Individuals put off estate planning because they think they don’t own enough, they’re not old enough, they’re busy, think they have plenty of time, they’re confused and don’t know who can help them, or they just don’t want to think it. Then, when something happens to them, their families have to pick up the pieces.

At disability: If your name is on the title of your assets and you can’t conduct business due to mental or physical incapacity, only a court appointee can sign for you. The court, not your family, will control how your assets are used to care for you through a conservatorship or guardianship (depending on the term used in your state). It can become expensive and time consuming, it is open to the public, and it can be difficult to end even if you recover.

At your death: If you die without an intentional estate plan, your assets will be distributed according to the probate laws in your state. In many states, if you are married and have children, your spouse and children will each receive a share. That means your spouse could receive only a fraction of your estate, which may not be enough to live on. If you have minor children, the court will control their inheritance. If both parents die (i.e., in a car accident), the court will appoint a guardian without knowing whom you would have chosen.

Given the choice—and you do have the choice—wouldn’t you prefer these matters be handled privately by your family, not by the courts? Wouldn’t you prefer to keep control of who receives what and when? And, if you have young children, wouldn’t you prefer to have a say in who will raise them if you can’t?

A will provides your instructions, but it does not avoid probate. Any assets titled in your name or directed by your will must go through your state’s probate process before they can be distributed to your heirs. (If you own property in other states, your family will probably face multiple probates, each one according to the laws in that state.) The process varies greatly from state to state, but it can become expensive with legal fees, executor fees, and court costs. It can also take anywhere from nine months to two years or longer. With rare exception, probate files are open to the public and excluded heirs are encouraged to come forward and seek a share of your estate. In short, the court system, not your family, controls the process.

Not everything you own will go through probate. Jointly-owned property and assets that let you name a beneficiary (for example, life insurance, IRAs, 401(k)s, annuities, etc.) are not controlled by your will and usually will transfer to the new owner or beneficiary without probate. But there are many problems with joint ownership, and avoidance of probate is not guaranteed. For example, if a valid beneficiary is not named, the assets will have to go through probate and will be distributed along with the rest of your estate. If you name a minor as a beneficiary, the court will probably insist on a guardianship until the child legally becomes an adult.

For these reasons a revocable living trust is preferred by many families and professionals. It can avoid probate at death (including multiple probates if you own property in other states), prevent court control of assets at incapacity, bring all of your assets (even those with beneficiary designations) together into one plan, provide maximum privacy, is valid in every state, and can be changed by you at any time. It can also reflect your love and values to your family and future generations.

Unlike a will, a trust doesn’t have to die with you. Assets can stay in your trust, managed by the trustee you selected, until your beneficiaries reach the age you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, spouses, and irresponsible spending.

A living trust is more expensive initially than a will, but considering it can avoid court interference at incapacity and death, many people consider it to be a bargain.

Life insurance is present in almost every estate plan and serves as a source of support, education-expense coverage and liquidity to pay death taxes, pay expenses, fund business buy-sell agreements and sometimes to fund retirement plans.

For small estates, the amount of applicable exclusion ($2 million per person per estate), death taxes are not a significant consideration. For this reason, insurance ownership as a tax-savings device is not critical. The main item that policy owners should be aware of is to ensure that the beneficiaries are well provided for by the chosen insurance policy.

For larger estates with more assets than the amount of the applicable exclusion of $2 million, life insurance is an essential component of the estate plan.

Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. However, there are three circumstances that cause life insurance to be included in the decedent’s estate:

The proceeds are paid to the executor of the decedent’s estate.
The decedent at death possessed an incident of ownership in the policy.
There is a transfer of ownership within three years of death (three-year rule must be observed).

An incident of ownership includes the right to assign, to terminate, to name beneficiaries, to change beneficiaries and to borrow against the cash reserves.

First-to-Die Life Insurance Policy

Also known as joint whole life insurance, this is a group insurance policy where benefits are paid out to the surviving insured upon the death of one of the insured group members. The insurance policy can be designed as either a whole life or universal life policy. A first-to-die policy can reduce taxes upon the death of the first spouse if the unlimited marital deduction is not fully used.

Survivorship Life Insurance Policy (Second-to-Die Life Insurance Policy)

Survivorship life insurance also know as second-to-die, is similar to joint life in that the policy insures two or more people. However, survivorship life pays out upon the last death instead of the first one. Because the benefit is not paid until the last insured dies, the life expectancy is greater and therefore the premium is lower. Survivorship policies are typically either whole or universal life policies and are usually written to insure husband and wife or a parent and child.

The proceeds of the policy can be used to cover estate taxes, to provide for heirs or to make a charitable contribution. The premium on a second-to-die policy is generally lower than for separate policies because the premium is based on a joint age and the insurance company’s administrative expenses are lower with one policy.

Revocable Life Insurance Trust

In this arrangement the grantor names the trust as beneficiary of life insurance policies, retaining the right to revoke the trust and other rights of ownership.

This is often recommended for younger families with relatively modest assets but substantial life insurance policies.

Irrevocable Life Insurance Trust

The purpose of this arrangement is to exclude life insurance proceeds from the estate of the first spouse to die and from the estate of the surviving spouse. The spouse may be the life income beneficiary, but may not have any right to or power over trust principal except per the discretion of the trustees.

The big question with regard to insurance in estate planning is who should own the policy. The following are some advantages and disadvantages of ownership scenarios:

• If a life insurance policy is owned by the insured, the advantage is that he has continued control of the policy and any ownership in the associated cash values of a permanent policy. However, the death benefit of this policy would be subject to estate tax and the three-year inclusion would apply if it’s transferred out of the estate.
• If the spouse of the insured owns the policy, you could argue that the insured does have some indirect control of the policy and any associated cash value. The downside is that the replacement cost of the policy would be included in the estate of the spouse, and if the spouse dies before the insured, it’s possible that the policy might revert to the insured and be included in his or her estate.
• If the children of the insured owned the policy, the advantage is that the death benefit would be included in the children’s estate, not the parent’s. But here again, the insured has zero control over the policy, and if the children are minors it would require the costly appointment of legal guardians before benefits can be paid.
• The policy might also be owned by a revocable trust, where the insured might still control the policy and the death proceeds are shielded from potential creditors of the insured. But, because the insured has an incident of ownership through the revocable trust, the death benefit is includable in the insured’s gross estate and could be accessible to the estate’s creditors.
• If the policy is instead owned by an irrevocable trust as mentioned above, there is no inclusion in the gross estate, and there is an embedded mechanism via the trust language for continuation of the policy if the insured becomes incompetent. The downside is that the insured does not regain any control over the policy and cannot revoke the trust.

If an individual is named as beneficiary of a policy, while cheap to execute since a trust was not used, it could lead to some challenges. The biggest problem with this strategy is that the decedent cannot exert any control over the death proceeds. The individual that inherits the death benefits can use the money for any reason, even if the money was earmarked to pay estate taxes or settlement costs. If the beneficiary is a minor, the challenges will likely escalate.

If an estate is named beneficiary of the policy, the death benefits are includable in the decedent’s gross estate and are subject to the claims of the estate’s creditors, and this will no doubt increase probate costs. If, however, the beneficiary is an irrevocable trust, the trustee can be given broad powers to distribute or withhold benefits available to the insured’s estate, the assets are protected from creditors and oversight of the trust’s assets can be assigned to professional money managers.

Individuals should consult an experienced financial planner to determine their needs for life insurance and the types of policies that are suitable for their estate planning needs.