Estate Planning 101: Who Knew?

Boston trust attorney Michael Puzo has seen it time and again: people procrastinate about writing a will or putting their estate in order.

“It forces them to face their mortality, and they don’t want to,” he said.

Even those with modest assets – a house, a 401k, and maybe a life insurance policy – should carefully make an estate plan.  But are the nuts and bolts of wills and estate planning widely understood?

This question loomed as Puzo translated these legal complexities in a way anyone could grasp during his presentation to employees of Boston College, where Squared Away is based.  For readers who may not know where to start, here are 10 fundamentals gleaned from his talk:

A good estate plan achieves four goals:

• Distributes one’s assets to the desired person or people.
• Ensures beneficiaries receive the money when you want them to.
• Makes appropriate bequests either directly or indirectly through a trust, rather than a will.
• Minimizes taxes.

When thinking about a will, get out a blank sheet of paper and write down everything of value that you own, whether it’s a checking account, the house, a wedding ring, or life insurance policy – and who you want to receive each of them.

Many people may be surprised to learn they “have more money than they think they have,” Puzo said.

The difference between probate and non-probate property is critical:

When someone dies, their probated property goes through the state court system.  Probated property covers anything in an individual’s sole name; it does not cover jointly owned property, which passes to the surviving co-owner.  If the deceased has a will (the legal term is testate), the court merely validates the origin of the will.  But if you do not write a will (intestate), the court applies state law to determine how the property will be distributed.

“It’s irresponsible when someone dies and their children or grandchildren are left with a mess,” said Puzo, who is with Hemenway & Barnes LLP in Boston.  [Full disclosure: Puzo is an attorney for Boston College.]

Non-probate property is anything that can pass automatically – without a will – to beneficiaries or descendants, such as assets held in a trust, pensions, 401(k) investments, or life insurance policies that designate a beneficiary.

Most people shouldn’t worry about federal estate taxes, which kick in only when an estate’s value exceeds $5 million.  For a couple, estate taxes are typically deferred until the second spouse has died.

But federal taxes are just one hurdle: many states levy their own estate taxes.  Florida has none, for example, while Massachusetts’ tax ranges up to 16 percent and increases with the value of the estate.

A trust is a substitute for a will: both direct the distribution of one’s assets.  A revocable trust is preferable to an irrevocable trust in the vast majority of cases, Puzo said.  That’s because a revocable trust can be changed to reflect new circumstances, which are inevitable.  One’s child may divorce or someone may remarry after their spouse dies.  In virtually all situations, the revocable trust will become irrevocable upon your death.

A good reason to set up an irrevocable trust initially is to prevent paying taxes on life insurance, which grows in value when someone dies.  If a policy is placed in a trust and that trust is properly run, the policy holder no longer legally “owns” it, so it’s excluded from their taxable estate. The trust can, however, distribute the proceeds of the policy to beneficiaries.

In contrast to spouses, children do not usually have rights, under state law, to inherit property. When making the difficult decision to exclude one’s offspring from a will, don’t state the reason for doing so – this may give them a legal basis for challenging it, Puzo said.  The will should say that the child was intentionally left out of the will – and that’s all.

One reliable way to spark sibling rivalry is for a parent to put the name of one child who has been her primary caregiver on her checking or savings account.  When the parent dies, the caregiver can legally keep the money, justifying it to her siblings with comments like this: “Where were you when I was driving mom to the doctor?”

To prevent this, Puzo suggested parents give the caregiver legal authority to write checks without naming her as a joint owner on the account.

Designate beneficiaries for things like 401(k)s through a form provided by the manager of the financial product, rather than use a will.  It’s preferable to using the will, which creates unnecessary complications in this case.

Set up a durable power of attorney if you want a child or other family member to take care of you if you become incapacitated due to a stroke or dementia.  Not everyone is aware, Puzo said, that a simple power of attorney lapses once you’re incapacitated – perhaps defeating your intended purpose.

It’s also wise to name a durable power of attorney on Day 1, rather than specify a triggering event that will put it in effect in the future.  It could be hard for your child to prove legally that he or she has assumed stewardship.  For example, most banks won’t accept a simple letter from a doctor.