Answers to Fundamental Questions about Estate Planning
Estate planning can be simply defined as the complete process of planning an estate. The components of a successful estate plan would include:
- Estate creation and conservation during the owner’s life;
- The minimization of estate shrinkage at death;
- The creation of adequate liquidity for estate settlement costs and;
- a plan for proper estate distribution to the owners’ heirs
We recommend that you work with professionals (estate attorneys, CPA’s, financial planners) to create your estate plan. The articles on this website are not presented as legal or tax advice, but are there to provide you with basic information to assist you and your team with your planning. Because estate planning isn’t just about reducing taxes but also about making sure your assets are distributed as you wish both now and after you’re gone, you need to consider three questions before you begin your estate planning:
1. Who should inherit your assets?
If you’re married, before you can decide who should inherit your assets, you must consider marital rights. States have different laws designed to protect surviving spouses. If you die without a will or living trust, state law will dictate how much passes to your spouse.
Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law may allow the survivor to elect to receive the greater amount. Once you’ve considered your spouse’s rights, ask yourself these questions:
- Should your children share equally in your estate?
- Do you wish to include grandchildren or others as beneficiaries?
- Would you like to leave any assets to charity?
2. Which assets should they inherit?
You may want to consider special questions when transferring certain types of assets. For example:
- If you own a business, should the stock pass only to your children who are active in the business? Should you compensate the others with assets of comparable value?
- If you own rental properties, should all beneficiaries inherit them? Do they all have the ability to manage property? What are the cash needs of each beneficiary?
3. When and how should they inherit the assets?
To determine when and how your beneficiaries should inherit your assets, you need to focus on three factors:
- The potential age and maturity of the beneficiaries,
- The financial needs of you and your spouse during your lifetimes, and
- The tax implications.
Outright bequests offer simplicity, flexibility and some tax advantages, but you have no control over what the recipient does with the assets once they’re transferred.
Trusts can be useful when the beneficiaries are young or immature, when your estate is large, and for tax planning reasons. They also can provide the professional asset management capabilities an individual beneficiary lacks.
Transferring Property at Death
You have three basic choices for transferring your assets on your death: the will, which is the standard method; the living trust, which is rapidly growing in popularity; and beneficiary designations, for assets such as life insurance and IRAs. For more information about wills and trusts, visit Estate Planning – Transferring Property at Death – Wills and Living Trusts
Selecting an Executor or Trustee
Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate – an executor or personal representative and, if you have a living trust, a trustee. An individual (such as a family member, a friend or a professional advisor) or an institution (such as a bank or trust company) can serve in these capacities.
Many people name both an individual and an institution to leverage their collective expertise. What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:
- Administering your estate and distributing the assets to your beneficiaries,
- Making certain tax decisions,
- Paying any estate debts or expenses,
- Ensuring all life insurance and retirement plan benefits are received, and
- Filing the necessary tax returns and paying the appropriate federal and state taxes.
Whatever your choice, make sure the executor, personal representative or trustee is willing to serve. Also consider paying a reasonable fee for the services. The job isn’t easy, and not everyone will want or accept the responsibility. Provide for an alternate in case your first choice is unable or unwilling to perform.
Naming a spouse, child or other relative to act as executor is common, and he or she certainly can hire any professional assistance needed. Finally, make sure the executor, personal representative or trustee doesn’t have a conflict of interest.
For example, think twice about choosing a second spouse, children from a prior marriage, or an individual who owns part of your business. A co-owner’s personal goals regarding the business may differ from those of your family, and the desires of a stepparent and stepchildren may conflict.
Selecting a Guardian for your Children
If you have minor children, perhaps the most important element of your estate plan doesn’t involve your assets. Rather, it involves who will be your children’s guardian. Of course, the well-being of your children is your priority, but there are some financial issues to consider:
- Will the guardian be capable of managing your children’s assets?
- Will the guardian be financially strong? If not, consider compensation.
- Will the guardian’s home accommodate your children?
- How will the guardian determine your children’s living costs?
If you prefer, you can name separate guardians for your child and his or her assets. Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they’re still minors.
Determining Potential Estate Taxes
The next step is to get an idea of what your estate is worth and whether you need to worry about estate taxes, both under today’s rates and as exemptions change over the next several years.
How Much is your Estate Worth?
Begin by listing all of your assets and their value, including cash, stocks and bonds, notes and mortgages, annuities, retirement benefits, your personal residence, other real estate, partnership interests, life insurance, automobiles, artwork, jewelry, and collectibles.
If you’re married, prepare a similar list for your spouse’s assets. And be careful to review how you title the assets, to include them correctly in each spouse’s list. If you own an insurance policy at the time of your death, the proceeds on that policy usually will be included in your estate.
Remember, that’s proceeds. Your $1 million term insurance policy that isn’t worth much while you’re alive is suddenly worth $1 million on your death. If your estate is large enough, a significant share of those proceeds may go to the government as taxes, not to your chosen beneficiaries.
How the Estate Tax System Works
Here’s a simplified way to compute your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death – such transfers are deductions for your estate. Then if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her.
Those assets qualify for the marital deduction and avoid estate taxes until the surviving spouse dies. The net number represents your taxable estate. You can transfer up to the exemption amount at death free of estate taxes. This amount is $11.7 million in 2021.
Check with your estate planning advisor for the latest information. Additionally, note that the gift tax exemption, and therefore the amount you can give during life without tax, has remained at $1 million. If your taxable estate is equal to or less than the exemption available in the year of your death and you haven’t already used any of the exemption on lifetime gifts, no federal estate tax will be due when you die. But if your taxable estate exceeds this amount, it will be subject to estate tax.
Community Property States
Some of the estate planning strategies in this website depend on the ownership of assets. Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin have community property systems. (Alaska’s is elective.) Under such a system, each spouse usually has a one-half interest in property acquired during marriage.
If you live in a community property state, bear this in mind as you read over the different sections on estate planning as to how the information relates to your situation. You also should be aware of the other procedures involved in estate settlement. Here’s a quick review of some of them. Your attorney, as well as other estate planning professionals, can provide more details.
Transferring Other Property
When thinking about transferring your property, what probably first comes to mind are large assets, such as stock, real estate and business interests. But you also need to consider more basic assets:
- Safe deposit box contents: In most states, the bank seals the box as soon as it learns of the death and opens it only in the presence of the estate’s personal representative.
- Savings bonds: The surviving spouse can immediately cash in jointly owned E bonds. To cash in H and E bonds registered in the deceased’s name but payable on death to the surviving spouse, they must be sent to the Federal Reserve. Receiving benefits The surviving spouse or other beneficiaries may be eligible for any of the following:
- Social Security benefits: For the surviving spouse to qualify, the deceased must have been age 60 or older or their children must be under age 16. Disabled spouses can usually collect at an earlier age. Surviving children can also get benefits.
- Employee benefits: The deceased may have insurance, back pay, unused vacation pay, and pension funds the surviving spouse or beneficiaries are entitled to. The employer will have the specifics.
- Insurance they may not know about: Many organizations provide life insurance as part of their membership fee. They should be able to provide information.
When you hear the phrase “estate planning,” the first thought that comes to mind may be taxes. But estate planning is about more than just reducing taxes. It’s about ensuring your assets are distributed according to your wishes.
That’s why, even if your estate is less than the estate tax exemption, estate planning is still critical. In addition, as of this writing, there is much uncertainty surrounding estate taxes because the estate tax was temporarily repealed in 2010 and then scheduled to return in 2011 with higher rates and lower exemptions than in 2009.
Although it’s expected that Congress will take further action to change the law, it’s not a certainty until it happens. Check with your estate planning advisor for the latest information.
(Technical assistance for the information contained in this article was provided by The Law Offices of Afshin A. Asher, with offices in Los Angeles, California.)
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