Estate Planning 101
Article By: Jason Bosley & Donovan Richard of Game Changing Benefits
Estate planning is the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life and at and after death, while minimizing gift, estate, generation skipping transfer, and income tax.
Estate planning is all about protecting your loved ones, which means in part giving them protection from big tax hits. Essential to estate planning is transferring assets to heirs with an eye toward creating the smallest tax burden for them as possible.
Believe it or not, you have an estate. In fact, nearly everyone does. Your estate is comprised of everything you own— your home, car, other real estate, checking and savings accounts, investments, life insurance, furniture, and all personal possessions. No matter how large or how modest, everyone has an estate and something in common…you can’t take it with you when you die.
Making a plan in advance and naming whom you want to receive the things you own after you die, that is estate planning. However, good estate planning is much more than that.
It should also:
-Include instructions for passing your values (religion, education, hard work, etc.) in addition to your valuables.
-Include instructions for your care if you become disabled before you die.
-Name a guardian and an inheritance manager for minor children.
-Provide for family members with special needs without disrupting government benefits.
-Provide for loved ones who might be irresponsible with money or who may need future protection from creditors or divorce.
-Include life insurance to provide for your family at your death, disability income insurance to replace your income if you cannot work due to illness or injury, and long-term care -insurance to help pay for your care in case of an extended illness or injury.
-Provide for the transfer of your business at your retirement, disability, or death.
-Minimize taxes, court costs, and unnecessary legal fees.
-Be an ongoing process, not a one-time event. Your plan should be reviewed and updated as your family and financial situations (and laws) change over your lifetime.
Failing to Plan is Planning to Fail.
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. It’s at this time that we see most people’s wishes not be carried out in the way they wanted because they never expressed their wishes to anyone.
If you don’t have a plan, your state has one for you, and it’s not the one you had in mind.
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, time consuming, 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 and 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?
An estate plan begins with a will or living trust.
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.
Chances are you or someone you know is part of a blended family. Once uncommon, currently 42 percent of adults now are a part of a blended family, according to Pew Research. That’s 95.5 million people.
For the millions of divorced, widowed, and remarried Americans out there, estate planning is extra tricky. In a blended family situation, there are more opportunities to get it wrong, and the stakes—ensuring your assets are distributed to a current spouse and not an ex, or that your children and stepchildren are treated according to your wishes—are often higher.
Additionally, spouses—current, former or both—may not see eye-to-eye on key decisions. Who takes care of the kids if one parent dies—the surviving spouse or the natural parent? Which assets belong to which spouse?
Working through these details can not only avoid future estate planning hassles but also help maintain healthy relationships between all parties involved.
To get started, work through these questions:
-What do you want to happen when you die?
-Who do you want to make decisions for you, if you can’t make them for yourself?
-Who will provide for your kids?
-Who will take over as guardian for any minors when you die—the surviving spouse or the natural parent? Do the kids get a say?
-What are you going to do for your surviving spouse?
-How do you want to provide for them?
-Do you want to give them broad decision-making authority or would you rather limit it?
-Do you and your present and/or former spouse have shared objectives?
-Will you need two separate attorneys to handle your plans?
-How open are you willing to be in the planning conversation with a past and/or present spouse and an attorney?
Do you live in a separate or community property state? (In a community property state, both spouses are typically considered equal owners of all marital property. In a separate property state, if your name appears on an asset—say a home mortgage—you are considered the owner, though your spouse has the right to claim a fair and equitable portion of those assets.)
When you sit down to think about these matters, keep in mind any wealth or age disparities between yourself and any future or former spouses. If remarrying, do you need a prenuptial agreement? If there’s a big age difference, who’s more likely to die first?
Once you’ve decided what you’d like to see happen, it’s important to work with a lawyer to formalize and structure your plans. Free online services are not sophisticated enough to deal with the complexities of blended family estate planning, Additionally, it’s important to work with a lawyer who specializes in estate planning and has worked with blended families before.
A good, foundational estate plan can be costly, but it’s a bargain when you consider the benefits. Planning not only gives you peace of mind about what will happen to your assets when you’re gone but also allows you to preserve the peace with loved ones now.