I don’t need an estate plan, do I?

An estate plan consists of a set of documents that control the decisions that will be made on your behalf, upon your loss of mental capacity, or death.  An estate plan is not as simple as drafting a will.  I generally tell clients that they should have at least a will, an advance directive, and a power of attorney.  Additionally, it’s important that you review your assets for proper ownership designations and beneficiary designations.  Beyond these basics, there may be a huge advantage to a more complex estate plan, which may include one or more trusts, LLC’s, or other methods of controlling property and assets upon your death or incapacity.  By engaging in more comprehensive estate planning, you will almost certainly reduce the total cost of passing on your assets, and providing for your end of life care.

Without an estate plan, everything you own at the time of your death will be subject to the standard “intestate succession” laws of your state.  I’ve heard it said that if you plan to leave everything to your natural descendants, as the law would anyway, then you don’t need a will.  I absolutely disagree with this notion.  In order to receive your property, your descendants may have to go through probate, or other similar proceedings.

Probate is a court proceeding, which requires the services of an attorney in Oregon, and generally takes between six months to a year, sometimes longer.  There is generally a $531 filing fee, $134 for publication of notices, and between $3,000 – $6,000 in legal fees for a basic probate.  If there are complex assets, unusual or novel legal issues, or disagreements between heirs, the legal fees and costs can be much higher. The following example illustrates the benefits of proper estate planning.

The Estate of Beth

Beth is a 78-year-old woman, who lost her husband five years ago.    She has four children, all grown, with several children of their own.  She lost her fifth child in an accident when he was thirty five.  He was survived by two children of his own, who are now twenty and twenty four.

Beth’s estate consists of their family home (valued at $1.2 million), several investment accounts ($650,000) and the money in her bank account ($42,000).  She also owns four classic cars, which her late husband restored with the two grandchildren of her deceased son.  Beth has a few credit cards, a small home loan, and a couple loan notes for loans she gave to her children.  Recently, Beth had a stroke.  She is now unable to manage her own finances or make health care decisions.

Scenario 1 – No estate plan

Upon Beth’s incapacity, her oldest daughter, Jane, attempts to take control of the healthcare and financial decisions on behalf of her mother.  At the hospital, the staff allows Jane to make basic healthcare decisions.  When major decisions come up though, they tell Jane that without a healthcare power of attorney, they can’t allow her to make major decisions.

Jane consults with an attorney, who informs her that he can establish a guardianship and conservatorship, but the fees will be approximately $6,500.  The process is expected to take a month or two, during which Jane is forced to come up with the money to pay the attorney on her own, since she can’t access Beth’s funds. After the guardianship and conservatorship is set up, Jane is able to pay herself back for the money she advanced.  She moves into her mother’s house and handles her mother’s finances and healthcare decisions until her death, three years later.

After Beth’s death, Jane consults with an attorney to handle her mother’s estate.  The attorney helps her petition the court for administration of her mother’s intestate estate.  The cost of filing is $531, plus she is required to post a $1,400,000 bond to cover the assets of the estate.  The cost of the bond is $2,100.  Only after being appointed and bonded, is Jane able to pay herself back for the funds she advanced.

Over the next month, the attorney publishes notice of the estate proceeding, and sends notices directly to all of the heirs and interested persons of the estate.  After the publication and service of notice to heirs, the estate must wait 4 months before taking any steps toward closing.  During those four months, Jane works with the attorney to discover any debts of the estate.  After the notice period runs, Jane decides that the best way to distribute the estate is to sell the home and distribute the cash equally among the heirs.  She decides not to sell the classic cars though, as those are special to the two grandchildren who restored them with their grandpa.  It has now been just over six months since Beth’s death, and Jane is ready to close the estate.  The attorney prepares a document containing all the information from the estate administration, as well as a plan for distribution of the assets.  The plan gives each of Beth’s living children 1/5 of the remaining cash, and gives the two grandchildren their father’s 1/5 share, plus 2 cars each.

Upon receiving the plan for distribution, one of the heirs is very upset to learn that the home was sold.  He insists that his mother and father both told him that the home would stay in the family.  Eventually, the objection is resolved.  When all is settled, the estate is distributed and closed, but not before the attorney fee bill reaches $9,000.

 In the end, Beth incurred $6,500 in fees for a conservatorship and guardianship, a $531 filing fee for probate, $134 for publication, $2,100 for a bond, and an additional $9,000 in attorney fees to settle her estate.  The total cost of her estate planning/administration was $18,265.

Scenario 2 – Proper Estate Plan

Prior to her incapacity, Beth visited her attorney, who helped her set up a will, a trust, an advance directive, and a power of attorney.  Her power of attorney named her daughter Jane as her representative, and her advance directive named Jane as her healthcare representative.  The total cost of her complex estate plan was $2,500.  Beth’s trust named Jane as the successor trustee, in the event that Beth became incapacitated.  When Beth had her stroke, Jane showed up at the hospital with the binder containing the complex estate plan, which she retrieved from Beth’s home.  The hospital allowed Jane to make all medical decisions, without the need for a guardianship proceeding.  Beth’s bank allowed Jane to write checks to cover medical bills, mortgage payments, and anything else that needed to be paid on behalf of Beth.  After three years, Beth died.

Upon Beth’s death, Jane worked with her attorney to administer Beth’s trust.  The terms of the trust were quite clear.  The family home was to be sold, unless one or more of Beth’s children exercised their right to purchase the home.  The classic cars were to be given to the two grandchildren who worked on them with their grandpa.  The remaining assets were to be distributed equally among the 4 living children, and the two grandchildren, who were to receive their father’s 1/5 share.  Over the next month, Jane worked with her attorney to make the proper distributions, pay any taxes owed, and dissolve the trust.  The attorney charged $3,000 in fees to help with the trust administration.  The total cost of Beth’s estate plan, with proper planning before her incapacity, was $5,500.

Conclusion

The difference between Scenario 1 and Scenario 2 above is not just financial.  Where there is a proper plan in place, families tend to have fewer conflicts over the handling of the estate.  By setting up a proper plan, you take away decision-making power from your heirs, and leave no one to blame for your decisions but yourself.  As we saw, you also make it much easier, from a practical perspective, for your heirs to handle your affairs, both before your death, and after.  The total cost to Beth’s estate for her estate plan was $2,500, with an additional $3,000 for the administration of her estate.  Contrast that with the total cost of not having a plan, which was $18,265, and it is easy to see that money spent on a comprehensive estate plan is money well spent.  As a reader, you may be wondering if this is a worst case scenario.  It is not.  Keep in mind that in the scenario 1 above, there wasn’t even a will contest, or a challenge to the guardianship or conservatorship.  I see these scenarios play out regularly, and I can’t stress enough the importance of a proper estate plan.