With little Eggy on the way, we've had to do some estate planning. I'll be honest: I found trying to understand and interpret estate planning and legalese way more challenging than learning personal finance. If you feel the same way, then you'll want to stay tuned for my series on estate planning in “plain English” starting with this post. Today, I'm going to discuss the estate plan basics and define some basic terms you need to become familiar with.
The Vocabulary of Estate Plan Basics
Below, you will find some of the most frequently used terms in estate planning. In addition to breaking them down in simplified English, there are also helpful links for additional reading.
Know Your Situation
Before we dive into the estate plan basics, the first thing you need to do is take inventory of yourself. Specifically, you need to understand your personal situation. Who exactly are you looking to protect? Someone who is single is going to have a very different estate plan than someone who is married with a blended family.
Let's start with me for an example. Our situation is more complicated than the common “(first) marriage with kids” scenario, meaning first marriage, no prior divorce and all the kids are theirs.
Our situation: We are not married. I've never been married. M has been married before and has a son from that marriage. Eggy will be our first child together. We do plan on getting married, just not in the near future.
We just finished drafting wills, power of attorney, living wills and healthcare proxies with a lawyer in NY. Please note and keep in mind that estate laws are state specific and some or all documents will need to be updated/redone if you move states and as your reach life milestones.
Last Will & Testament
All couples with minor children need a Last Will & Testament or Will. Why? Because in the Will you name a guardian in the (highly) unlikely event both you and your spouse pass before your kid(s) are adults. Otherwise the court makes that decision for you!
So, if you don't have a Will (and both spouses each need their own wills, they generally mirror each other), then you are basically saying you're OK with having the court decide guardianship for your minor children. I am pretty sure you wouldn't be OK with this.
You can also name a backup guardian in case the first named guardian cannot carry out the duties.
Your executor is also named in your Will. That is the person who will carry out the wishes of your Will. If you're single (kids or not), you'll want a Will unless you have little to no assets or only assets that bypass probate (discussed below).
If you die without a Will, this is called intestate, and your “stuff” will be divided up according to state law.
Most Wills will needs to go through probate. Probate is the name of the legal process for settling a testator's (the deceased) estate.
The probate process involves a probate court, your named executor and a lawyer.
A lot of things do not need to go through probate, however. You may have heard that it is “good” to avoid probate. Probated wills incur costs against the estate – court fees, lawyer fees, executor fees (if applicable) and time.
Every state's probate process is different so you'll want to become familiar with the general probate process in your state. Retirement accounts (401(k)s, 403(b)s, IRAs, Roth IRAs, etc) DO NOT go through probate unless no beneficiary has been named. The same is true for bank accounts and life insurance proceeds.
Definitely make sure you have named your beneficiaries correctly. This is not as straightforward as it sounds.
For 99.9% of us, our spouse will be the primary beneficiary for all of these. In fact, if your spouse is not the primary beneficiary of your 401(k) (or a similar work qualified retirement plan), then you need notarized permission from your spouse to do so.
Let's say you have 2 children named Amy and Tom for the next example. The secondary or contingency beneficiary is logically 50/50 split between your two children.
Let's go a bit further and say Amy has 1 child and Tom has 2 children.
If, at the time of your death, Amy has passed as well, then guess what? All of it goes to Tom and Amy's child is effectively cut out of the estate. This is probably not what was intended. The intention was for Amy's share to pass on to her kid.
In order to do this, you need to name Amy and Tom and add the phrase per stirpes after their names. Per stirpes means that items are distributed to each family branch. Some states do this slightly differently so be sure to understand your state law on this.
Final Thoughts on Estate Plan Basics
Hopefully, the first post in this estate plan series took out some of the guesswork behind vocabulary that is often used with estate plan basics.
[ Disclaimer: Please note that some of the links above are affiliate links. This means that I may receive a commission if you purchase through one of my links. I highly recommend all of the products & services because they are companies that I have found to be helpful and trustworthy. I use many of these products & services myself. ]