Chapter 8
Estate Planning

In this chapter, we’ll talk about transferring the assets we don’t use during our lifetimes to loved ones and/or other beneficiaries.

Estate planning, in its simplest form, could be defined as how you want to transfer your “stuff” after you’ve passed away. Leaving a legacy and giving heirs the best platform to succeed in their lives is a meaningful estate planning goal. But, remember what Warren Buffett, one of the world’s richest men, said when he was quoted in Fortune magazine in 1986: “One should leave enough money to your kids so they can do anything, but not enough so they can do nothing.”

Assets pass at death by contract (e.g., beneficiary and transfer on death designations), by law (e.g., beneficiary deed, joint accounts, trusts), and through probate (e.g., testate, or “by will,” or intestate, or “no will”). Every adult, whether they have a high net worth or a balance sheet that is negative, has something they want to pass down after death (sometimes it is only their values, not their valuables; sometimes it is both their values and their valuables).

Simple Estate Planning Documents

Every individual, regardless of net worth, should consider having these four documents:

  1. Last will and testament
  2. Durable power of attorney
  3. Living will (a.k.a. health care proxy, advanced directive, medical power of attorney)
  4. Ethical will

Last Will and Testament

A last will and testament states an individual’s wishes. Everyone should have one of these. A last will and testament is used to distribute property to beneficiaries, specify last wishes, and name guardians for minor children. It is an important part of any estate plan. Without one, the courts will make these critical decisions for you. One function of a probate court is proving whether a will exists and helping to settle an estate, especially if there is a third-party interest involved with the estate. I believe everyone needs to have a last will and testament.

If your financial situation is not complex, there are many different avenues you can explore to create an estate planning document. Some individuals, through their employer, might have access to prepaid legal aid and, for a small fee, they could have access to a team of attorneys that would do their estate planning documents at no cost with membership in this prepaid legal. This is a very cost-effective way of getting estate planning documents, as long as one doesn’t need a lot of customization. There are also online services like and that offer various templates.

Here in Arizona, where I live, the state accepts holographic wills, which means they are handwritten and, with the original signature of the individual, this document will be recognized in the probate court. To find out if your state allows handwritten wills, just do a quick search online.

Durable Power of Attorney

Durable Power of Attorney documents are also important. I also suggest that everyone should have one of these.

Having a durable power of attorney means you’re authorizing someone to act on your behalf until the day you pass away.

I currently have a female client who, prior to our professional relationship, was unaware of the importance of having estate planning documents. Unfortunately, her husband began exhibiting signs of dementia and it progressed fairly quickly. Consequently, she was powerless because everything was in his name. She had to go through the process of getting a court order. Not only did it take almost a year to obtain it, it cost her more than five figures in attorney’s fees, courts fees, and so on. Most of the costs and the time and energy spent could have been avoided if the couple had consulted an estate planning attorney early on about these important issues.

The Living Will

The other thing everyone needs is a living will. A living will states whether you wish to be resuscitated or if you are want to be kept alive, even in a vegetative state. This document is essential so that your preferences are followed when you cannot speak for yourself.

The Ethical Will

You may also consider creating an ethical will. You might want to write a “love letter” to your kin and other special people in your life. This is sometimes called an “ethical will.” While it is not a legal document, it can be a powerful way to express your sentiments and wishes for those you leave behind. Just do an online search for “ethical wills” and you will find many resources.

Beyond the Basics: A Living Trust

The more someone has to give away after their passing, especially if there are businesses involved or minor children, the more they may need a living trust. The reason is that if you only have a last will and testament and you have minor children, there could be a scenario in which anytime your children need to gain access to the estate, and they’re under age 18, they may have to go through the court system to get approval. Not only can that be a bottleneck, but it can be time-consuming and costly when you’re factoring in attorney’s fees.

If you have a living trust in place, that living trust can be the owner of most all your assets. But it cannot own your IRA or your 401(k). An IRA has to be owned by an individual because it is an Individual Retirement Account, of course (similarly, the 401(k) is an individual retirement account held within an employer plan, so it cannot be held within a living trust). But any type of property, after-tax accounts, or bank accounts can be titled in the name of the trust. And what’s nice about that is, when appropriately titled in the name of the trust, those assets in the trust do not have to go through the probate system.

The probate system is actually a public record, so if there were some business relationships that went sour or if there are family challenges with divorces, remarriages, stepchildren, and so on, there is a record of the individual’s intention. The probate system is such that there is also a time period for people to go forward in front of the courts and stake a claim on a person’s estate if they feel that it is appropriate to do so.

Conversely, a living trust is not a public record, so you would be able to bypass the public record aspect and keep it all in-house within the trustees of the living trust. This can provide a nice level of privacy for the family as well. My wife and I are cotrustees of our living trust and if something were to happen to me as a trustee, she would still be able to make the necessary changes as she sees fit.

You also need to find trustees to continue to administer the trust after both you and your spouse have passed on. It’s good to have two contingent trustees (like my wife and I have) because circumstances can be very different in the future than the way they are right now. Perhaps that trustee is in a place where he or she can’t commit to helping manage the financial assets. If there are minor children, there may be other trustees managing the money and other caregivers (sometimes called “guardians”) looking after the children. So there are checks and balances there. It’s not always a good thing to have one trustee manage everything (i.e., both the assets and the children) but, in some cases, there is no other solution and as long as you’re confident in that trustee, he or she will be able to live up to their trustee duties.

Trustees can be friends, family, colleagues, and if you don’t have an individual you can appoint, you can assign a trust department within a bank (or an independently owned trust company) to administer the trust. In that scenario, you’re not going to have that personal connection and of course you’ll have to pay a fee to that trust department to administer your trust. Some families decide to use a trust company instead of a family member or friend due to the possible future scenario in which an appointed trustee is not able to fulfill the duties.

When the original trustees or grantors pass away, the trust becomes irrevocable (the revocable trust can be changed at any time while the trustees are alive). You can look at the trust document as though it is a Constitution that you and the trustees have to abide by.

Always consider that you will want to give the trustee an “out” if they can’t continue on with the responsibilities. So when you talk to them about this, you can say, “if something happens down the road and we’re gone and you can’t continue on, here’s A, B, and C contacts for you to talk to after you decide you can’t manage the trust anymore.” If there are three trustees, for example, you will have a primary trustee, and if he or she decides they can’t act as the primary trustee, the responsibility would transfer to trustee B. And if trustee B is the administrator and passes away, it then goes to trustee C, which may be the trust department of the bank or an independent trust company. There’s always continuity in managing trust bylaws.

Estate Taxes

Once a final estate exceeds a certain threshold, there could be an estate tax, often referred to as a death tax. The federal estate tax exemption for 2015 is $5,430,000. What that basically means is that anything over that threshold may be exposed to an estate tax, which is currently set at 40 percent and must be paid within nine months.

Trust Alternating Distribution Provisions

Inside of a living trust, you can lay out specific requirements regarding what conditions the trust’s beneficiaries must meet in order to receive funds from the trust. This is sometimes called an “incentive trust,” but basically you are specifying alternatives for distributing trust assets.

Here is how my wife and I have structured our living trust: We have three young children. My wife and I feel that, as long as we are around, we are blessed with the opportunity to be able to teach our children what matters most in life and how we value life. We can coach them and help them become the best they can be. But if my wife and I are hurt in an accident or we have passed away prematurely and we haven’t had that time to teach them what’s most important in life, I would like our money to be used as a “carrot” as our kids grow older because they need to be mature in order to adequately deal with money. If they become more financially responsible while my wife and I are alive, we can always ease up on the guidelines of our trusts.

But while our children are still very young and impressionable, we would rather control our money in a way that we feel is an incentive for them to reach their full potential. What we have done is legally title everything that we can in the living trust. Our cars, our home, our brokerage account, our checking account, everything is in the name of the trust except our IRAs and 401(k)s (remember, IRAs and 401(k)s cannot be held inside a trust). But, nonetheless, the trust guidelines are very liberal in providing our kids everything that they would need financially in their childhood—from addressing how to buy a car when they turn 16 to having their education paid for. We also have provided our caregivers and those who would be the guardians of our children an annual stipend to help them take care of the financial burden of caregiving.

After the children graduate from college, they would have to start participating in what my wife and I feel is an appropriate adult life. In other words, they would not receive a lump sum payout as they would if they received everything through a will. If you leave everything in a will to minor children, once they turn 18, those dollars are theirs and they can potentially do whatever they want with it. Many who are 18 are not financially mature enough to manage money and often they end up squandering most of it. Sometimes, those dollars create a negative habit, perpetually prohibiting them from reaching their maximum potential. That is why my wife and I have decided that everything is staying in the trust and, if something happens to us, once the kids graduate from college, they will submit their W-2s or their 1099s to the trustee at the end of every year. We have set it up that as long as our children submit their W-2 or 1099 they will get a dollar-for-dollar match from the trust. If they decide not to work, that’s okay, but they’re not going to have our money to fund that lifestyle.

Before my wife and I had our three kids, she taught elementary school, and we feel that teachers today are underpaid. So we included in our trust that if any of our children decide to become teachers, they will get a two-for-one match. So, if they make $40,000 as a teacher, when they submit their W-2 at the end of the year, the trust will pay them $80,000. You can even set up your trust to require your children to do a certain number of hours a year of community service, and you can even make drug-testing mandatory prior to being eligible to take money out of the trust.

This type of customization should really only be done by attorneys who specialize in estate planning. You can be your own financial engineer as well as an engineer for your children if you align yourself with an estate planning attorney who understands your objectives.

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