Financial wellness7 min read

The What, Why, and How of Estate Planning

By Joseph Cooter - May 26, 2020

What is an estate plan and when should you get one?

An estate plan is a set of documents that prepares for the inevitable: these documents determine what will happen to your things when you pass away.  A good estate plan will also include a strategy for how to look after yourself and your loved ones should you become incapacitated and no longer able to make financial or medical decisions. 

Although there is no strict requirement that anyone must have an estate plan, most people create a plan once they acquire significant assets or dependents.  For many people, this means they will create their first estate plan shortly after buying a house or having kids. 

Of course, major milestones like purchasing a home or expanding the nuclear family are not the only reasons people are pondering their estate plans today: fears about COVID-19 (also known as the Corona Virus) have spurred many people to ensure that their final affairs are in order. 

Why does anyone need estate planning?

Unlike the ancient Egyptians, most people today don’t believe they can take their assets with them into the afterlife (and despite the separation of church and state, our federal government agrees).  This means that when we pass away, our assets will be distributed to living people. 

Every state in our country has created default rules so that, when someone dies without a plan, their assets will pass on in a predetermined way.  These default rules are called “intestacy laws” or “intestate succession laws” and they are overseen by a special type of court called a “probate court.”  Although this system is preferable to first-come-first-serve amongst the decedent’s family members, it rarely aligns with precisely what the deceased person would have wanted.     

Thus, a primary goal of estate planning is to ensure that your assets are distributed according to your wishes, rather than your state’s default rules.  This usually means passing on your assets to close family members, friends, and charitable institutions—while avoiding unnecessary payments to the state (e.g. taxes) and minimizing fees to lawyers, accountants, and other professionals and institutions.  In California and many other states, one of the major goals in estate planning is avoiding probate court, which is the expensive, slow, and public judicial process that frequently oversees the distribution of an estate.  Unsurprisingly as a lawyer myself, I strongly recommend that everyone consult with a lawyer about how best to avoid this expensive process.

In addition to creating the best possible plan for your assets after you pass away, a good plan will also address who will look after you and your assets if you become mentally incapacitated and are no longer able to care for yourself.  Furthermore, a good plan will also consider what should happen to your loved ones and dependents (such as minor children, elderly relatives, or persons with special needs).

What does an estate plan consist of?

While a simple will could be considered “an estate plan,” most estate planning attorneys and other professionals focus on four key documents that comprise a complete estate plan.  These documents are:

  1. a durable power of attorney;
  2. an advance health care directive;
  3. a last will and testament (commonly called “a will”); and
  4. a revocable living trust.

The first two of these documents, the durable power of attorney and the advance health care directive, create a contingency plan should you become unable to make decisions about your own health or finances.  The second two documents, the will and trust, are primarily concerned with what will happen to your assets after you pass away (although most trusts will also include plans for incapacity).  

One of the most common questions that I hear as an estate planning attorney is: do I need a trust, or is a will enough?  Although every case is unique and other factors must be taken into account, a common rule of thumb in California is that if your assets exceed $150,000 or you own real estate, it may be a good idea for you to consider a trust.  Trusts are complex legal documents and I strongly recommend that you consult an attorney about creating one—but don’t just take my word for it: the California attorney general warns that many “unscrupulous actors” will try to sell you on unnecessary living trusts, or will leverage your financial information in nefarious ways.     

What is the cost of estate planning?

If you create your own estate plan, it can cost very little.  The State of California provides a Statutory Will that anyone can download for free.  There are also self-help books, such as those published by NOLO press which you can purchase for a minimal price (or even get at your local library).  But, DIYers beware: estate planning is a legal minefield, full of procedural traps and unexpected taxation ramifications.  In fact, just about every DIY resource will include a recommendation that its readers speak to an experienced estate planning attorney. 

The cost of hiring an estate planning attorney will vary widely by location and by the complexity of the plan.  There are also numerous fee structures available: some estate planning attorneys will charge by the hour, although many will charge a flat-rate based on services provided.  In the San Francisco Bay Area, where I practice, a flat-rate for a complete estate plan for a married couple can range anywhere from $1,500 to $5,000 or more, depending on the assets of the clients and the complexity of the plan.          

 

Joseph Cooter holds a Juris Doctorate from Berkeley Law, a Master’s Degree in Public Policy from the University of Michigan, and a Bachelor’s Degree from Carleton College.  He is the sole proprietor of the Law Office of Joseph Cooter, specializing exclusively in estate planning law. 

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