Estate Planning 101

Speaker: Maritess Bott

Maritess: 

Hi everyone, this is Maritess Bott. Thank you so much for watching or listening to our podcast today. Today we’re going to do things a little bit differently. I’m going to present and show a few things on the screen. If you are just listening to the podcast, hopefully you can still get something from it, but definitely check it out on YouTube so you can see the actual slides that I’m presenting.

Today it’s called Estate Planning 101. That means we’re going to boil it down to the basics and hopefully it’s understandable to you. What we’re going to do is share four common fact patterns in estate planning. You may be part of this fact pattern, you may not recognize it, but hopefully you can relate to one of them and understand it. At the very least, it helps you understand the topic of estate planning.

The first one is Young Families. You might have a married couple with a couple of kids, both of whom are minor children. Typically, the family is going to have three objectives:

One, name a guardian for the minor children in case the parents, heaven forbid, pass away.

Two, make sure that money is available to raise the kids.

Three, give the money to them in different stages of their adult years.

Those are very common fact patterns. Now I’m going to show you this particular fact pattern when there’s no planning involved. You do nothing—no will, no trust, nothing. Often, people own assets in these different categories: they have a house, some retirement accounts, life insurance, and then other assets, which I consider regular stocks, CDs, or anything like that.

How are these distributed to your family members? We’re presuming this is a young couple. The house is held in joint tenancy with the married couple. They also have beneficiaries on their different assets like life insurance and retirement accounts. Then everything else falls into the category of probatable assets.

Probatable assets means that if you’re in Illinois and the value is greater than $100,000, then we’re opening an estate—a probate estate.

At the first death, the surviving spouse does get the house automatically without going through probate if it’s in joint tenancy with right of survivorship or tenancy by the entirety. Upon the first death, typically with life insurance and retirement accounts, you put your spouse first and then your kids second, so it will go to them without going through probate.

However, everything else—say you have a bank account that’s $200,000, some cars, and some individual stocks—will have to go through the court process called probate. As we’ve talked about in previous podcasts, it’s expensive, time-consuming, and a public record, which you don’t want to happen.

Even though people come to me saying, “I don’t need any planning; I have everybody named,” not everything has beneficiaries that you can name. We don’t want any of your assets to go through probate.

What about simultaneous death? What if husband and wife die together? We don’t know—we don’t have a crystal ball. And certainly, if all of it is going to the kids, what age do we want them to have it? If they’re young, under 18, the money is going to be held by the life insurance company until they turn 18. Then at 18, here’s your $500,000 insurance policy, which may not be what you would want to happen.

Now I’m going to show you this fact pattern with a will plan. With a will plan, we’re going to have all these different documents, the main document being the Last Will and Testament. The common objective is to name your guardians. Unfortunately, even with a will, you still have to go through probate if you have assets that are greater than $100,000. We might have named guardians in the will, we’ve done that, but we haven’t avoided probate.

Joint tenancy assets with beneficiaries will go to family without going through probate, but still, we’re going through that probate process.

What is the best way to do it? The house can also be transferred to the family through what’s called a Transfer on Death Instrument. That means upon the death of both parents, we can name the kids as the beneficiary, but once again, if they are too young to get it, that would not be a good idea.

So now what’s the best option? A trust plan.

The trust is going to be the main document. We’re going to have the spouse still be the main beneficiary, but now we’re going to add the trust as the second beneficiary. We’re going to have all these other documents listed as well, and we’re going to have everything laid out in the trust.

What we’re doing is avoiding probate. That’s the whole objective—to avoid probate. The trust already says everything goes to the spouse upon the first death, and then upon the second death, it will go to the kids in trust with provisions to make sure they get the money at appropriate ages and stages.

With a young family, you might think, “I have a simple plan, I don’t need to do this.” Just beware that there are objectives you are not fulfilling if you don’t have an estate plan in the first place, or if you just have a will.

Now, the second kind of fact pattern is if you’ve gone through a divorce and now the person who’s divorced has children and comes to me for advice. Usually, their objectives are:

One, I want to name my guardians for my minor children.

Two, we still want to give money to the kids in stages.

Three, please make sure it doesn’t go to my ex-spouse.

If you have children together, your ex-spouse is the natural guardian for your minor children. If you do no planning, potentially, it could go to your ex-spouse.

If there’s no planning involved, we’re going to have all these assets that depend on what type of asset it is. Some things have beneficiaries, some will go through probate, and eventually it’ll get to the kids. But if they’re minor children, do you want them to get it at 18?

Who is the beneficiary? The kids—but they’re minors. The guardian is the ex-spouse. Guess what—with that, the ex-spouse can essentially keep spending the money. Whether they use it on the kids or not is nothing you can control. That’s pretty scary—that your potential inheritance that you’re giving to your kids might be stripped away, taken by your ex-spouse, and possibly even your ex-spouse’s new relationship and their children.

With a will plan, it’s fine. Just like earlier, we can have a will, we name your guardians, but we have to go through probate. There are going to be assets that go to the kids directly, but once again, we’re going to have the same issues: kids could get the money at 18, money can go to the ex-spouse, and if there’s no contingent beneficiary with respect to assets that aren’t part of the will, that creates problems.

Now, what happens here? A trust plan is really your best bet. Your trust is going to have all the instructions on where everything is supposed to go. Your trust will avoid the court system called probate. We’re also going to give the money to the kids—it’s going to be available to raise them by the guardians you’ve chosen—but nothing, zero, will go to the ex-spouse because you’re going to choose the trustee who manages that money, hopefully somebody on your side of the family. That money will never go to your ex-spouse or your ex-spouse’s new relationship.

Let’s also address any requirements by your divorce decree in the trust so we don’t overgive to your ex. If the life insurance requirement is no longer needed because maybe the kids are past college, then let’s make sure the trust is the beneficiary and nothing goes to your ex-spouse inadvertently.

Now let’s move on to the third fact pattern. The third fact pattern is single adults with no children. You could be single, never married, or widowed, or maybe you just don’t have children. The common objectives are:

One, we want to name who will make decisions if we become incapacitated.

Two, we want to determine who receives our assets when we’re gone.

Three, we want to avoid probate court.

These are really big, important things for a single person.

So let’s take a look at what happens with no planning in place. If you have no plan, you still have the same types of assets: house, retirement accounts, life insurance, and other assets. The house, if it’s titled in your name only, will go through probate when you die.

If you don’t have any beneficiaries on your life insurance or your retirement accounts, those will also go through probate. If you have no beneficiaries named and no will, the state of Illinois decides who gets your property through intestacy laws. That means they’ll look for your next of kin—parents, siblings, nieces, nephews—and that might not be what you want.

Also, if you become incapacitated, who’s making your financial or medical decisions? If you haven’t designated anyone through a power of attorney, your loved ones may have to go to court to become your guardian. That’s time-consuming and costly.

Now, if you have a will plan, it’s better than nothing. The will says where your property goes and names an executor, but again, you’re still going through probate. So the cost, delay, and publicity of the process are still there.

The best option again is a trust plan. You name a successor trustee who can step in if you become incapacitated. You avoid guardianship court because your trustee can manage your assets for you. When you pass away, your successor trustee distributes your assets to the people or charities you’ve chosen, privately and without court involvement.

This is a great tool especially for single individuals who may not have a built-in next of kin or someone automatically responsible for their estate.

Now, our fourth and final fact pattern: blended families. This is very common today. We have a married couple where one or both spouses have children from prior relationships.

The common objectives for blended families are:

One,  want to take care of my spouse if I die first.

Two, I want to make sure that my children from my prior relationship receive something after both of us are gone.

Three, I want to avoid fights between the stepchildren and the surviving spouse.

If there’s no planning involved, this can be a big mess. Let’s say the couple owns their house together as joint tenants. At the first death, it automatically goes to the surviving spouse. Then the surviving spouse has full control—meaning they can leave it to their own children, not their stepchildren.

If the deceased spouse had wanted their own children to receive something, that may never happen without planning. Life insurance and retirement accounts often go to the spouse first, and if they remarry or change beneficiaries, again, those stepchildren may get nothing.

A will plan helps a little but still doesn’t fully protect everyone. A will can say, “I leave this to my spouse, then to my kids,” but after probate, the surviving spouse can change their will at any time. So the kids from the first marriage still might not be protected.

The best option for blended families is a trust plan. A properly drafted trust allows you to provide for your spouse during their lifetime, but ensure that whatever remains after they pass goes to your children from your prior relationship. You can specify exactly how much goes to your spouse, how much is held for your children, and how those assets are used.

For example, your trust might say that your spouse can use income from the trust for the rest of their life, but the principal will go to your children after your spouse’s death. This structure keeps everyone protected and avoids fights between step-siblings or new family members.

So let’s summarize everything. In all four of these fact patterns—young families, divorced parents, single adults, and blended families—the trust plan is almost always the best way to meet your goals and avoid probate.

A will is helpful, but it doesn’t avoid probate. And doing nothing means your family will likely end up in court, paying more, waiting longer, and possibly fighting with each other.

Estate planning doesn’t have to be complicated or intimidating. It’s about giving you peace of mind and making sure the people you care about are taken care of, in the way you want.

If you’d like to learn more about how a trust could work for your family, or if you just want to review your current plan, please reach out. I’m always happy to walk you through your options and help you figure out what makes the most sense for your situation.

Thank you so much for watching and listening. We’ll see you next time.