Estate Planning During Economic Catastrophe

I'm not an alarmist, but like you, loyal readers, I'm a little freaked by all the economic news. On the TV last night I watched esteemed economics professors using phrases like "classic bank run." And this was on News Hour on PBS!

So, what does this have to do with estate planning? Well, during times like this, you might be inclined to put your estate plan on the back burner. Don't. Here's why: your need for an estate plan doesn't go away because of economic uncertainty. If you don't have a plan, you should still get one. If you do have a plan that is out of date, you should still get it updated.

The fact is that estate plans can be expensive, and during times like these, you probably want to hang on to as much cash as you can for security. Here are some tips for keeping as much of that cash as possible, while still getting a plan in place:

Get a Will Instead of a Trust

Estate planning attorneys like to recommend trusts because they are more flexible than wills, they avoid probate (which can be expensive, time consuming, and is a public court record), and they can be set up to assist you if you become incapacitated. Because they can do so much more than a will, they are much more complicated documents. Because they are much more complicated documents, they are more expensive to prepare. If you want an estate plan, but cannot afford a living trust, a will might do for now. Let's look at the following scenario:

A married couple in their late 30s with two children under the age of 5. They own their own home worth about $550,000 (titled as community property), each have about $100,000 in separate 410(k) plans from current and previous employers, and each have $500,000 life insurance policies with 30-year terms naming the other as beneficiaries. They also have about $35,000 in checking and savings accounts. All of their assets are in California and are community property.

In a perfect world, an estate planner would recommend a living trust that is split into two trusts on the death of the first spouse (one for the surviving spouse, and another funded with the deceased spouse's estate that bypasses the surviving spouse to ensure something for the children), and trust for the children that will pay the money outright to them when they turn 25 or graduate from college. Such a plan would avoid probate, would ensure that there is some money to be inherited by the children when the surviving spouse dies, and would ensure that they children don't get the money before they are ready to handle it. In the world of living trusts, this is a more simple plan, but it is still a pretty complex document. It can also be very expensive to prepare.

Can you achieve the same result with a will? Not really, but you can come close. With the wills, you can create a trust with your estate, but you cannot split the estate into two trusts on the death of the first spouse. Because the assets are all community property each spouse's estate is half of each asset. That becomes tough to split when it is not held in cash (like the house). Although each spouse could leave their estate to their children in trust (rather than to each other), it would likely result in the liquidating of the estate assets in order to properly fund the trust. Since the surviving spouse would probably want to stay in the house, each spouse should give their estate to the other spouse. The house would automatically transfer to the surviving spouse because it is titled as community property. The surviving spouse would receive the insurance proceeds and 401(k) as beneficiary.

Their might not necessarily be a probate on the death of the first spouse. Assets held jointly (like the house) do not go through probate. Assets with beneficiary designations (like the life insurance and the 401(k)s) also don't go through probate. If a person's probate estate is less than $100,000, then probate can be avoided. Here, the actual assets subject to probate are less than $100,000, so probate can be avoided on the death of the first spouse. (The surviving spouse will probably not be able to avoid probate because the house will no longer be held jointly, and the proceeds from the life insurance will be held by the surviving spouse alone.)

To keep the will-based plan as simple as possible, they could leave their estates to each other, and if their spouse does not survive them to their children in a California Uniform Transfers to Minors Act (CUTMA) account. This holds the money in an account, and distributes the money to them outright when they reach an age between 18 and 25. The will can also name guardians for their children while they are still minors. They can execute durable powers of attorney for financial decisions in the event they become incapacitated, and advance health care directives for their medical decisions.

This is much more simple, and less expensive, to prepare than a living trust. It has some drawbacks, but it is far better than no plan at all.

If you are considering an estate plan, but are uncomfortable with the expense of getting a living trust, a will may be a good alternative. Once the ecomony picks up, and you feel better about spending the money on your estate plan, it can always be amended to include a trust.

Don't let economic uncertainty keep you from putting together that you know you should have.