Insights: Article

Estate Planning is More Than Just Tax Planning

By Ramona Johnson

February 08, 2017

Many people think estate planning is not necessary, that it is only for those of us that are getting older or those fortunate enough to be extremely wealthy. But the truth is, many more could benefit from having an estate plan in place, even a simple one. And, while no one likes to think about their death, it is inevitable, which makes planning and knowing the decisions related to what will happen with your assets so very important.

Preparation is Key
Estate building is a process in which a person’s wealth is amassed. Estate planning is more about keeping what has been built to use or to pass on to future generations, while taking legal, personal, and tax implications into consideration. Typical goals within the estate planning process include minimizing transfer taxes and costs, maximizing net assets, protecting assets to enjoy life and maintain your standard of living, and fulfilling personal and charitable wishes regarding asset disposition, particularly upon death.

Importance of Having a Will
One of the more important steps in the estate planning process is to have a will prepared. A will is especially beneficial for dealing with solely-owned assets, children under age 18 or extraordinary health issues. If you do not have a valid will when you pass away, your estate is considered intestate. This means the distribution of your assets is left up to the rules established by the state of domicile, or the state in which you lived and paid taxes. Unfortunately, a majority of people will die without a valid will, which causes unnecessary stress and burden on the remaining family members, both emotionally and financially.

A will controls the distribution of assets that do not pass directly to a beneficiary through a beneficiary designation, joint tenancy or any other ownership structure that directs how the property is transferred at death. Probate is the legal and public process for handling the transfer of assets. Your probate estate typically includes solely-owned assets such as real estate, brokerage/cash accounts, and personal property.

When planning the information to be contained in a will, it is important to outline four main points:

  • Who is receiving the property?
  • When will the property be distributed?
  • Will any trusts be created? If so, what are the terms?
  • Who will administer your probate estate (personal representative) or any trusts that are created (trustee)? Who will be the guardian of any children?

Benefits of a Revocable Living Trust
Another document that can be used to control the distribution of your assets is a Revocable Living Trust (RLT). A RLT can be a very flexible document. First it can be fully funded during your lifetime which means that the RLT becomes the owner of all property that does not have a beneficiary designation. You can keep control of the RLT assets by serving as trustee and you have the ability to change provisions or revoke the trust if you so choose, so long as you are competent to make changes. The RLT will become irrevocable upon your death; therefore, make sure the distribution and operational decisions contained in an RLT are kept current. The probate process is avoided at your death if the RLT owns all of your assets. This can be beneficial for a few reasons, including privacy (it is not a public document for inquiring minds to read), ease of asset management, and perhaps costs savings since there is no probate, including ancillary probate if property is owned in another state.

A RLT is also used as a means to determining how your property is distributed after you pass away. With this alternative, the RLT may own some of your property, but not all property at your date of death. If stated in your will, the probate process may be used to transfer assets not held in the RLT to “pour-over” into the RLT. As a result, the RLT provisions will control the operation and distribution of all assets at your death, rather than the will. The RLT agreement may be part of the estate plan and is available to fund at any time. 

Power of Attorney
Another consideration for your estate planning includes powers of attorney—both financial and health care. A financial power of attorney allows your appointee to handle your financial affairs if you are unable to do so. Your appointee is given permission to act entirely on your behalf, so it’s important to choose someone who is trustworthy and good with finances. Banks or trust companies can be named for the financial power of attorney in place of an individual, but these companies will typically charge a fee for this service.

A health care power of attorney allows your designee to make any and all medical decisions if you are unable to make your own decisions. The health care power of attorney typically includes provisions for your living will or advanced medical directive. This means it’s incredibly important to appoint someone you trust, and to discuss or write down your wishes prior to anything happening. This discussion can include a declaration of your wishes regarding the use of life-sustaining medical treatment in the event you are unable to express your wishes. Note that a living will only applies to decisions regarding terminal illness or incident, and what is considered “terminal” is typically defined by the state of residence. 

Estate Planning Steps 
Overall, the process of estate planning can be broken down into three main steps:

  1. Identify how you want your assets to be handled prior to or upon death
  2. Identify how you want your beneficiaries to receive their inheritance
  3. Look for options to reduce any potential estate tax liability

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