Financial Independence: Estate Planning and Asset Protection

Objectives

After studying this course, you should be able to accomplish the following:

• Describe the purpose of a Last Will and Testament.
• Explain the probate process.
• Describe how to avoid probate.
• Explain the weaknesses of joint tenancy.
• Describe the purpose of a Living Will.
• Describe the purpose of a Durable Power of Attorney.
• Implement strategies to pay for estate costs.

Self-Assessment

Heads up! 

1. If you were to die today, what would be left for your family?
2. Why do you think a will is important?
3. What does probate mean to you?

Introduction

What happens to your estate when you die? Where do all your possessions and money go? If you have outstanding debts, how are they paid? If you have underage or disabled children, how are they cared for? How would your spouse survive financially? Where would he or she live? These and many similar questions are often only passing thoughts; however, they are questions that should be answered long before you pass away. The purpose of this course is to help you plan your estate and protect your assets.

Note: the information in this course is for educational purposes only and should not be viewed as legal or tax advice. Please contact a qualified professional for your estate planning.

Last will and Testament

What is a Last Will and Testament (hereafter referred to as a Will)? In its most basic definition, a Will is a letter of instructions to a probate court judge regarding the disposition of a deceased person’s estate. It is often created by individuals (with lawyers) who want to designate to whom their estate is to be given (beneficiaries). A Will can only say who is to receive any of the assets of the deceased. A Will cannot (generally) say how the named beneficiaries are to receive the assets or when the named beneficiaries are to receive the estate assets. It is signed in front of two witnesses to clarify the validity of the Will to the probate court judge.

Before we delve deeper into Wills, we will take a moment to discuss probate and probate judges. Probate means to establish the authenticity (validity) of something—in this case, the validity of a Will. Therefore, a probate judge establishes the authenticity of a deceased person’s Will, and his or her probate court considers the distribution of the deceased person’s estate. The court oversees procedures to pay the deceased person’s debts and distribute their assets to the beneficiaries.

One of the most important purposes of a Will is to appoint guardians over a deceased person’s minor children. Since minor children are living beings, guardian appointments must be overseen by a probate court judge.

Another main purpose of a Will is to establish the distribution of assets from the deceased person’s estate. For the purposes of this section, we shall discuss the distribution of assets as though you were the deceased.

After your death, your personal representative (executor), with the assistance of an attorney, presents your Will (if there is one) and an inventory of your estate’s assets and liabilities to the probate court. The court then determines if the Will is legal—they authenticate it. If it is deemed authentic, the court accepts it for probate. Your creditors, through a legal notice inserted in the local newspaper, are then notified of your death and are given an opportunity to present their claims against your estate. This notice also serves to alert interested parties who may wish to enter a legal objection to the disposition of your estate. If the terms of the Will are unclear, the court will construe its meanings and officially decide what you meant. If you do not have a Will, or if your Will is declared invalid by the court, then the court will distribute your estate in accordance with the intestacy laws of the state.

Parents of younger families usually have their own ideas of how and when their younger children are to use or receive any of the estate’s assets, such as cash investments, real property, or insurance money.

Probate court judges are obligated to give any beneficiary of a Will who is over the age of 18 that beneficiary’s entire estate distribution as a lump sum, without restriction. If a Will has any language directing a beneficiary’s distribution after the age of 18, then that Will has a testamentary trust embedded or attached to the Will. This trust directs the probate court judge to fund the trust using the proceeds from the estate. The probate court judge then affirms the appointment of a named trustee and hands the administration of the trust over to that appointed person. If the testamentary trust has not specified a trustee to handle the trust’s assets, the probate court judge will, at his or her discretion, appoint a trustee.

Now that we have established what a Will is and briefly explained how it works, we shall now discuss how to create a Will. You should become familiar with this process and prepare to create one for yourself. A Will is a major part of establishing your estate plan and protecting your assets.

Preparing a Last Will and Testament

There is more than one way to prepare a Will. It can be created by the following means:

• By Yourself
  o   Holographically (writing it by hand)
  o   Do-it-yourself Will Kits or Will Software
• With an Attorney
• By the State (an intestate Will)

By Yourself

There are two ways that you can create a Will by yourself. One way is to write it yourself and the other is to use a do-it-yourself Will kit or Will software.

Holographic Wills are Wills that you write yourself (holographic means entirely written by the person in whose name it appears). They are convenient to prepare, and they are usually accepted by probate court judges. However, important provisions and appointments are likely to be overlooked or omitted when writing your own Will, which may cause more work for the probate court judge, delays in administrating the Will, and increased attorney representation for the estate of the deceased. In addition, unclear or omitted portions are often left up to the judge to decide, and his or her decision may not be what you had intended.

Do-it-yourself Will kits (or Will software) are usually created by businesses looking to make some money. You can find them online or in book form. Reputable kits will have been reviewed by attorneys and they usually contain everything you need to create a valid Will, but important provisions and appointments may still be overlooked with a Will kit. By using a Will kit, you do save the cost of attorney’s fees; however, a Will kit still needs to be probated before a probate court judge.

Note: Make sure that the Will kit or Will Software is specific to your state because different laws apply to each state.

With an Attorney

Attorneys, especially those experienced with probate law, can help you to create a valid Will. Attorney-prepared Wills should have a complete set of provisions or instructions for the probate court judge. However, attorneys charge for their time and expertise to prepare the Will; therefore, your Will can cost considerably more than if you had created it yourself. Attorneys are also counting on the survivors of the estate to use the same law firm to represent the Will before the probate court judge.

By the State

If you die without a Will or if your Will has been declared invalid, the state in which you reside will be forced to write your Will for you. In other words, if you die intestate, your estate is subject to state distribution laws as officiated by the probate court! The probate court will distribute your property in accordance with the laws of the state where your property resides. This distribution may have little resemblance to what you would have liked, had you elected to spell out your wishes in your own Will. The following is a lighthearted example of an intestate Will for the state of California. (The intestate statutes (laws) may be different for each state; and for illustrative purposes, some of the California statutes for intestate succession have been written in everyday language—meaning this is what could happen to your estate if you do not leave a Will.)

My Last Will and Testament

Being of sound mind and memory, I do hereby publish this as my last Will and Testament.

FIRST: I give my wife only one-third of my possessions, and I give my children the remaining two-thirds. If there are no surviving children of issue, I give to my wife one-half of my possessions, and I give the other half to my parents or their issue.

I appoint my wife as Guardian of the children, but I am going to require that she report to the probate court each year and render an accounting of how, why, and where she spent the money necessary for the proper care of the children. As a safeguard, I direct my wife to purchase a Performance Bond to guarantee that she exercises the proper judgment in the handling, investing, and spending of the children’s money.

As my children reach age 18, they shall have full rights to withdraw and spend their share of my estate. No one shall have the right to question the children’s actions on how they decide to spend their respective shares after they turn age 18. The children shall have the right to demand and receive a complete accounting from their mother of what she did with their money prior to their reaching age 18.

SECOND: Should my wife remarry, her new husband shall be entitled to one-third of everything my wife possesses. Should my children need some of this share for their support and care, the new husband shall also have the sole right to decide whether or not any of them will get a portion of any of his one-third shares. The new husband shall also have the sole right to decide who is to get his share upon his death, even to the exclusion of my children.

THIRD: Should my wife predecease me or die while any of my children are yet minors, I do not wish to exercise my right to nominate the Guardian of my children. Rather than nominating a Guardian of my preference, I direct my relatives and friends to gather and select a guardian by mutual agreement. I request that the court approve their selection; however, the court may turn down their selection if the suggested Guardian lives outside the court’s jurisdiction.

FOURTH: Under the existing tax laws, there are certainly legitimate and legal avenues open to me to reduce or eliminate my death (estate) taxes. Since I prefer to have my money used for government purposes rather than for the benefit of my wife and children, I direct that no effort be made to lower or eliminate these taxes.

FIFTH: Although I realize that my possessions (estate) will be subject to large fees for the lawyers, executors or administrators, court, and other probate costs, I prefer that my money be paid to them rather than going to my wife and children. It was too much trouble to set up an inter vivos or living trust that would have avoided the delays, publicity, costs, and expenses of probate.

IN WITNESS THEREOF, I allow the state to set my hand and seal to this my last Will and Testament.

The moral of the story is unless you want the state to determine how to disperse your assets, at the very least, take the time to create a valid Will.

Passing Legal Title and The Troubles with Probate

After all claims against the estate are presented to the probate court, the court then determines who is entitled to receive the remaining property. Your executor is authorized to pay creditors, taxes due, expenses for administration of the probate estate, etc. After your debts are paid, the court grants your executor authorization to transfer the title of any remaining properties or assets to your wife, family, or other heirs. In other words, whatever additional assets are available are then distributed to your beneficiaries (your legal heirs).

Ancillary Administration

If you own property in another state, the probate court will require an ancillary administration. This means that any out-of-state property will have to go through additional probate in the state where the property is located! This means the executor (who is handling the probate in the state in which you died) may have to hire another attorney to handle the probate where your out-of-state property is physically located. This could result in additional costs, delays, and taxes.

Publicity

Every issue that comes before a probate court becomes a matter of public record, which then available to anyone who requests it. Typically, three documents become public. The first contains a list of your beneficiaries and immediate family members. The second is your Will. The final document contains an inventory of all of your property and assets. This information makes public what you own and who will inherit it. As such, anyone has the constitutional right to look through public records and use the information as they wish.

A trust can help you to avoid some of the expenses, delays, and loss of privacy caused by probate (trusts help to keep your affairs private). Trusts will be discussed later in this course.

Note: For examples of permanent public records, perform a search on the Internet for the Will of a deceased famous person.

Abuses of Probate

Because the legal system is not perfect, there may be problems associated with Wills and the probate process. While we could discuss several ways in which abuses occur with probate, we will let Professor William J. Pierce, of the University of Michigan Law School, touch upon the subject:

Within the legal profession, the abuses of probate are being increasingly recognized. Sooner or later some of your own family’s money will be involved. It’s time we found out just what part of the billions going through those courts sticks to the fingers of politicians and court appointees. Then we must find a way to put an end to this legal extortion… I became aware some years ago of the injustices of the system and of the existence of a simple legal device that would avoid them. The device is called the inter vivos or living trust. The inter vivos or living trust comes into being while the individual is still alive. He can serve as his own trustee, with the beneficiary named as successor trustee. The arrangement is completely outside the jurisdiction of the probate court. Let no one persuade you that the inter vivos trust isn’t legal in your state. It’s legal everywhere. Search until you find an attorney who will draw one for you, and be wary of opinions from any person who might lose a legal or executor’s fee if you have a living trust.

Notice how Pierce suggests the use of a living trust to circumvent the possible abuses associated with probate.

Inter Vivos (Living) Trust

Inter vivos  is Latin for “among the living.” Within the law, it refers to a person who is alive. And relating to probate law, it refers to a living person willing his or her estate to trust while he or she is still alive. Also, because the trust holds title to your property, no lawyer or probate judge is needed to pass the legal title of those properties to your heirs. Therefore, many of the delays, publicity, or expense of probate need not be encountered as your assets are transferred from you to your beneficiaries by the trust. The key to an inter vivos trust (hereafter referred to as a living trust) is that you need to create it while you are still alive!

Note: Estate planners will tell you that the disadvantages of revocable living trusts are few, but they do exist. They include the hassles of transferring property titles and those associated with the reassignment of bank accounts, securities, businesses, and other investments into the name of the trust. Also, because the transfer is revocable, the assets are still in the person’s estate for estate tax purposes.

Joint Tenancy and Rights of Survivorship

Many individuals through sentiment, custom, habit, or just by chance take title or place their homes, securities, and other assets in joint ownership with their wives and/or others. Unfortunately, most of them do so with little understanding of the tax and other legal consequences of such joint ownership  (tenancy).

Concerning joint tenancy, the first and foremost consideration is the fact that if you own property jointly (with rights of survivorship) the property is NOT subject to your Will or Trust. By law, it MUST automatically go to the surviving joint tenant.

Joint tenancy is a convenient form of ownership that has been encouraged in society by financial institutions and by some professional advisors. It is estimated that it is used in the estate plans of 95% of all married couples. Because of the survivorship feature of joint tenancy, it is thought to create an estate plan instantly because it requires no Will, no trust, or other estate planning tool, and it does not have to go through probate when the first joint tenant dies. Although joint tenancy is easy and convenient, there are drawbacks: property can pass to unintended heirs, and it is an excellent way for creditors to attach unpaid debt to your estate. In addition, taxes are created for non-spousal owners.

There are some negatives to jointly owning a property with rights of survivorship. Two of them are discussed below.

The “And” Factor

Stocks and bonds, and real estate properties held in joint tenancy must have the word and between both names of the joint tenants (John Smith and  Mary Smith). Such assets must be owned by a specific individual or individuals. If you place or between the co-tenants (John Smith or  Mary Smith), there is no specific owner. The word and makes two tenants specific owners of the same assets. Accordingly, both of them co-own the assets; and if one of them dies, the other still owns the assets. However, the problem with and is that BOTH co-tenants must sign for each and every legal transaction concerning the assets. Therefore, if one of the co-tenants becomes incapacitated, the other co-tenant MUST have a power-of-attorney or go to court and be appointed as conservator over the incapacitated co-tenant.

Control

Joint tenancy can create a serious loss of control of assets. When one of the co-tenants dies, the assets (without going through the probate court) are immediately owned by the surviving tenant. This creates a unique situation in that the surviving tenant now has full control over the assets, regardless of the deceased’s intentions.

Living Wills

A Living Will is a legal document that enumerates the medical care an individual desires or does not want, in the event of incapacitation and inability to communicate his or her wishes. For example, if a person sustains life-threatening injuries, or becomes debilitated because of a terminal illness, the decisions about his or her health care can be dictated by the Living Will. Without a Living Will, the decision becomes the responsibility of the spouse, immediate family member(s), or other third parties. The absence of a Living Will can be the cause of contention and strife if the owner of the Will becomes incapacitated.

Setting up a Living Will can be accomplished with an uncomplicated, written, and notarized declaration, which is signed before two witnesses. An example of the legal wording for a Living Will is stated below.

If I should have an incurable or irreversible condition that will result either in death within a relative short period of time or a state of permanent unconsciousness from which, to a reasonable degree of medical certainty, there can be no recovery, it is my desire that my life not be prolonged by the administration of life-sustaining procedures. If I am unable to participate in my health care decisions, I direct my attending physician to withhold or withdraw life-sustaining procedures that merely prolong the dying process and are not necessary to my comfort or freedom from pain.

Note: For further information on Living Wills, contact an attorney or other professional in your state.

Managing Estate Taxes

There are many techniques to avoid paying too much in estate taxes. Some of them are listed below.

A-B Trust

If a couple has a so-called A-B living trust, with separate trusts for the husband and wife, they can pass double the exemption amount to their children tax-free. Under this method, each trust can use the maximum federal estate tax exemption, even if one spouse dies before the other.

Updated note: for 2026 the federal estate tax filing threshold is $15,000,000 per person, and a surviving spouse can elect to use a deceased spouse’s unused exemption (portability) on a timely filed estate tax return. Many families now use trusts for reasons other than federal estate tax. State estate and inheritance taxes can apply at lower amounts. See the IRS page on estate tax and talk with an estate planning attorney.

Annual Gift Tax Exclusion

The annual gift tax exclusion is $19,000 per recipient for 2026, and tuition or medical expenses you pay directly for someone are generally not taxable gifts. See the IRS frequently asked questions on gift taxes. This gift exemption amount doubles if the gift is from both parents. But beware. To qualify, the gift must be a gift of a present interest  (meaning that the gift has to be an immediate, bona fide, existent gift and not some promise of a future offering); the beneficiary must have the immediate benefit and use of the gift.

The following are six estate tax-planning solutions, which may be used after both the Unified Gift and Estate Tax Exemptions have been maximized because of a creation of an A-B Trust (as described above).

• Lifetime Gifts
• Charitable Gifts
• Charitable Remainder Trusts
• Family Limited Partnerships
• Qualified Terminable Interest Property (Q-Tip Trust)
• Section 303 Redemption

Conservatorship

In the event you become incapacitated or incompetent, your spouse or children can ask the court to appoint someone to take care of your financial affairs through the creation of a conservatorship.

The conservator of your estate is also responsible for your managing your care. The conservator must keep your money and property separate and never commingle any accounts. A separate bank account should be opened for you, as well as any accounts for your securities. The conservator must keep a record of all disbursements of your assets.

Usually, the conservator will be required at the end of the first year, and every two years thereafter, to file an accounting that shows what money and property were dispersed; what income they received during this period; and account for monies that were spent (with receipts for each expense). The accounting must also list the money and property left at the end of the accounting period for which the conservator is responsible for the next period. The conservator is responsible to take possession of the property and filing an inventory with the court. This inventory will include all of your property and accounts, as well as all insurance policies (life, health, disability, fire, theft, or other) and an appraisal of all your property.

From time to time, the conservator may wish to take some action concerning the management of your estate, such as leasing, mortgaging/ selling property, or investing the proceeds of a sale. Permission from the court and consulting attorneys is often required.

Durable Power of Attorney

The durable power of attorney is a legal document that allows an individual to give another person the power to act on his or her behalf. Thus, under a durable power of attorney, you can grant your attorney-in-fact the power and authority to exercise or perform any act, power, duty, right, or obligation whatsoever that you now have relating to any purchase, sale, or management of any property or asset, real or personal, tangible or intangible, now owned or hereafter acquired by you or your living trust.

Medical Durable Power of Attorney

You may also create a medical durable power of attorney, which in the event of a temporary illness or incapacity authorizes your attorney in fact to arrange for medical care and psychiatric treatment on your behalf. This temporary authority would then be revoked upon your recovery.

Not all powers of attorney for health care are the same. Listed below are some provisions you should consider for yours:

• Authority to access information
• Authority to make medical treatment decisions
• Authority to hire and fire doctors, nurses, and hospitals
• Authority to give or withhold medical care
• Authority to arrange for pain-relieving drugs or unconventional pain relief therapies
• Authority to ensure rights of privacy or arrange for home care
• Authority to arrange for spiritual comfort and welfare

If your condition is terminal or incurable, with no reasonable hope of recovery, you can authorize your attorney?in?fact, under your medical durable power of attorney, to have life-sustaining treatments or procedures withheld or withdrawn, and your death is permitted to occur naturally.

Trust

A trust is an agreement where money and/or property is owned and managed by one or more persons (or organizations) for the benefit of another. A trust is created by the trustor or settlor transferring some or all of his or her property to others (trustee(s)) to own and manage.

Trusts can be revocable or irrevocable. In revocable trusts, the trustee(s) hold and utilize the trust property according to the trust document for the benefit of the trust beneficiaries, but the trustor has the right to alter or revoke the trust. Revocable trusts become irrevocable upon the trustor’s death since the trustor is no longer able to change or revoke the trust. With irrevocable trusts, the trustee(s) are the legal owners of the trust property and are obliged to hold and utilize the property for the benefit the of trust beneficiaries. However, a trustor cannot alter or revoke an irrevocable trust. Revocable and irrevocable trusts have different tax consequences.

Trusts may be useful tools used to protect assets and avoid probate by transferring title and ownership of assets into the trust. Many different types of trusts are available for use and several are listed below (the A-B Trust was discussed earlier):

• Revocable Trust
• Irrevocable Trust
• Living Trust
• Land Trust
• Incentive Trust
• Blind Trust
• Charitable Remainder Trust
• Exemption Trust
• Income Trust
• 2503 C Children’s Trust

Remember to consider the following when planning for your future security with a trust:

Do you have a Will or living trust?
If you have a Will or living trust, was it created in the last five years?
Do your heirs and advisors know where your
Will or trust is stored?
Have you moved all appropriate assets into your trust?
If either of your parents is still living, do they have appropriate measures in place?