WILL THEY OR WON’T THEY?
A Basic Guide to Estate Planning
This blog is intended as a very basic summary of wills and estate planning. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney if you have any questions regarding your estate or need to draft a will.
WHAT IS AN ESTATE?
An estate is everything you can’t take with you, which includes all your assets.
- Houses and land
- Jewelry, art, guns, heirlooms, and all other personal belongings
- Bank accounts
- Investment portfolios / stocks & bonds
- Retirement accounts
- Life insurance
- Business assets
All of the above are examples of things we try to accumulate in life to build up our estate, and when we pass it all has to go to someone else. The question is: Who will it go to? Should it go to family? Extended family? Your estate? It’s important that you make this decision before you pass so you can be sure your assets will all go where they were intended to go after your death.
Not only do we have assets as part of our estate, but we also have liabilities. This comprises all the debt you can’t take with you and can include:
- Mortgage debt
- Credit card debt
- Personal loans (student debt)
- Funeral expenses
- House bills
- Medical bills
- Other bills
As we collect our assets and add to the list of things we own in life, we also typically collect liabilities. The most important ones we see most often are mortgage debt and credit card debt. These are usually the highest areas of debt, so it’s important that your estate knows who is holding those things – which company holds your mortgage and who your credit cards are with. Many people hide this information and it makes it very difficult for your estate to handle your affairs when they don’t know what you have.
Another one we see frequently is student debt; if your student debt is through the federal government it will be forgiven upon your death, but if you have a private loan then your estate would have to address that.
When you die, you unfortunately don’t get a free tax year – you still have to pay income tax on everything you made up until you died. It becomes your estate’s responsibility to pay this.
Your gross estate is made up of all your assets. Once you deduct all your liabilities, you’re left with the net estate, which is also your taxable estate.
When collecting information for your will and estate, you can use our Will Information Sheet to keep all necessary info in one place.
WHAT DO I NEED FOR A BASIC ESTATE?
Every estate should have 3 things:
- Power of Attorney (POA)
- Advance Directive / Living Will
It’s important to note that each state has its own rules for how estate planning is done in that particular state. This means that if you have all the above documents completed but then you move to a new state, you should absolutely make sure to have your estate documents updated with an attorney who practices in the new state. It doesn’t mean you can’t use your existing documents in the new state, but they may be processed differently and not be used as efficiently as they would in the state they were drafted. The new state may also require different steps in the process than the old state did, so you’ll want to ensure those have been added.
WHAT HAPPENS TO OUR ESTATE WHEN WE DIE?
The easiest answer to this is that it will go through probate court. The English noun “probate” derives from the Latin verb probare – to try, test, prove, examine – more specifically from the verb’s past participle nominative neuter probatum, “having been proved.” This is what we do in probate court – we prove something. In the case of an estate, we are proving a will and the documents involved in the will to verify it was a valid decision made by the deceased regarding their belongings. Once proved, the state will allow you to handle the estate according to the deceased’s wishes.
If you have a will and it gets probated, that is called a Testate Estate or Testate Succession. ‘Succession’ is just a fancy word for when you pass things down to your heirs.
There are rules regarding how things will be passed down if you don’t have a will, and not having a will is called Intestate Estate or Intestate Succession. It is in the government’s interest to ensure people aren’t fighting over your belongings after you die, so in the event you didn’t have a will the government will follow their own rules on the line of succession in order to keep society moving forward.
Not everything needs to go through probate. All estates are created upon death, but not all estates need to go through the court system. Many things are created in a way that allows them to pass outside of the probated estate, and this happens most often with a married couple. Some of the things that can pass outside of a probated estate include:
- Survivorship clauses on deeds – Typically if a married couple owns a home together they will have a survivorship clause on their deed. That clause will kick in immediately upon death, so instead of having to go through the court and probate the will, all we have to do is let the court know one of the spouses has passed away through a death affidavit. This removes the deceased spouse from the deed and the living spouse is now the sole owner of the property.
- Beneficiary clauses – These typically exist on things like stock and investment accounts, insurance, retirement accounts, etc. When these are through your employer, you’ll usually have to state a beneficiary as soon as the accounts are opened. I always recommend that you keep those beneficiary clauses up to date because they are just as important as the will itself. These are not within our control when we’re probating your estate; they are passed automatically upon death and will dictate who receives the benefit regardless of what else is stated in your will.
- Payment on Death clauses – This usually pertains to bank accounts. You can attach these clauses to checking and saving accounts and have them pass to the next person in line immediately upon death, which is an alternative to having a joint account. In either of these situations, the account will not need to be probated because the survivor and heir will already have access to everything they need. If the surviving spouse does not have access to something like a separate account or a safety deposit box, they will have to discuss with the estate attorney how much money is actually in the account – if there’s only $1,000 in the account and you’ll have to pay $2,000 to probate the estate, it may not be worth it for you to pursue that.
- Joint accounts – In this case, the surviving spouse would already have full access to the bank account and it would therefore not need to be probated.
With a testate estate, we go to the probate court to prove a will that has been witnessed and verified. When you have a will, the statute says there are three minimum requirements and a fourth one that is understood:
- The drafter must be 18 or over
- The will must be signed by the drafter
- The will must be written or typed – it cannot be oral
- The signing must be witnessed by two people
These are the bare minimum requirements of a legal will in Alabama. I have seen people bring in a hand-written will that was signed and witnessed, and we have filed that in probate; this isn’t the best way to have a will done because it is usually missing many important clauses that truly benefit the estate. If you do a will with or without an attorney, though, you will ensure control of where your assets go and you’ll be able to separate your estate how you like.
An important thing to consider is that every estate that is filed in probate must have a bond and an inventory filed; the bond is where your rep states to an insurance company what they believe the estate to be worth, and the insurance company will provide insurance in that amount so that if the personal rep does not do things correctly, the heirs will still have something to claim against. Then there is the inventory, where you have to come back to court after opening the estate to tell them all the things you’ve collected and paid out, which constitutes the inventory and accounting provision. When you do a will with an attorney, 9 out of 10 times they will exempt the requirement of doing a bond and inventory, which makes it much easier for the personal rep to process the estate with the court. Your personal representative is personally liable to your estate, so you should be sure to pick someone who is responsible and can be trusted to complete this task reliably. It is also beneficial to choose your personal representative early and let them know they’ve been chosen and where all these important documents can be found.
The statutory powers given to a person representative are very limited, so with a will you can expand those powers. One of the most important ones to expand is to allow your rep to sell real estate. Real estate is one of the most important things we deal with when it comes to an estate. You can sell real estate while an estate is open, and there are lots of rules around it – you can read more about how real estate passes through an estate on our blog HERE.
If you have minor children and you are concerned about what will happen to them when you pass, there are some things you can control with your will such as who their guardian will be upon the death of you and your spouse. Being able to choose that person ahead of time can give you a sense of ease. Whereas the guardian takes care of the daily wellbeing of the child and looks after them day to day, the conservator is in control of the money and assets that child would have received had they been older and will use it for their benefit. You don’t have to select the same person as guardian and conservator, which happens often when you want someone very caring to physically take care of the child but someone who is very financially responsible to take care of the money. Appointing a custodian of your child prevents you from having to create a trust, which is a high-manage asset. Appointing a custodian in your will is much more streamlined and still an effective way of protecting the child.
Having a legal will and making all these choices before your death will help with ease of process after you pass and will also help reduce costs for your personal rep and the attorney when it comes time to file in probate.
In an intestate estate, the deceased did not have a will. In this case we would go to the probate court and let them know there is no will, and the court would then look to the statutes to see who is next in line to benefit from the deceased’s estate. The statutes surprise a lot of people – the assumption is that the spouse of the deceased would receive everything by default, but this is not always the case. There are succession rules, and the order of succession (ignoring the spouse) is as follows:
- Children of the deceased and their descendants
- Parents of the deceased
- Siblings of the deceased
- Nieces and nephews of the deceased
- Grandparents of the deceased
- Aunts and uncles of the deceased
- Anyone else in the bloodline
- State of Alabama
If it ends up going to the State of Alabama, the State will hold it for a period of time until it eventually enters into the general fund of the State.
When you have a spouse but you also have children, the spouse will get the first $50,000 and then the court will split the estate evenly with the children. This is what shocks people. If a husband and wife own property together but don’t have a survivorship clause and then one of the spouses dies, those assets will not automatically go solely to the surviving spouse – they will be split with the children too, in which case you’ll have to have a conservator appointed to handle the children’s assets and go to court to determine what happens with all the assets that have been split. The surviving spouse would also have to go through the bond and inventory process and get court approval for every decision, including whether they can sell their own house. Because of all the court involvement and additional steps, your cost will go up significantly and your burdens will be heavier. With an intestate estate, you’re really just on a ride – you don’t have a lot of say in the decision-making and have to go along with whatever the court decides based on their own rules. It is a very drastic difference when someone dies with a will vs. without a will.
PERSONAL REPRESENTATIVE VS. POWER OF ATTORNEY
I get asked a lot if a personal rep is basically the same as a power of attorney and the answer is no. They have similar authorities and powers, but they are very different things.
Power of Attorney: A living person who can act on behalf of another living person. This includes the Principal (person who grants the power of attorney) and the Agent (person acting on behalf of the principal).
Personal Representative: A living person who can act on behalf of a dead person.
A power of attorney is limited to doing the same things the principal can do as a healthy, capable, living person. For example, your agent can pull money out of your bank account or can sell your house for you in the case that you are just not physically capable of being there – you are out of the country or are unable to leave the hospital, etc. There is also a difference in a durable vs. nondurable power of attorney.
Nondurable POA: The agent can only do things the principal can also do. For example, if the principal were unconscious and unable to sign a document, the agent would also be unable to sign.
Durable POA: If the principal is living, the agent can do anything on behalf of them regardless of their physical or cognitive ability.
The default POA you’ll get when dealing with an attorney is a durable POA, one that will last through any incompetency issues that may come up. This is very important because if you ever have a family member go through a medical issue where they are unable to speak for themselves or that has left them with an inability to understand their surroundings, you won’t have to go to court to appoint a guardian to speak for them – you can use that durable POA to handle their affairs, which makes the process much easier on families.
There are many ways to draft how to use a power of attorney. POAs can be granted to multiple people, for instance to Bob AND Joe or to Bob OR Joe. The ones I typically draft do not have multiple people on them because it can lead to confusion and difficulty when two or more people are in charge of the same decision. When multiple people are listed as having the same power, you both need to be able to agree and be present to make any decisions. For example, you would both need to sign at closing when selling the agent’s real estate. Sometimes this is done on purpose, such as when you want all your children to agree on selling your real estate, but it can get confusing and complicated. When you use “or” in a POA, there can sometimes be a debate regarding whether or not they are able to operate independently from one another – I avoid this by drafting multiple POAs for the people in your life you want to have them. This way each person has a unique document granting them that unique power, and if we need to remove that document we can revoke a single POA rather than having to revoke a section of it. There are instances where a POA will be assigned to one agent but another if the first can’t or won’t act. In this case, for the second person to use the POA they have to prove that the first person could not or would not act through affidavits or other proof, which creates a barrier of use. I always recommend the simplest version of these documents to my clients and typically do not draft these kinds of agreements, but they are possible.
A personal representative, on the other hand, is a living person who represents a dead person and their estate and will handle their affairs for them as if they were alive. This is an important distinction – the personal representative cannot use their powers until the person is dead. This is very different from a power of attorney, in which case you cannot use your power anymore once the principal dies; you can use it if they are incapacitated, but not if they have died. So once you die and an estate is formed, that’s when the personal rep will be appointed; if you have assigned a different person as your personal rep than your power of attorney, they will need to be in communication with each other so they can discuss what has already been done, but often they are the same person. The personal rep is personally liable for any mishandling of the estate, so make sure you have chosen a very responsible person who is capable of handling your estate effectively. This means that if the rep pays an amount out to the wrong person, they are personally liable to the actual heir in order to ensure the heir gets what was owed to them.
When choosing a personal rep, I always recommend appointing two: a main one and a backup in case you outlive the first person you’ve chosen. This way there is always someone else who can step in if the first person is no longer able or willing to perform the duties.
ADVANCE DIRECTIVE / LIVING WILL
This is what Alabama’s Advance Directive looks like. This doesn’t result in great pillow talk between you and your spouse, but it is very important to have this discussion. The advanced directive isn’t actually for you even though it feels like it is; it’s really for your loved ones who will have to make very difficult medical decisions regarding how to handle your treatment at a time when you can’t speak for yourself.
The advanced directive will first define some terms for you.
- What does it mean to be terminally ill or injured?
- What constitutes life-sustaining treatment?
Once defined, it will ask in the case that you’re terminally ill or injured whether or not you would like life-sustaining treatment; you then have to answer yes or no. This document can give your loved ones comfort in knowing they were simply acting out your wishes rather than making their own decisions that resulted in your death. There is so much peace in knowing that’s what someone wanted rather than having to guess.
The third page allows you to appoint a proxy, which is a person who can speak on your behalf to doctors. This is the person who will speak directly with doctors regarding your medical decisions and wishes, and this usually goes hand in hand with the power of attorney. We have a medical power of attorney, but oftentimes now your power of attorney will also include a medical provision already written into it. If you were to get a durable power of attorney from my office, we have a medical provision built into it so that you have medical authority as well as general power of attorney. I still recommend appointing a proxy on the advance directive because this is the document that hospitals are looking for – they’re used to this form and are very familiar with it. You can turn this in to your general practitioner or the hospital you know you would be using and they will hold it with your records. Then if anything were to happen to you, this document would already be readily available and your medical staff would have access to it and would know to speak to your proxy.
One thing people don’t often consider is that there are three different versions of power you can give your proxy on this form:
- I want my health care proxy to follow only the directions as listed on this form.
- I want my health care proxy to follow my directions as listed on this form and to make any decisions about things I have not covered in the form.
- I want my health care proxy to make all final decisions, even though it could mean doing something different from what I have listed on this form.
It’s important to read these thoroughly to really understand which one best works for you. They range from most conservative to most liberal with the highest level of authority given to your proxy.
Page 3 also allows you to make note of people you want informed about your care but not to necessarily make decisions on your behalf. This would allow your child, for example, to still be involved and informed on your medical care even if your spouse is the one who has the authority to make decisions.
The advance directive can be filled out and is considered valid once two witnesses sign. I only ask that when you use witnesses you always use people who are not related to you. Do not use any witness who is related to you for a legal document. Invite your neighbor over, have a coworker sign it, or use anyone else you have a relationship with but who isn’t a direct relative.
People often ask me when estate tax kicks in, and it’s actually a lot later than you’d think. Alabama doesn’t have a state tax, so we’re just discussing the federal tax here. Around 20 years ago it kicked in when you had an estate worth $1,500,000, and it has increased since then due to inflation and the law being updated. In 2022, estate tax now kicks in once your estate is worth $12,060,000 per person.
When you’re going through the estate-planning process, you don’t automatically need to make a trust to prevent your heirs from paying taxes – they won’t have to unless your estate is worth over $12M. Creating a trust costs a significant amount of money and will also incur legal fees, which will all just eat into your heirs’ inheritance, so I don’t recommend creating one unless you really need to. I’m always happy to discuss estates worth less than this $12M mark, but in terms of trusts I usually want to see that you’re creating a trust for a reason other than financial ones, such as a medical reason or if it’s for the benefit of a child.
If you predecease your spouse and your estate is worth, for example, $5M, your spouse can use something called Portability – they can reserve the $7M you didn’t use for themselves and add it to their own net worth when they die. Now if they’ve increased the estate to $18M by the time they die, they can pass the full amount on to their heirs without it being taxed.
How are business assets handled in a will?
Business assets are controlled through the operating agreement of the business, so this will dictate how things are shared or conveyed after someone dies. Business agreements can be very unique or very generic. A lot of times if you have a sole member LLC, which a lot of Realtors end up doing particularly if they own investment property, that will just flow through your estate – your estate will inherit the ownership of that business. So if the business owns anything or has any debts, that will all be inherited along with everything else. It will still maintain its business status, so if you need to liquidate it or shut it down you will have the authority to do so. This is why it’s very important that you list your business as an asset or a liability – probably both – when planning your estate.
Is it correct that if your estate is under $12M, you don’t need an irrevocable trust?
This will be based on your individual needs. My typical recommendation is that we don’t need to have a trust conversation because historically people have used trusts as creative financial planning to lower their tax burdens. Fifteen years ago, this was extremely common; back when the limit was $500,000 before estate tax hit, everyone wanted to create a trust – you’d inherit everything up to that $500,00 and everything else went into the trust. Nowadays, that limit is significantly higher, so the default need of creating a trust is no longer there in Alabama. Every state is different so if you live elsewhere an attorney may recommend a trust to avoid a state tax that we don’t have here. I personally won’t recommend it for you unless you have a special need.
Should you create a trust if you’re trying to hide your identity or personal information?
People used to have this intention with a trust, but it is very difficult to hide your identity these days. I can understand the desire, especially if you’re in particular service industries, but it’s almost impossible to actually keep your identity hidden now. For example, if you purchase real estate with your trust, I am legally required to list a Trust Certificate, which will give away all that information you’re trying to hide – who created the trust, who the trustee is, etc. We can add layers of protection by putting attorneys in charge of the trust, which can make it more difficult to access, but it really comes down to the cost of hiding all this information and being able to access your assets without needing to get a team of people together. The first thing we would do is walk you through the reality of having a trust like this and what it would take to access it and use it so you can weigh whether it is worth the difficulty and cost. We have had people such as FBI agents hide their identity behind a trust due to the delicate work they do with criminals, but once again it isn’t foolproof.
Should you include a list of your passwords in these documents?
Absolutely. Not only that, but a lot of accounts are dual authenticated now, so you would need both the password AND the deceased’s cell phone in order to retrieve the dual authentication code. Having these things will greatly help your heirs access your accounts.
Can I just draft my will using an online resource like Legal Zoom?
You can, but Legal Zoom is not an Alabama company, so they draft based on rules that cover the whole country and may not deal with Alabama issues specifically. They’re not bad wills, but they won’t protect you the way a locally done will can. A local attorney will understand our local laws and customs and will be able to draft your will accordingly. If you are going to use Legal Zoom then great, take the cost savings, but know that you’re saving costs because it doesn’t cover everything.
Can a creditor claim money from, for example, a life insurance benefit I have through work that would go directly to my beneficiary?
Beneficiaries that pass outside the estate will not go through the probate process, they’ll go directly to the heirs. This usually means they will pass outside a creditor’s reach, and so your debt will not be collected out of the benefit before it goes to the heir. This is why it is very important to keep those beneficiaries updated. Some people will put their own name as the beneficiary, and this just means that the benefit has to go through your estate upon your death. In this case it would need to be probated and would be available for any claims against the estate. If you have questions about a specific beneficiary clause and how it would convey, please contact our office to discuss specifics.
By: Geoffrey Middleton
Attorney, Munger & Middleton
Written in August 2022