How to Think About Estate Planning

There are several aspects to estate planning, but at its core, it’s a property transfer process (with some incapacity planning).

A person can’t own property after they die

If someone dies having legal ownership of property, what happens to it? For practical purposes, it can’t continue to be owned by the deceased. How would they manage it? Collect income? Pay taxes? They aren’t around anymore.

Each item of property has to be transferred to someone or some entity. Even if property is abandoned, it comes under control of the state where the property is located. Or in certain cases, it may be sold or thrown away by whomever has control of it.

Either way, there is no way to directly own property from beyond the grave. So, what happens?

It’s all about following instructions

Hopefully, the final owner of the property left instructions before they died as to what to do. One can imagine many people making a claim to the property, but why believe any of these self-interested parties?

If a bank is holding money of the deceased, they need to know who to give it to. If it’s a house, who has the right to live in it or sell it? If it’s a retirement account, who gets those distributions? These instructions have to come from the last owner.

There are usually multiple ways to accomplish a transfer of a particular asset. It can be in the ownership document itself, like a deed. It can be in a financial institution beneficiary designation form. Or it can be in a separate set of instructions like in a will or a trust.

In each of these situations, you have to legally make the transfer. Sometimes this may just require a death certificate, while other times you need a court to approve the transfer. Some transfers may be quick, while others will take a while.

What if there are no instructions to follow?

This is referred to as intestate. meaning there is some property that is not disposed of by a method other than a will but is also not disposed of by will. In other words, there are no instructions anywhere as to who inherits the property.

This is common enough that there are laws to deal with it. There is an assumption that people want their property to go to their closest relatives. So, there are legal code sections that lay out the different distribution methods depending on your family situation. Generally, the spouse is first in line, and then children. It goes out from there to more remote relatives.

An estate plan considers several issues

Whatever decision someone makes, they probably don’t want the beneficiaries to be angry about the fairness of the distribution. It may strain family relationships. It may lead to challenges of the instructions of the deceased based on the validity of a document or undue influence. Thinking through who gets what and how it might play out is important.

Taxes are always an issue. No one wants to pay them. There are ways to delay or minimize taxes but it probably shouldn’t be the number one driving force if it’s going to change the plan’s other goals.

Is someone going to inherit a large chuck of wealth and blow through it in two years? There are ways to slow down and space out transfers using a trust for someone who isn’t great with finances.

A plan benefits everyone

Having some kind of plan makes it a lot easier on everyone involved. An orderly set of documents and transfer instructions is better than the potential chaos of hard-to-find information or no guidance. No one has to make an estate plan, but it’s a thoughtful gesture to people you care about.