself which is a legal entity created by the trust (the trust actually owns those assets) and the trust document specifies where they are to go and what's to be done with them. It's a much more private option, which many people like. It's also far quicker because there's no delay since it doesn't have to go through the probate process.
So what happens if you don't have any estate planning documents when you pass away?
It's stunning that only 30%-40% of people that pass away have any estate plan. This means six or seven out of ten people pass without any estate planning in place. So there's good news and bad news about that. The good news is that in the State of Maryland, like every jurisdiction, has their own estate plan and it's built into the statutes that govern the transfer of wealth which means the assets will get distributed. The bad news is the State of Maryland may not distribute your assets the way you want them to be distributed. It's a process that meets the most common scenario and that scenario may not be the one specific for your family needs.
What should I do with my estate planning documents once I have them?
The first thing you should do is make sure your documents are stored safely and securely. I like to recommend to folks that they actually store them in the courthouse. The court offers the process of filing those documents in advance, which makes sense because the Executor will have to go to the court anyway to present the will. If your will is already at the courthouse, it's stored and maintained. Alternatively, you put it in a secure safe deposit box. However, you need to make sure that someone knows where it is and how they can get to it when you're gone. If you haven't told anybody, they're never going to find your will.
While you're living, how often do you typically advise clients to update them?
Again, this is a really important point that people overlook frequently. The older you get, the more frequently the document should be reviewed, because things happen in your life that might change your distribution. So for younger clients, we recommend updating your documents every five years or so. Older clients should update them every couple of years or whenever anything significant happens in their life such as a loss of a spouse, loss of a child, the addition of a spouse, addition of a child, or when something major like that happens.