Estate Planning Basics
Estate planning is something you do for your family. It is simply the process of getting your affairs in order so that you make things easier for your surviving family members after you are gone. The result of your financial planning for your retirement income is taken into consideration during your in estate planning process.
And if you’re interested in leaving an inheritance, you want to make sure that the bulk of your estate gets passed onto your heirs, not the government. Estate planning has a number of different facets, so be sure to cover your bases as you plan for your future and the future of your estate.
Estate plans are not only for the rich and famous. You don’t need to be a multi-millionaire to want to protect your loved ones and your assets. A properly prepared estate plan should allow you to pass along what you own to your heirs, the way you want them to receive it, and when you want them to receive it. A good place to start is with a will. Amazingly, about 70% of Americans don’t have wills.
Creating a will forces you to add up all of your assets and then specify who gets what in your estate. If you don’t take this step, this crucial decision will be left to the courts. All of these issues are far too important to be left to chance. A properly prepared estate plan should also include:
Living Will – Also known as a health care proxy, this important document enables you to specify whether you would want to be kept alive by artificial means should you become severely incapacitated due to illness or injury. This is not the kind of excruciating decision you would want to burden your family with having to make. Furthermore, if your intention would be to not go on life support if there was no reasonable expectation of recovery, having a living will means that money that might have otherwise gone to pay for life-sustaining care will now be passed on to your loved ones.
Durable Power of Attorney – An ordinary Power of Attorney allows someone else to act on your behalf when you cannot be present. For instance, that person can enter into contracts, negotiate, and settle matters as if they were you. But an ordinary power of attorney expires when a grantor becomes incompetent or passes away. By contrast, a Durable Power of Attorney can act on a person’s behalf even while that person is still alive. In the event that you become incapacitated either due to disability or dementia, a Durable Power of Attorney will ensure that someone you trust will continue to make important financial and medical transactions on your behalf long after you have lost the capacity to handle these matters yourself.
The documents described above are some of the basic estate-planning tools. which will go a long way toward ensuring that your assets are managed and distributed according to your wishes.
If you have an estate tax liability, you will need a plan that will ensure that the bulk of your estate will go to your heirs, not the government. There are many strategies and techniques available to help you accomplish this. To help you get started, here are some options to consider:
Gifting – One of the simplest ways to reduce your estate tax liability is to transfer money to loved ones while you’re still living. This is called “gifting” and here’s how it works. Every US citizen is entitled to give away up to $14,000 per person per year. A husband and a wife can give $28,000 to any child, grandchild or anyone else for that matter, and as long as you stay within the limits, none of these “gifts” are subject to gift or estate taxes.
Bypass Trusts – If you die and you’re married, the proceeds of your estate can be passed on to your spouse tax free because of the “unlimited marital deduction.” But if you’ve left a sizable estate to your spouse, all you’ve really done is shift the estate tax burden. One way to address this problem is by creating bypass trusts for you and your spouse.Bypass trusts allow each spouse to take advantage of the $1 million federal estate tax exemption. In other words, the IRS allows up to $2 million (the combined exemptions of you and your spouse) to “bypass” your estates. This arrangement can save your children hundreds of thousands of dollars in estate taxes.
Life Insurance – Life insurance can help address a number of estate planning issues. First, one of the main reasons people buy life insurance in the first place is to create an estate. Most of us would like to leave an inheritance to our loved ones. But not all of us will have a sizable estate to pass along. Life insurance does something that no other product can do – it can create an instant estate.
Life insurance is also a great vehicle for paying estate taxes. When a person with an estate tax liability dies, their family members often have no choice but to quickly sell off certain assets to pay for federal and state estate taxes, lawyers fees, probate costs, etc. The proceeds from a life insurance policy create instant liquidity when someone dies, eliminating the need to hastily liquidate other assets, often for a fraction of their true value.
Other Options to Consider –
Irrevocable life insurance trusts and bypass trusts, there are QTIP trusts, Charitable trusts, Qualified Personal Residence trusts and many other sophisticated planning tools. The best way to make sense of the myriad of options available to you is to consult with professionals – financial advisors, attorneys, and accountants – who specialize in estate planning. They can help you make the right choices for your family, ensuring that the lion’s share of your estate gets passed onto your heirs, not Uncle Sam.
It’s important to know what your options are and to get all your bases covered. We can help with giving you estate planning solutions and to help you make sure all your ‘I’s are dotted and your ‘T’s are crossed.