Estate Planning: What is an Estate? Do I need an Estate Plan?

Some of the most common questions around estate planning come down to defining an “estate” and the need for a “plan.”

What is an “Estate?”

It's not just a house in Kyoto...it's all your stuff.

To put it briefly, your “estate” is essentially everything you own (or might possibly own in the future) such as real estate (e.g. home, investment property, rental, condo, townhome, vacant land, farm ground, etc.), bank or financial “cash” accounts (e.g. checking and savings, non-tax sheltered investment accounts, Certificates of Deposit – CDs, etc.), tax-sheltered retirement accounts (e.g. Individual Retirement Accounts IRAs including Roths and Standard, 401k or 403b, certain profit sharing plans, etc.), business interests (e.g. privately held stock in a corporation, partnership interests or limited liability company LLC interests, etc.), contracts or promissory notes, life insurance, digital assets (e.g. crypto, websites, trademarks, digital artwork, etc.), personal property (e.g. automobiles, other vehicles, trailers, furniture, artwork, jewelry, firearms, equipment, tools, etc.), and other types of property including future inheritances or pay-outs, etc. In other words, everything you own or may own in the future…that’s your estate.

So what is an estate “Plan?”

Mr. Burns has a plan, do you?

This can be a little bit more complex. To be frank, it really depends on a series of factors such as: What type of assets do you have? How would you like them transferred to your heirs? Is your focus on tax efficiency or asset protection or potential care of a minor or disabled person? The estate plan is essentially a legal framework created to accomplish your goals and objectives around your property or “Estate,” and it can take many different shapes:

Most Common Types of Estate Plans –

1.      No Plan – This is actually a sort of plan by default. If there is no documentation to direct where your estate goes, it will fall under the default statutes in your jurisdiction. “Intestacy” laws (I.E. Intestacy refers to dying without a valid Will or other estate plan) generally describe how the court would distribute your assets without additional guidance that an estate plan would provide. Many seek to avoid an outsider making decisions about how their property or estate would be distributed to their heirs.

Do your research...not having a Will or Trust could be messy.

2.      Last Will and Testament – This is a binding document with lots of legal requirements needed to get it right. Essentially, a Will acts as a formal set of instructions to a judge in a “probate action.” (I.E. “Probate” is a court-supervised legal process for settling a deceased person’s estate… it can be directed by a Will or left to the judgment of the judiciary.) The Will directs the probate by appointing the executor or personal representative, determining heirs and specifying who gets what property. It also settles the debts of the decedent and resolves any other outstanding issues using court authority. That can be a good or a bad thing, depending.

3.      Revocable Living Trust – A trust is somewhat like a company to “hold” your estate and transfer it to your heirs sort of like a contract. In essence, the trust acts like a vehicle to hold assets while they are growing and increasing or changing. It can transfer those same assets without court intervention so typically no probate is needed. Of course, if an asset that can’t be transferred without probate is left out of the trust, then a court administration would be needed to get it “funded” (I.E. transferred to the trust) into the right place. A living trust can therefore be used to administer assets during your life and designate how they will be transferred after you pass without the cost and delay of probate. (Note: there are several kinds of trusts with a wide range of options for accomplishing estate planning goals.)

Sometimes most of your wealth is in a business.

4.      Limited Liability Companies (LLCs), Corporations or Partnerships – Business entities can be used to hold assets and transfer them to the successors also under certain circumstances. Tax treatment of various types of entities can be very tricky, and transition often involves sale of stock or business interests…or even sale of certain assets held within the entity. These are often combined with either a Will or a Trust but can sometimes operate alone. This is risky, however, because the tax consequences can be severe. On the other hand, business entities can enhance your current tax picture, provide asset protection and ease the transition to your heirs.

To sum up, your estate is all your stuff either current or pending. Your estate plan is the method by which you hold your stuff during your life and how you transfer it to your heirs afterwards. So, do you have an “estate?” Yep. You sure do. Do you need an “estate plan?” Probably. Is “estate planning” only for the wealthy? No, absolutely not.

Start with an easy question… if you own real property like your home or have any share of a small business, then you have an estate and absolutely need estate planning.

Curry Andrews, Attorney