I don’t need an estate plan, right? I don’t really own anything… WRONG!

When I talk to people about “estate planning,” the most common response is, “I don’t need an estate plan because I don’t have an estate.” The problem is that the word “estate” conjures visions of Hearst Castle or the Biltmore estate. People wrongly assume that they don’t need an estate plan unless they are uber-rich.

But the reality is that, in the law, the word “estate” just means “all the stuff someone owns at the time of their death.” So, anyone who owns something (a favorite pair of running shoes, a new Lorde CD, or that 1993 Honda Civic) will have an “estate” at the time of his or her death. People tend to forget, too, that things like life insurance or lawsuits related to the cause of death can often create a very significant estate, even where a person doesn’t own much at the time of death. So, the amount of money you have, while certainly relevant to the issue of whether you need an estate plan, is by no means the most important consideration.

So, what are the most important factors to consider? In my experience, there are currently three demographics for whom it is absolutely vital to have a solid estate plan in place:

  • parents whose children are under the age of about thirty-five;
  • couples with children from prior relationships, regardless of the age of the children; and
  • unmarried people in long-term, committed relationships (for example, same-sex couples or a male-female couple who does not wish to get married).

For the first category, parents need to consider the ramifications for their children inheriting large amounts of money before they are financially savvy, mature, responsible adults. For many young adults, the prospect of inheriting a significant amount of money, such as a life insurance payout, at age eighteen or twenty-one, or even age thirty, can have severely negative consequences. Having the double whammy of the death of one or both parents plus a newfound wealth can lead young adults to either “blow” the money on a new Bentley or a lifetime supply of Cheetos, or worse can give them the emotional shock and financial ability to become severely addicted to drugs, alcohol, or gambling. By the time the inheritance is gone, the young adult is now broke, addicted, parentless, and in serious trouble.

This problem is easily avoided by establishing a simple trust, which would manage the money for the benefit of the children until they are mature enough to manage the money for themselves. It’s an easy solution, but does require the parents to spend a bit of time and money to put such a plan in place.

The problem is more extreme if the children are under the age of eighteen, because parents not only need to consider the financial ramifications but also need to appoint someone to be the legal guardian of the children in the event of the death of the parents. Dying without a guardian designated in a legally significant way (such as through a will) invites serious trouble in the form of lawsuits between family members over who is best suited to adopt the children. Again, this problem is easily avoided, but requires the parents to take action to put a plan in place.

For the second category, there are many stories of couples with children from prior relationships who inadvertently disinherit an entire side of the family. Take, for example, a situation where a husband dies and then a few years later his wife dies with no estate plan in place. Most likely, the husband’s children will not inherit anything from their father, while the wife’s children will inherit everything.

Similarly, in the third category, without an estate plan in place, if one of the partners dies or becomes disabled, the other partner will have virtually no rights or recourse to be involved in medical decisions and will not inherit anything. This can lead to extreme consequences where, for example, the couple owns a house together. Without an estate plan in place, upon the death of one of the people in the couple, the house may well be inherited by that person’s children, parents, or siblings – not the surviving partner, who wishes to continue living in the house. What happens next depends entirely on the personalities involved, but it could get very ugly very quickly.

Again, all of these horrible outcomes can be easily avoided with a little advance planning. That is the purpose of an estate plan: to make sure that in the event of someone’s death, their surviving loved ones are protected and treated in the way the now-deceased person would have wanted. Certainly, if you are fabulously wealthy, you also need to have a solid estate plan in place, but people need to understand that estate planning is for the masses, not for the 1%.

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