Barbara Sadler: How Do I Set Up An Estate Plan?

Estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law. Estate planning involves planning for how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated. Assets that could make up an individual’s estate include houses, cars, stocks, paintings, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for surviving spouse and children, funding children and/or grandchildren’s education, or leaving their legacy behind to a charitable cause.

The most basic step in estate planning involves writing a will. Other major estate planning tasks include:

• Limiting estate taxes by setting up trust accounts in the name of beneficiaries
• Establishing a guardian for living dependents
• Naming an executor of the estate to oversee the terms of the will
• Creating/updating beneficiaries on plans such as life insurance, IRAs and 401(k)s
• Setting up funeral arrangements
• Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate
• Setting up a durable power of attorney (POA) to direct other assets and investments

The sum total of a person’s belongings, property, money, and assets is generally referred to as their estate. In particular, there should be plans regarding how the estate will be divided and distributed to recipients when the estate owner passes away. Individuals, families, and couples who want to think ahead for the future will create typically an estate plan so that different pieces of their net wealth can be managed as part of a unified whole.

Is an Estate Plan Different from a Will?

A will is a legal document created when an individual is alive. This document specifies who should inherit any assets or material objects upon their death. Usually, a comprehensive estate plan will include a will as part of the entire plan. However, an estate plan is also likely to include other financial management instruments, such as a trust or multiple trusts that can take effect while the person is still alive. Ultimately, an estate plan can be more varied and unique to each individual based on their assets and needs. So an estate plan is far more comprehensive, if the individual requires it.

How To Create an Estate Plan

Creating an estate plan will involve identifying tallying up all the different pieces of a person’s individual wealth. This may include property owned, stocks, holdings, cash, savings, insurance policies, and health issues. People with disabilities or disabled beneficiaries may need to create specific estate plans to meet their needs. Many people draft a will to begin the overall process of creating an estate plan. This is typically the main legal instrument that contains their instructions and preferences for the distribution of their estate. Next, it is necessary to consider any assets they want to leave in trust and establish a trust for those assets. Trusts are established by a grantor (the estate owner), who assigns trustees and beneficiaries, as well as guidelines for the trust, and then moves wealth and gifts into the trust. The trustee is the person tasked with managing the property, while the beneficiary is the person who will ultimately receive the property. Trusts can sometimes be useful for transferring property to recipients before the estate owner passes away. This can have several benefits depending on the type of property and the type of trust involved. For instance, certain taxes can be avoided, and trust property transfers can make the overall estate distribution process simpler when the person passes away.

An estate plan will need a power of attorney to be designated in the event that the owners of the estate are no longer able to manage their affairs. A power of attorney allows the estate owner to designate another person (an “agent”), who can make legal decisions on their behalf. Also, a set of health care instructions should be included as part of the estate plan. The person creating the estate plan must decide if they want the same person or persons managing their health care and financial matters, or if they would like to designate different parties. Next, the person creating their estate plan will need to establish insurance policies, especially estate planning life insurance. Life insurance often covers the payment of debt or estate tax after the person passes away.

Calculating potential taxes that the federal government could collect after death is necessary to select the right policy that will cover all expenses, including funeral expenses. It is also a good idea to insure any businesses or business ventures. Finally, an estate planning lawyer can advise you on how to store the documents of your estate plan so that they are safe and accessible to those who need them.

Some Factors To Consider When Creating an Estate Plan

When creating an estate plan, it is useful to broadly consider various factors that might affect the distribution of your estate. Each estate is different, as each person will own different assets and property, and will have differing amounts of financial savings.

Some factors that you should consider when creating your estate plan may include:
• Who Will Receive Your Property: You should consider who you want the beneficiaries to be when you pass away. Beneficiaries are the persons who will receive portions of property and assets. In most cases, this will include close family members like a spouse, children, and siblings. It can also include friends, more distant relatives, and even business associates. These should be stated clearly (usually in the will document) so as to avoid any disputes or conflicts;

• The Type of Property Involved: You should look closely at all the different types of property, assets, and bank account funds you own. This can influence the way that your estate property is divided up. For instance, you may want a certain family member to receive real property (such as a home), while you may want other family members to receive your stocks and security assets. This all depends entirely on your personal preferences and desires; and

• The Local State Law Regarding Wills, Trusts, and Estates: Estate planning laws will vary by state. These may have effects on the way you can distribute and allocate your estate property. If you have any questions regarding the specific estate laws in your area, you should contact an attorney.

• Creating a Will or Trust: You might want to draft your will or trust by yourself. You can certainly do so if your estate is simple. However, many people’s estate plans are more complicated than they could imagine. For this reason, you would benefit from consulting with an attorney. For example, if you have a disabled heir, you don’t want to leave them assets through a will. Instead, you should create a special needs trust. If your estate is large, you might be able to lower your estate taxes using different trusts. A lawyer can explain the differences between a will and a trust. They are very similar, but a trust can help you avoid probate, which might be time-consuming and expensive.

• Identify your assets: Everything you own belongs to your estate. You should sit down and identify everything that you own. Consider the following common assets:

1. real estate
2. financial accounts
3. automobiles
4. personal property, such as clothing, jewelry, books, art, etc.
5. life insurance policies
6. retirement or pension accounts.
7. digital assets, such as digital photographs, unpublished manuscripts, eBooks, etc.

• Plan to protect your heirs from your debt: Debt can include anything from medical bills to a mortgage. If you may be leaving any debt behind, there are a few things you can do to make sure that your heirs are not harassed by creditors. These include:

1. Buying enough life insurance to cover your debt.
2. Naming a person as your beneficiary instead of an estate.
3. Getting loan protection insurance.
4. Paying off your debt while you are living.

• Nominate an executor: Your executor will be responsible for collecting and safekeeping your estate after you die. They file your will with the probate court and then pay any debts you have with your estate assets. Once all debts are paid, they distribute your property according to your wishes. If you decide to create a trust, then you will name a trustee. Choose someone you trust and someone your heirs will trust. For example, if you have three children, you might not want to name any of them. This will reduce squabbling. Instead, you could name a good friend. Name one or more alternates in case your original choice declines to serve or dies before you. Some states place restrictions on who may serve as your executor, so talk about this choice with your lawyer.

• Name your beneficiaries: You can leave property to whoever you like. Make sure to name alternates in case your beneficiary dies before you. For example, you might want to give your diamond ring to your daughter, but if she dies before you, then you can leave it to her daughter (your granddaughter). You can also give property to groups of people. This might be easiest with money, which can be easily divided. If you leave a house to two people, they may have to sell it. You probably won’t name a beneficiary for every specific piece of property. This is why your will has a residuary clause. Your residuary is everything you own that you haven’t specifically bequeathed to someone. Name one or more beneficiaries to your residuary estate. In community property states, your spouse may have a claim to part of your estate, even if they are not your beneficiary.

• Choose guardians for young children: You can name your guardians in a will. Choose people you trust and who agree to become guardians in case you die. You should also name back-up guardians in case the original ones decline to serve. Always talk it over with the potential guardian. Many people have legitimate reasons why they can’t serve, and you should know ahead of time.

• Planning for Estate Taxes: Federal or state taxes applied on an estate can considerably reduce its value before asset distribution is made to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments. During the estate planning process, there are significant steps that individuals and married couples can take to reduce the impact of these taxes. For instance, married couples can set up an AB trust that divides into two after the death of the first spouse. Or a grandfather may encourage his grandchildren to seek college or advanced degrees and, therefore, transfer assets to an entity for the purpose of current or future education funding. That may be a much more tax-efficient move as opposed to dying, having those assets transferred, and finally having the same assets fund college when the beneficiaries are of college age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids. Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus, lowering the estate tax bill. As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes.

Estate planners can work with the donor in order to reduce taxable income as a result of those contributions or formulate strategies that maximize the effect of those donations. Estate freezing is also a strategy that can be taken to limit death taxes. It involves an individual locking in the current value and thus, tax liability, of his or her property, while attributing the value of future growth of that capital property to another person. Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild. This method involves freezing the value of an asset at its value on the date of transfer. Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate his or her potential tax liability on death and better plan for the payment of income taxes.

Life Insurance And Estate Planning

Life insurance serves as a source to pay death taxes, pay expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax arising on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. Estate planning is an ongoing process and should be started as soon as one has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run higher than 40%), so at the very least a will should be set up even if the taxable estate is not large.

Organize Your Files

Your executor will remember you more fondly if you organize your estate-planning paperwork and financial records, and store them in a safe yet accessible place. Keep the original documents in your lawyer’s vault or in a bank safe-deposit box or home safe. Be aware that if your spouse or someone else is not the co-owner of your safe-deposit box, your executor may have to file a petition with the court for permission to open it. Pull together any of the documents your executor will need, such as the deed to your burial plot; insurance policies; statements from your bank, brokerage house, and mutual-fund accounts; and pension and other employee-benefit information. Maintain an up-to-date list of your assets, the names and telephone numbers of your legal and financial advisers, and an inventory of the items in your safe-deposit box. Store such documents at home in a locked, waterproof, and fireproof metal box, file cabinet, or safe. And finally, review your estate plan at least every five years. Make sure all of your documents still reflect your desires, and that your beneficiaries and financial and health care proxies are still willing and able to serve.