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What is estate planning?
Whether your estate is modest or large, you have the right to decide what will happen to it. But to ensure that your wishes are followed, you need an estate plan. Though the words "estate planning" may make you think of something that goes on behind high gates at the end of a long driveway, estate planning is not only for the very rich. An estate plan is simply a way to make sure that your property will go to those you choose, as quickly and economically as possible.
What if I don't plan?
Without a plan, upon your death, your assets are disposed of according to state law. State law, called the law of intestacy, may or may not match what you desire as to whom should get the property or how the property should be handled.
Without a plan, you have no opportunity to personally select guardians for minor children, to name the person who should manage the children's assets, to decide at what age assets are distributed, or to select the person who should handle the details of distributing the estate. Without planning, these important decisions are left to a judge who can only apply state law and attempt to determine what would be reasonable under the circumstances. With a plan, you can set your own guidelines for distribution and management of assets.
Planning permits you to designate the amount of time a beneficiary must survive in order to inherit. A survivorship clause can prevent an unintended distribution of property. Under the law of intestacy, the distribution of property is determined according to the order of death. If an accident occurs and only one spouse survives, the surviving spouse inherits all property. If the surviving spouse lives for only a week, all assets are inherited by the relatives of the second spouse to die, since the predeceased spouse's relatives are considered heirs of the spouse who survived one week. Since the spouse who survived legally owned all assets, only that spouse's heirs receive an inheritance.
Can I reduce costs and administrative hassle by planning?
Clearly written wills and trusts can minimize the cost of administering an estate. If a will is used and probate is required, the will tells the probate court what the deceased's wishes were so the court can more quickly and inexpensively approve procedures to carry out those wishes. Or, a living (revocable) trust can be used to totally avoid the probate process. This allows the transfer of assets to beneficiaries with no court intervention.
Provisions also can be added to prevent unnecessary bureaucracy. For example, the document can provide that if a beneficiary does not survive by at least 60 days, that beneficiary will be deemed not to have survived. This provision could save the cost and delay of probating assets through the estate of the deceased beneficiary to get them to the living beneficiary.
How about estate taxes?
Federal estate taxes kick in for estates with a value exceeding $1.5 million dollars. What should you do? We can suggest a variety of ways to save on estate taxes.
For example, you may want to use a bypass trust, which would allow you to make full use of the one million dollar federal estate tax exemption. Here's how it might work. When the first person dies, one million dollars goes into a trust earmarked for the kids, but the surviving spouse continues to get the income kicked off by the trust. That ensures that the first person's one million dollar exemption gets used. On the death of the second person, another one million dollars will be exempt, thereby sheltering a full two million dollars from federal estate taxes.
What is the value of my estate?
Your estate includes everything you own at the time of your death: house, car, furniture, savings accounts, insurance policies and securities. Though the actual value of your estate is computed only after you die, for estate planning you need to estimate the value for yourself. Why? Because only by knowing that value can you anticipate what estate taxes will be due when you die. Under current law, you can leave an estate worth up to one million dollars without incurring any federal estate taxes. If the value of your estate's assets is more than that, your estate will owe the federal government taxes at rates between 37 and 55 percent on any amount in excess of one million dollars.
Figuring the value of what you own can be tricky. For example, if you house is owned as tenancy by the entirety (which only spouses are allowed to elect) or as joint tenancy with right of survivorship (which any two or more people can elect), you and your spouse (or joint tenant) automatically inherit each other's interest. So if you and your husband jointly owned a $100,000 house and your husband were to die first, only half of the house's value, $50,000, would be counted in figuring the value of his estate. Life insurance is another often overlooked asset. Remember that the full death benefit value of your life insurance counts toward your estate.
What should I do to get started?
Thinking about death, accident or illness is never pleasant. However, if something does happen, that is not the time for family members to be forced into making important decisions, or to be burdened with excessive administrative details. Planning ahead is much more efficient, inexpensive and thoughtful than burdening a family during in grief. Fill out the worksheet in this website. Send it to us and we'll make an appointment to discuss your situation. We all work too hard to accumulate property to allow it to be wasted on unnecessary bureaucracy or to allow it to go to someone other than the people or cause of our choice.
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NOTE:
The answers to the FAQs are simplifications intended for a lay person. The facts in your situation may be different and lead to a different outcome. Consult a professional for advice before proceeding.
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