The Basics of Estate Planning

By Ric Edelman

Question: I know that I should do some estate planning, but I have no idea how to go about it. How do I get started? How does a trust work, and how much does it cost to set up a trust? How do I know whether I even have enough assets to make it advisable to create one? I’m lost. Could you please explain the basics?

Ric: The most essential document is a will. It is where you state who is to inherit your property.

In addition, we typically recommend that you obtain a durable power of attorney and a durable medical power of attorney. These are often bundled into what’s called a healthcare directive or a medical directive. These documents tell medical personnel how you want to be treated in the event you are incapacitated. Do you want them to use Herculean efforts to keep you alive, supported by machines, perhaps for years? Or would you prefer them to let you pass naturally without intervention other than the avoidance of discomfort?

These documents also let you designate a family member or friend to make this decision if you’re not able to articulate your wishes to hospital staff.

We also encourage many of our clients to consider a revocable living trust. Revocable means you can change your mind about any aspect of the trust — such as who gets your property (easing worries you might make a mistake). Living means it can manage your assets if you become unable to so do — for example, to pay your bills while you’re in the hospital. Finally and most important, upon your death it allows your assets to pass to your spouse, children and other heirs without them having to go through probate court. This can help them get their inheritance faster (probate can take a year or more), while also avoiding related costs (often, 5% of the value of your assets) and publicity (probate is a public process; these trusts keep everything private).

We’ve found that lawyers often charge $1,500 to $3,000 for this work. Some folks need additional documents, such as a marital trust (also called an A/B trust or credit shelter trust). Its purpose is to reduce estate tax liability; but, frankly, if your net worth isn’t in the eight figures, you probably don’t need this document (which can cost another $2,000 to $3,000).

There are many more kinds of trusts available. For example, if you have an heir who would squander any money you provide, a spendthrift trust can dole out the inheritance as an allowance instead. A special needs trust is used if you have an heir who has disabilities that prevent him or her from working or living independently. The trust can provide financial support without interfering with social service payments.

There are also charitable remainder trusts, grantor retained annuity trusts, family trusts — the list is extensive. If you have a need, there’s probably a trust that can help.

The good news: You needn’t be an expert in estate planning. Don’t waste your time becoming knowledgeable about all this — unless you plan to get a law degree. Instead, all you need to be is an expert in your situation. Know what your property is and how you want to dispose of it. After learning your concerns and hopes, your financial advisor can help you design an estate plan. We’ll refer you to an attorney who’s expert in this field. It’s really quite easy.

Once you’re sure what you want to accomplish, your advisor and the estate attorney can work together to determine the strategy you need. In most cases, the legal bill will be under $2,000. For some it could range between $2,000 and $5,000, and more for the very wealthy. In each case, the cost is well worth it.

The lawyer you choose will have a big impact on the fee you will pay. Some lawyers work alone or in small practices. Others are part of big firms that have fresh-cut flowers in their wood-paneled lobby and serve coffee on fine china. Obviously you’ll pay a lot more for the latter.

Most estate attorneys charge flat rates for their work and will tell you the cost up front. Just make sure the attorney you choose emphasizes estate planning in his or her practice. Don’t hire a generalist.

If you don’t have an attorney, we can usually refer you to some in your area who merit consideration.