Foundational Basics of Estate Planning

An estate plan is not just for the wealthy. Most people do not understand what an estate plan is, and therefore they do not get one. They think they must have a lot of money or assets to have a plan. That is not true. Everyone should have at least a basic plan in place. The more money and assets you have, the more in-depth your plan must be. 

When you die, your money and assets go to the government, lawyers, family, or charity. If you do not create a proper plan as to where your money and assets go, the government and lawyers will make that decision for you.

We all know lawyers are expensive and they will get the first payout. What about the government? At the end of the day, how much of your assets will your family receive? That’s anyone’s guess. 

By creating a plan, you: 

  • Preserve assets and distribute them in the way you want
  • Protect minor children
  • Fulfill obligations to a child or sibling with special needs, or to elderly parents to provide continuity of care
  • Protect a spouse or partner from financial hardship
  • Give children and/or grandchildren a financial foundation on which to build
  • Ensure protection for yourself and your family in times of sickness or medical incapacity
  • Leave a  legacy

Estate Settlements, final expenses, and funerals are expensive

Upon your death, you may have numerous debts to settle before your remaining assets can be transferred to your heirs. This can include:

  • Funeral expenses
  • Final medical expenses and other bills
  • Probate costs
  • Executor’s and attorneys’ fees
  • Outstanding debts to creditors
  • Income taxes from your job or business, annuities, retirement funds, real estate, or other investments
  • Inheritance tax

What Assets Are Included in Your Estate

Your Estate will include everything you own at death. If you have not had your estate reviewed and assessed recently, you should. It may be worth more than you think. Once you determine what your estate is worth, we can create a plan to help you preserve it. If you have Life Insurance, your Life Insurance proceeds can be included in your estate. Be sure to talk to your lawyer about an Irrevocable Life Insurance Trust.

Estate planning is not just for the wealthy. Everyone should have at least a basic estate plan.

The Unpredictability of Tax Rates

Just because estate taxes may have a high exemption today, does not mean they will tomorrow. How much do you trust the government? Tax law constantly changes. Your estate may also have a much higher value down the road. Do not make bad plans based on today’s laws and your current situation. 

It is important to recognize your estate plan and estate tax plan need a solid strategy and needs to be reviewed on a regular basis. Do not forget about state taxes. Many states and the District of Columbia impose estate and/or inheritance taxes.

Estate Planning Basics

These are the four basic planning tools every family should have. These should be considered as the first steps in a complete estate planning strategy.

1. Your Will

This is a legal document where you provide directions on who will get your assets. It specifies who will care for your children. Without a will, the courts will decide.

A will does not avoid probate, but it does minimize the cost of probate and can avoid or reduce time spent in the courts and fighting among heirs. 

2. Living Will and Health Care Proxy

This may also be called a directive to physicians or an advance directive. It is a document that lets you state your wishes for your end-of-life medical care in case you can’t make your own decisions. You may even appoint someone to make medical decisions on your behalf. This must be in writing.

3. Durable Power of Attorney

A document that authorizes someone to act on your behalf if you become disabled, incapacitated or in some cases, simply unavailable to make financial decisions.

4. Trusts

There is an incredible number of Trusts available for various needs. Please consult with your attorney on what kind of Trust you need for your situation.  Here are a few:

  • Gifting Strategies
  • Charitable Remainder Trusts 
  • Grantor Retained Annuity Trust.
  • Intentionally Defective Grantor Trust 
  • Dynasty Trust.
  • Irrevocable Life Insurance Trust 

Using Life Insurance in Estate Planning

Life insurance is a valuable element for estate planning. Federal estate taxes can be significant and must be paid within 9 months of death. Assets such as a home or an IRA may not be liquidated easily. Proceeds from a life insurance policy are received income-tax-free and can be used to the taxes. 

Proceeds can be used to “cash-out” other heirs if there is a business or to provide estate equalization. Proceeds can be used to preserve family assets or to start another wealthy estate. 

The bottom line is that having a life insurance policy in conjunction with the rest of a good estate plan guarantees an effective way to transfer wealth to your beneficiaries.