Regardless of your net worth is, it’s important to have a basic estate plan in place. Such a plan ensures that your family and financial goals are met after you die. An estate plan has several elements. They include: a will; assignment of power of attorney; and a living will or health-care proxy (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates.

Taking inventory of your assets is a good place to start. Your assets include your investments, retirement savings, insurance policies, and real estate or business interests.

Ask yourself three questions:

  • Whom do you want to inherit your assets?
  • Whom do you want handling your financial affairs if you’re ever incapacitated?
  • Whom do you want making medical decisions for you if you become unable to make them for yourself?

Wills

Everybody needs a will. A will tells the world exactly where you want your assets distributed when you die. It’s also the best place to name guardians for your children. Dying without a will — also known as dying “intestate” — can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.

Trusts

Trusts aren’t just for the wealthy. Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.

Estate Planning

Estate planning also is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity.

Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney.

Many estate planning attorneys also advise people to create a living will. Specific final arrangements, such as whether to be buried or cremated, are also often part of such documents.

More sophisticated estate plans may even cover deferring or decreasing estate taxes or winding up a business.

Tax Code

The tax code allows people to set up charitable remainder trusts and set up qualified personal residence trusts to own their personal residence yet leave it to their children without estate tax.

Because the United States tax code does not tax life insurance proceeds as income, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change beneficiary, the proceeds will remain in his estate. For this reason, the trust vehicle is used to own the life insurance policy and it must be irrevocable to avoid inclusion in the estate.

Understanding a living trust

Contrary to what you’ve probably heard, a will may not be the best plan for you and your family, primarily because a will does not avoid probate when you die a will must be verified by the probate court before it can be enforced. Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die- a concern of millions of older Americans and their families.

Fortunately, there is a simple and proven alternative to a will-the revocable living trust. It avoids probate and lets you keep control of your assets while you are living—even if you become incapacitated—and after you die.

Probate

Probate is the legal process through which the court sees that when you die, your debts are paid and your assets are distributed according to your will. If you don’t have a valid will, your assets are distributed according to state law.

What’s so bad about probating a Will? It can be expensive. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state.

Because these costs can vary widely, be sure to get an estimate. It takes time. It usually takes nine months to two years, but often longer.

During part of this time assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied. Your family has no privacy.

Probate is a public process, so any “interested party” can see what you owned and who you owed. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors. Your family has no control.

The probate process determines how much it will cost, how long it will take, and what information is made public.


RJG Financial Services, LLC focuses on providing education and information to help you understand income and taxes in planning your retirement options.