During our current times, young families are prioritizing estate planning. We hope to empower these families with the know-how to select an optimal estate plan. In Part I of our blog series, we outline estate planning considerations. We also encourage you to execute advance directives (which we previously wrote about here). Your advance directives and your estate plan work in conjunction to help you achieve peace-of-mind.
Step 1: Determine your goals.
Start the estate planning process by reflecting on your goals. What are your objectives? What are your concerns?
For many young families, the most important concern is the selection of guardians for their minor children. In Illinois, there are two types of guardians: guardians of the estate and guardians of the person. The former manages the money or assets held by a minor child, while the latter becomes a substitute parent. The same person can fulfill both roles, but you have the option to select different people. When making such decisions, it is helpful to consider who will honor your parenting philosophy and values and who has the stability in their own lives to take on such a role.
Young families should also assess whether they have added goals — i.e., planning for a child with special needs, managing business interests or avoiding probate, etc. Your current goals will guide the estate planning process.
Step 2: What do you think about probate?
Probate court is the court that oversees the administration of the decedent’s estate. In Illinois, if you own real estate or have assets that exceed $100,000, then your will will be administered through probate. Probate takes time. Currently, the process must allow for six months for creditors to be notified before assets can be distributed to your beneficiaries. And, of course, you will have to pay court costs and legal fees. Because of this, some families opt for probate avoidance plans which require more planning than simple wills.
Other families, however, decide to take such steps down the line. Regardless of which route you take, you will need to consider what will happen if you opt for a plan that does not avoid probate. Many partners jointly own assets, which generally means that the assets transfer to the surviving partner upon the death of the first to pass. You may feel comfortable putting off a more costly probate avoidance plan for now because of this. But make sure that you consider the scenario where both of you pass simultaneously or within a short period of time. If there is no probate avoidance plan in place, then your assets must pass through a formal probate process.
Step 3: Are you using devices that bypass probate?
After considering probate, many couples assume that they must set up a trust to avoid probate. Not necessarily. There are devices in Illinois that can help you avoid probate without incurring the expense of a trust.
First, beneficiary designations. On most financial accounts and life insurance policies, you can designate who you want assets to pass to. Once selected, the individual typically inherits the asset without court intervention. Note that some financial institutions will not allow you to name a minor outright as a beneficiary. It is advisable to speak with the institution and your estate planning attorney to consider naming your child as a beneficiary by taking advantage of your state’s Minors Act or by naming a trusted adult beneficiary. The former allows the assets to transfer to a Uniform Transfer to Minors Act (“UTMA”) account that is overseen by a custodian of your choice until the child turns 21. For some young families, this is a great step that avoids the necessity and expense of a trust.
Second, a transfer on death instrument (“TODI”). In Illinois, you can pass your home through a transfer on death instrument — a document filed with your county recorder of deeds in which you name who will take the property upon your death. The TODI is a great option for families who would otherwise bypass probate but for their home. If, however, you are quite certain that you may move, or that you will engage in trust planning down the line, then a TODI will merely be a stop gap. If that’s the case, it may or may not make sense to invest in a TODI, depending on your circumstances.
Step 4: Do I have multiple properties, want greater control over how my assets are distributed or have complex non-beneficiary designation assets?
For some young families, the devices that bypass probate are insufficient. Once a family has multiple properties, wants greater control over who gets what and when, or has non-beneficiary designation assets that exceed $100,000, then a trust makes more sense.
If you are concerned about life insurance proceeds transferring to your child via a UTMA account at the age of 21, then you may be able to set up a trust to achieve greater control. Make sure that your life insurance policy allows for this. If it does, then this trust can be set up as a living trust to avoid probate or it may be contained in your will as a testamentary trust.
And, of course, some families prefer a trust because it does not become a part of the public record. If you would prefer to keep the details of who will inherit your assets and real property private, then a trust is optimal.
Finally, it is important to think of additional wrinkles. Is it likely that you will move? Are you a non-citizen? Are there significant liabilities or inheritances you expect? If so, you should bring this to the attention of your estate planning attorney. This may impact which plan makes sense for you.
We understand that there is a lot to consider. But investing in such decision-making upfront will help you select a plan that more comprehensively addresses your needs and goals.
Stay tuned for Part II!