Estate planning is the process of designating the distribution of your assets upon your death. It also dictates how your affairs will be conducted if you are no longer able to make these decisions yourself. Although this is a simple estate planning definition, it pretty much sums up what the process entails. It can be as simple as writing a will or creating a living revocable trust, or both. The latter will keep your estate out of probate, which a will does not.
If you’re worried about burdening your heirs with high estate taxes, an irrevocable trust would be the more prudent choice. Sound estate planning should also explore the use of a living will and a financial power of attorney. These can be useful in the event that you can no longer make health and financial decisions on your own. Ultimately, the degree of estate planning complexity depends on the size of your estate and the type of assets you own.
Most people don’t know it, but they have an estate. An estate is simply the sum of your possessions at a given point in time during your lifetime or when you die. It can consist of your house, car, jewelry, stocks, bank accounts, life insurance and other professional or personal interests. Some estates are worth a lot more than others, of course, but large or small, most Americans have one.
The most basic, and likely the most well-known, estate planning instrument is the last will and testament. This document details your wishes regarding the distribution of your assets. In short, it specifies who gets what when you die. If you die intestate, without a will, the state steps in and decides how your estate will be handled. For your own peace of mind and the welfare of your heirs, it’s best to leave a will behind. This way, you’re more assured that others will handle your estate will be handled according to your wishes – and not the state’s laws.
While a valid will takes precedence over state laws, it will not keep your estate out of probate. Before a will is enforced, a court must first determine that it is, in fact, the decedent’s final instructions. The executor has to file the will in court and inform all known beneficiaries that the probate process has begun. A notice (or several notices) will be placed in a local paper. This will give creditors and unknown heirs a chance to step forward and stake a claim on your estate. A probate can be time-consuming and costly. Worse, it is only at the end of this process that your heirs can access the assets you left behind.
Trusts keep your estate out of probate – and your private affairs beyond the public scrutiny of prying eyes. There are different type of estate planning trusts you can use. The revocable living trust is the most commonly used trust for estate planning purposes. The assets you place in this type of trust go directly to the named beneficiaries without passing probate. You can be both grantor and trustee of such a revocable trust. It is also referred to as an inter vivos trust. You retain control over the assets even if, technically, you no longer own them – the trust does.
Because you still control the assets in a revocable trust, they may be considered in the valuation of your estate. They will skip probate but will likely include living trust assets in figuring out the estate tax your heirs have to pay. Majority of American estates will likely not end up having to pay estate taxes. The current exemption is at $5.45 million per individual, twice this for married couples. As a rule, if you pass on with an estate that’s worth less than this amount, no estate taxes are due.
If your estate exceeds the exemption, a wise strategy is to use an irrevocable trust to hold your estate assets. The terms of an irrevocable trust cannot be changed once it has been set up. Therefore, as grantor, you no longer control the assets in an irrevocable trust. That is now a task that falls on the trustee. Assets in an irrevocable trust are exempt from probate and are not part of the valuation of a decedent’s estate. This could mean substantial savings in terms of estate taxes for your heirs. A Medicaid Trust is a power irrevocable trust into which you can convey assets. Once you do, you can become eligible to have the government cover 100% of nursing home costs.
Sound estate planning should also make provisions for your care in the event you’re unable to do so yourself. Towards this end, you need to have a health care declaration, also known as a living will. This gives someone you name (and trust) the power to make healthcare decisions on your behalf if you become incapacitated. You may already have made your wishes known to your spouse or adult children. But if you don’t have it down in writing, the state could intervene and a legal mess can ensue. This at a time when your family can least afford to deal with one.
Along the same vein, it’s prudent to give someone power of attorney over your financial affairs. This could already be the trustee or your financial advisor, but again, this has to be in writing. When you inform them of the task you’re asking them to perform for you, make your wishes clear. Understandably, this could be a difficult and emotional conversation. But, if you want your wishes to be honored, it is a conversation you must initiate. When you can no longer make decisions for yourself, the people you want on your side are those you can trust to carry out your wishes.
Life insurance is often included in carefully thought-out estate planning checklist. Life insurance benefits can provide continued income for your loved ones at your death. Astute estate planners typically advise creating an irrevocable life insurance trust (ILIT) to hold a life insurance policy. This can be especially prudent if you know you’re leaving behind an asset-rich but cash-poor estate. Your estate may consist of priceless heirlooms and antiques that place it well outside the current exemption. In this case, it makes sense to create an ILIT to hold your life insurance policy. Since trust assets are outside probate, your heirs will have access to the life insurance benefits sooner. They can then use some of this money to pay for any estate taxes that become due.
Life insurance is not the only type of insurance you should include when planning your estate. Consider taking out disability income insurance. This can replace your income if you’re suddenly injured and can no longer work. There is also long-term care insurance to help pay for your care in the event of a prolonged illness. The more safety nets you have, the greater your chances of not hitting the ground with a crashing thud.
Make sure you have a beneficiary for your bank and retirement accounts and that this is kept current. Naming a beneficiary automatically makes these types of account ‘payable on death’ to the beneficiary. If the beneficiary is an ex-spouse or deceased, your present heirs will have a tough time accessing the funds. Worse, this can result in your estate having to go through probate, which would cause additional delay. Stocks and brokerage accounts can be registered as well so they transfer to your named beneficiary upon your demise. Keeping your list of beneficiaries current can be easily overlooked. However, something as simple as this can cause major problems for your heirs down the road. Estate planning means dotting your ‘I’s’ and crossing your ‘T’s.’ There’s simply no way to get around that.
By now, it’s clear that estate planning is not a one-time endeavor. You should make it a point to revisit and review your plan regularly. As your life circumstances change, your plans for your estate could evolve as well. Keep in mind that laws that impact estate planning can change too. An experienced estate planning lawyer or professional can prove to be invaluable in terms of keeping up with these changes. This is all the more true if your estate plan includes offshore trust vehicles.
There are two common misconceptions about estate planning. One, it’s only for the rich and two, it’s an overly complicated process. The latter is sometimes true, but this would largely depend on the kind of estate assets you own. Besides, a seasoned estate planning expert can give you advice and easily help you find your way around the unknown territory of estate planning. In addition, not planning your estate can lead to even bigger complications later on for your heirs.
The misconception that estate planning is only for the rich and landed couldn’t be farther from the truth. An estate is simply the sum of an individual’s assets (less liabilities) at a given point in time. It can include real property such as a house or vehicle, as well as one’s legal rights and entitlements. By this understanding, almost everyone has an estate, making estate planning a must for almost everyone.
Estate planning can include wills, trusts (revocable and irrevocable), different types of insurance, a living will and other such vehicles. An estate plan is customized to meet an individual’s current and future goals for his or her assets. Estate planning basics for one individual may be similar to another’s, but there’s no such thing as an estate planning template that answers everyone’s needs. Remember that an estate plan is most effective when it is kept as current as possible. Review your estate plan regularly – or as often as changes occur in your professional and personal life. There is no better way to protect your loved ones than leaving an estate plan that is thorough and up-to-date.