Many find the thought of estate planning overwhelming. Each person’s plan will differ based on their assets, goals, and location. Successful estate planning leads to the individual’s wishes being fulfilled when they die. The plan helps protect their assets, so more goes to the heirs and less to the government.
Understanding Estate Planning
To create an estate plan, a person must make decisions regarding their assets and what will happen to these assets if they are incapacitated or when they pass away. They must also decide who will oversee the distribution of these assets and write all of this information down. They may wish to look for an estate planning advisor to help create these documents and ensure they will hold up in a court of law. With the help of this advisor, a person can complete the following steps to protect their legacy.
Who Will Oversee the Estate?
A person must be named to oversee the estate and manage the individual’s affairs. However, some men and women choose to name several people and have them take on different roles. One person might be named power of attorney to make financial decisions for the deceased or incapacitated. Another person may be given a healthcare proxy to make decisions for this individual, and they will need a living will explaining how to handle end-of-life matters and medical decisions.
The estate plan will name an executor of the will and a trustee of a living trust if this document is included. The executor will oversee the time-consuming probate process, so ensure the person named is willing to take on this role. It is important to understand the duties of a co-trustee and transmit this information to the chosen person. A person might want to create a revocable or living trust to avoid this process, as the assets won’t need to go through probate.
Wealth Transfer
Who will get any funds that remain after a person passes? Assets typically pass to those named as beneficiaries regardless of what the account holder’s will states. Joint accounts with rights of survivorship are another way wealth is transferred, or a trust might be used. Another option is to pass assets while alive, as this may reduce the taxable estate while allowing heirs to benefit sooner. Direct gifting, funding a 529 plan, and opening a donor-advised fund are ways to pass assets during a lifetime.
Establish a Trust
People today often choose to establish a trust to protect their assets and maintain their privacy. They may also use this trust for philanthropic reasons. There is no guarantee that the trust will reduce the person’s tax liability, but creating one may make sense. The individual will need to talk to their estate planning advisor to learn the benefits of a trust and whether it will minimize the estate tax liability.
Moving growth assets out of an estate to minimize the tax liability often involves establishing a grantor-retained annuity trust (GRAT). This trust will make payments to the grantor for a specific number of years while leaving excess assets to named heirs. The trust minimizes the estate or gift tax liability.
Another option is an irrevocable life insurance trust (ILIT), which a person might create to help their loved ones cover any costs related to settling their estate. Married couples should look into a spousal lifetime access trust (SLAT). This trust allows them to transfer wealth while minimizing taxes. The surviving spouse may access the funds in the trust if needed.
However, individuals should consult their estate planning advisor because tax laws change regularly. They must ensure they have the latest information when deciding which path to take.
Unique Situations
Parents with special needs children should consult a financial advisor when creating an estate plan. Leaving assets to a special needs child could impact their eligibility for assistance programs. The assets may need to be placed in a trust that can be used to improve the child’s life without affecting their eligibility for government assistance programs.
Every person needs an estate plan. Many people hesitate to take the first step, which they shouldn’t. Make an appointment with an estate planning advisor. The information obtained during this meeting will give the individual peace of mind and let them know how to start this process. Information is powerful when estate planning, so set up an appointment today.
