Introduction
Estate planning is the process of planning for the accumulation, conservation, and distribution of estate assets; this process should help you accomplish your personal and family goals. Every estate is planned, either through an individual plans for the estate, or by default through rules established by the state and local governments. The purpose of estate planning is to ensure that you—and not others, such as the government or lawyers—choose who will inherit your wealth. Through proper estate planning, you can take care of those you love even after you die.
Understand the Principles of Estate-Planning
The following are a few important principles of estate planning.
1. Understand yourself
What are your personal and family goals? What are you trying to accomplish with estate planning? Make sure what you are planning to do is in the best long-term interests of those you love.
What is your budget and balance sheet? Is what you are planning to do reasonable in light of your available resources? Will it still allow you to live in a dignified manner for the rest of your life.
2. Understand the estate planning process and all applicable laws
Once you understand what you are trying to accomplish, you must next understand the estate-planning process and applicable laws. Make sure what you are doing is legal and in keeping with applicable laws. Recognize the tax consequences of your actions, and plan for adequate liquidity to meet those tax needs.
3. Start early
Start estate planning early. Once you are married, write a will to make sure your assets will go to who you want. Once you have children, make sure you articulate who you want to be the guardian and executor of your children. As your assets reach a critical mass, determine how you want to dispose of those assets, and do it in a way that is most consistent with your goals and objectives.
Understand the Importance of Estate Planning and the Goals of Estate Planning
The purpose of estate planning is to help us achieve our personal and family goals even after we die. Estate planning ensures that your wealth will go to those you want it to go to, so you can achieve your personal goals even after you are gone. And you can even significantly reduce the taxes paid to Uncle Sam by proper estate planning, thus ensuring that your heirs get a larger inheritance.
There are five main goals of estate planning:
1. Live life fully: Living your life fully means providing not only for yourself (and your spouse and family, if you are married), but providing for others according to your values. Living life fully also means preparing for the possibility that you may become unable to provide for yourself, your family, and others.
2. Pass on your property to others according to your desires: In order to pass on your property according to your desires, you must provide for both administration (someone to do the paperwork and ensure that your desires are completed) and disposition (the decision of who gets what) of the assets.
3. Provide for guardianship of children who are still minors: For most parents, the issue of guardianship is one of the most crucial decisions of the estate-planning process. Who will raise your children should you die?
4. Avoid probate if desired, or use probate strategically: Probate is the legal process by which an asset’s title is transferred.
5. Decrease or eliminate taxes: Through proper estate planning, you can decrease or eliminate the taxes that must be paid on your estate.
1. Live Life Fully
To live life fully, you must provide for yourself as well as for others for whom you are responsible. You must account for the possibility that you may die prematurely. One of the main ways of managing the risk of premature death is to buy life insurance. There are two main types of life insurance. Term life insurance provides a simple death benefit with no accumulation of cash value but significantly lower premiums. Cash-value policies offer a death benefit plus a cash-value component that grows, tax deferred, over time and cannot be cancelled.
In order to live life fully, you also need to plan for the possibility that you may become unable to provide. Medical advance directives cover this possibility by allowing you to establish a living will and/or designate the special power of attorney for health care. This special power of attorney for health care gives someone else the power to make medical decisions for you should you become unable to make these decisions for yourself. Exercise caution when establishing powers of attorney, such as durable power of attorney, special power of attorney, or general powers of attorney. Someone who has your power of attorney can do anything that you can do, including sell your house, your car, and enter into agreements.
2. Pass Property at Death According to Your Desires
There are four ways to designate the way that property should be divided after you die:
1. Will: A will does not transfer property—it only indicates where you want the property to be transferred—so the property must be probated, or passed on according to law.
2. Law: Put simply, you can allow the state to write your will. This will does not transfer property either, so the property must be probated as well.
3. Contract or life insurance: Contracts bypass the probate process.
4. Trust: These transfer property during life but do not make a complete gift until you die.
Pass on property at death by will
A will is a legal document that specifies your desires at the time of your death and allows your desires to be enforced. Wills permit you to do the following: appoint a personal representative to act on your behalf, appoint guardians for your minor children, appoint conservators for the assets of minor children, and provide for disposition of your property at death. In some states, a will also allows you to keep a separate updated list of tangible personal property dispositions, so you do not have to write a new will each time to decide to give something to someone else.
Current wills can revoke or change earlier wills. A will is necessary to disinherit a presumed heir, and a will can create a testamentary trust, a trust that is to be set up when you die. Unfortunately, creating a will does not avoid probate, even if the will creates a testamentary trust.
Pass on property at death by law
If you fail to write a will, the state will write your will for you upon your death. Through this process, known as intestacy, the state tries to determine what your will would have been had you written a will for yourself.
Pass property at death by contract
Third-party contracts and deeds are two examples of contracts to disperse property upon death. Examples of third-party contracts include insurance, pay-on-death accounts, IRAs, and pension plans. Contractual deeds can either be in the form of joint tenancy, which grants rights of survivorship (i.e., the property goes to the surviving tenant); or tenancy-in-common, which grants no such rights of survivorship (i.e. the property goes to whoever is stated in the contract). Although contracts do avoid probate, they do not avoid tax consequences.
Having a contractual deed for joint-tenancy with a nonspouse may not be a good idea as it circumvents will and trust provisions. This contract creates a gift for tax purposes when a nonspouse’s name is added. However, a joint-tenancy contract postpones probate only until the second joint-tenant dies. It also may create problems for the new tenant because of taxes on capital gains income. Additional problems may occur if one joint-tenant becomes incompetent, because the asset cannot be sold or disposed of under this contract. Loss of control occurs when creating a joint-tenancy with a person who is not your spouse.
Pass on property at death by trust
There are many advantages to passing on property by way of trusts. Trusts are legal entities that are allowed, by law, to hold assets. Specific types of trusts may reduce or eliminate estate taxes, allow for privacy, and facilitate advanced planning. Trusts may be used as a means of handling complex family situations.
3. Provide for Guardianship of Minor Children
For most parents, the most important part of estate planning is providing for guardianship of children who are still minors. You must answer the question, if my spouse and I die, who would take care of our children and raise them the way we would want them to be raised? In addition, you must ask yourself, who would take care of your children’s assets until the children are old enough and wise enough to manage these assets themselves?
4. Avoid Probate if Desired, or Use Probate Strategically
Probate is the legal process by which an asset’s title is transferred after an individual’s death. One concern that many individuals have regarding probate is that the records of the assets, including information about who owns the assets, are open to public view. Anyone who reviews the public records gains access to the information.
Probate is not necessarily bad, and it is necessary to pass on an asset’s title. However, if it is important that information about ownership not be available to the public, advance planning and the use of various estate planning tools can be helpful in avoiding probate.
5. Avoid Taxes
The final reason for estate planning is to avoid taxes. There are many legal ways to save substantially on estate and gift taxes.
The above information is an excerpt from an article entitled Estate Planning Basics by the Brigham Young University’s Marriott School. The full article can be found here.