Estate Planning is for the Wealthy, Right? Nope!

Google the word "estate" and you will almost exclusively get pics of mansions and everything luxurious that come with them. No wonder why images of yachts and gray hair come to mind when people think of estate planning. For sure, the world of the wealthy bears little resemblance with where most of us live. So logically, estate planning must be a priority for the older and richer, much unlike our reality of being younger and definitely poorer, right?

The law of estate planning is full of incomprehensible words like "escheat," "rule against perpetuities" or "per stirpes." They mean little to most of us. So let me try to distill an otherwise obscure area of the law into something that should have the highest of your priority: the welfare of your loved ones if or when you are not around.

Contrary to popular belief everyone has an estate - not just the wealthy. It is the sum of our assets less our liabilities, plain and simple: our net worth.

To give you an idea, the Federal Reserve reports that in 2016 the median net worth of those in their 30's was around $11k, in their 40's was around $60k, in their 50's was $125k, and in their 60's was $190k. Most of us have savings, equity in our homes, maybe a 401k, life insurance, student loans, credit cards, car payments, etc. That whole enchilada exists regardless of whether we are alive or dead. The thing is that we normally are in control our net worth; we pay our debts, spend our cash, or do whatever we want with it. But what happens to our net worth when we are unable to control it - either because we are incapacitated or die?

Welcome to Estate Planning.

Lack of estate planning can result in our net worth being handled by wrong people in wrong ways. If for example a car accident leaves us unconscious, all accounts solely in our name are effectively frozen - and for good reason: no bank will be handing over cash to strangers. This is the worst time to decipher who can sign on our behalf; incapacity already throws the family into turmoil. Too many families have been broken apart by internal strife and disagreement while figuring out our wishes.

Things go downhill from there. Upon death our net worth ends up in probate court, where our debts are cancelled and the balance of our net worth is transferred over to the inheritors. A probate case can tie up property for more than a year and cost of up to 5% of the estate in attorney and court fees, according to Nolo.com. As if this is not bad enough, your net worth may end up in the wrong hands according to another obscure term: state laws of intestacy. And even if it ends up in the right hands, the assets are exposed to waste, mismanagement or attachment from creditors - after all, about 70% of inter-generational wealth is transferred sub-optimally; for the most part lost.

There are far better and less expensive ways to protect our legacy and look after the welfare of our loved ones. Let me contrast the undesirable outcomes already discussed with what we accomplish by having an estate plan in place.

Power of Attorney: It allows an immediate and seamless transition of power to sign on our behalf to people we trust while we are incapacitated. No long and expensive guardianship proceedings when we need to access funds in times of emergency.

Healthcare Proxy and Living Will: Together they provide specific instructions about your health care if you are unable to communicate your desires. No infighting and resulting acrimony among your loved ones.

Revocable Trust: The preferred mechanism to ensure an efficient and orderly transfer of wealth. Granted, when there is no significant net worth to worry about, revocable trusts can be an overkill, but for the average person this is an especially useful and critical component of their overall estate plan. After our passing, assets in trust are not held up in lengthy and expensive probate court proceedings; instead they are managed according to the by-laws of the trust. But it gets even better: These assets become protected against creditors of our loved ones (divorces, bad businesses, law suits, etc.) and against waste or mismanagement (bad investment choices, overspending, substance abuse, gambling, etc.) Assets from probate, on the other hand, come without any strings attached and can vanish in no time.

Pour-Over Will: Connected to the last point on trusts, assets can inadvertently be left outside the revocable trust, especially property we acquire long after the trust is formed. Unfortunately these assets cannot avoid probate, but can be directed to be "poured over" the trust by the probate court via a Pour-Over Will. As such, these assets can still enjoy the protections afforded by the trust; otherwise not available from a simple will or no will at all.

I admit that widowing back in 2014 has heightened concerns about my legacy and the welfare of my young daughter. But we shouldn't go through a traumatic experience of losing a loved one to overcome the uncomfortable nature of thinking about our own mortality - certainly the size of our net worth should not be an excuse for not doing any planning at all.

Want to know more? Contact us at dcoriat@strategic-a.com to schedule a conversation. While every situation is different, we can help you determine what estate plan is right for you.