While no one wants to think about death or disability, establishing an estate plan is one of the most important steps you can take to protect yourself and your loved ones. Proper estate planning not only puts you in charge of your finances, but it can also spare your loved ones the expense, delay and frustration associated with managing your affairs when you pass away or become disabled.
An effective estate plan may be used to:
Avoid Probate
If leave your estate to your loved ones using a will, everything you own will pass through probate. The probate process is expensive, and time-consuming. The probate court is in control of your assets until the estate has been settled and distributed. It is not unusual for the probate courts to freeze assets for weeks or even months while trying to determine the proper disposition of the estate, which might prevent your loved ones from accessing much needed funds to pay for living expenses. With proper planning, your assets can be passed on to your loved ones without undergoing probate, in a manner that is timely and efficient.
Minimize Estate Taxes
The IRS will review your estate at death to determine if taxes will be assessed. This determination depends on the size of your estate. Many states also have their own separate estate and inheritance taxes that may be assessed. However, there are many effective strategies that can be implemented to reduce or eliminate death taxes and provide more resources to your loved ones.
Trusts
Trusts are simply an arrangement where one party holds property on behalf of another party. In an estate planning context, trusts are created by the person doing the estate planning (the settlor), who authorizes another person (the trustee) to manage the assets for the benefit of a third party (the beneficiaries). There are many reasons for establishing trusts including tax minimization or providing for the needs of underage beneficiaries.
Some types of trusts that may be useful in estate planning are:
- Trusts for minors. Many people leave assets to minors in a trust as part of a comprehensive estate plan. This is typically done to ensure that assets are there for the child’s benefit while he or she is younger. For example, for support, education, and medical expenses.
- Special needs trusts. Special needs trusts are tools that enable a person to leave property to an individual with special needs. However, many individuals with special needs receive government benefits, so any gifts of property and money could result in ineligibility for these critical benefits. A special needs trust may be used to enrich your loved one’s life without jeopardizing government benefits.
- Irrevocable life insurance trusts. Irrevocable life insurance trusts (or ILIT’s) are legal entities that own life insurance you previously owned. This means that the proceeds from the policy are not part of your estate and not subject to estate tax.
As you can see, there are many different types of trusts, each of which can be customized to serve a valuable purpose in accomplishing the wishes of those making gifts or planning an estate.
Estate Planning with Wills
A will is simply a legal document where you name the people who will receive your property after your passing. Wills can be used for a lot more than simply dictating who gets your favorite antique collection. Here’s a list of some of the very valuable things a will can do:
- Name your executor (or personal representative). A will usually states who will be the executor of an estate. This person will have the legal responsibility to carry out the terms of your will.
- Name guardians for children. Typically, a will is the document that states who should raise a person’s child(ren) if something happens to the parent. The will also usually contains at least one alternate in the event the first choice cannot serve.
- Establish trusts. A special type of will, called a “pour-over” will, directs that property subject to that will be placed (“poured-over”) into a trust.
- List funeral wishes. A will may be used to express your funeral wishes.
- Tax planning. Wills can be great tools for tax planning to avoid federal or state estate or inheritance taxes.
A valid will can serve as a powerful estate planning tool to ensure your wishes will be honored and to preserve your legacy.