Money 101: Estate Planning Guide

Get Ahead of Your Estate Planning

Learn all you ever need to know about estate planning, including the reason for creating a will and the importance of a power of attorney.

1. It’s important to have a standard estate plan, no matter what your net worth is.

Setting up an estate plan will help to ensure that your financial goals and your families’ needs are met once you are gone.

2. An estate plan consists of several components.

These components include a will, a living will or health-care proxy, and an assigned power of attorney. In some situations, a trust is also a valid element. When creating an estate plan, consider both state and federal estate laws.

3. Begin by taking inventory of your assets.

Assets can include your real estate property, investments, business interests, retirement savings, and any insurance policies you have in your name. Decide who you would like to inherit these assets once you are gone. If you ever become incapacitated, who would you like handling your financial affairs? This person may also be chosen to make any important medical decisions that you may not be able to make yourself.

4. Everyone should have a will.

Having a will can make things easier, and less costly, once you are gone. It will say exactly how your assets will be distributed. It may also include the names of guardians for your children. When you die without a will, known as “intestate”, it can stressful to your heirs as they will need to decide where your assets go. Even with a trust, you should still have a will to take care of any outside holdings.

5. Not only the wealthy can get a trust.

Trusts are legal conditions that describe when and how your assets will be distributed once you are gone. It can also prevent a delay in the distributed assets, publicity of probate court, and will allow a reduction in estate and gift taxes. Some trusts can also provide greater protection of assets against lawsuits and creditors.

6. Prevent confusion and disputes by discussing your estate plan.

Inheritance can sometimes lead to confusion and disputes if no estate plan is left to heirs. By clearly stating your wishes, you can help stop any potential conflicts that may arise once you are gone.

7. Federal estate tax exemption – the amount that is free of federal tax left to heirs – changes on a continuing basis.

In 2009, estate tax hit approximately 3.5 million, but phased out for a year in 2010. The tax was reinstalled in 2011 at $1 million.

8. You could leave an undetermined amount of money to your spouse, tax-free – but this isn’t always the best route.

If you leave your spouse with all of your assets, you don’t use the estate tax exemption and increase your spouse’s taxable estate. If your spouse leaves the money to your children, they will most likely have to pay more in estate taxes. It will also defer the difficult decisions about your asset distribution until the death of your spouse.

9. Consider one of two simple ways to give tax-free gifts and reduce your estate.

You are able to give up to $13,000 per year to any individual or $26,000 if married and giving a gift from both of you. You can also pay an unlimited amount of funds for education or medical bills, as long as the funds are sent directly to the institutions.

10. Give charitable gifts that will keep on giving.

Donating to a community foundation or charitable gift fund allows your investment to grow tax-free. You also have the option of selecting which charities you would like to give to before and after you die.

Identifying Your Assets

While thinking about your mortality early is not a favorite task for anyone, it doesn’t need to be stressful. Think of the great things that an estate plan will provide:

  • You get to decide how your assets will be distributed, and that your written word must be carried out by law.
  • You can arrange your estate plan to ensure that minimal funds are taken for tax purposes.
  • You have the satisfaction of knowing that your financial strains are taken care of and not left for your loved ones to deal with.

The first step in creating an estate plan is to take stock of all your assets. These include your retirement accounts, real estate, investments, insurance policies, and any business interests.

Next, determine what you would like to do with these assets and how will inherit them. Think about the person or people who you trust to handle your medical and business affairs if you ever become incapacitated.

After making a basic plan for your assets, discuss it with your heirs. Ensure that they understand your intentions to reduce the risk of disputes and disagreements after you are gone.

Keep in mind estate governing laws as you create your estate plan, and realize that these laws can change. For example, the Tax Relief Act of 2001 has made several important changes that will take place in a span of 10 years. These include:

  • Gradual increase in estate tax exemption and the repeal of the estate tax.
  • Reduction in estate and gift-tax rates which in 2010, is as low as 35 percent and down from 55 percent in 2001.
  • Gradual repeal of federal credit for estate.
  • Revision of how tax of inherited assets is calculated.

This complex law made estate planning more complicated, especially for those with larger-sized estates. If you wish to protect your assets, it’s wise to find a trusted estate-planning lawyer. A competent lawyer is able to create legal documents, keep your estate current according to new laws, offer advice, and administer disposition of assets.

Why Do I Need a Will?

A will is a legal document that tells the world to whom you leave your assets. If you die without one, the state has the ability to decide who gets what.

Intestacy laws can vary according to the state in which you reside. In general, your assets will be split between your living spouse and any children. If you are single and have no children, the state will decide to which blood relatives to give your estate.

Creating a will is very important for those with young children. Wills are the best, legal way to transfer guardianship of minors.

You can amend your will whenever you like, and should periodically. On occasion, review the beneficiaries for your IRA, 401(k), life insurance policy, and pension, as these funds will be sent directly to the named beneficiaries when you die.

Wills are also useful in combination with trusts. A trust is a legal document that allows you to predetermine how your assets will be distributed once you are gone. It may also allow you to minimize estate and gift taxes. Since most trusts only deal with specific assets, it’s still important to have a will in place.

Even with a revocable living trust in which you can put most of your assets, you may still need a pour-over will. A pour-over will can designate a guardian for your children and ensure that your assets are put into the trust, even if you fail to retitle some before you pass.

Assets that are not retitled in the trust can become subject to probate. If you have not created a clear estate plan, the court has the ability to distribute your assets to heirs, even if you have not chosen them.

Writing a Will – Why Should I Assign a Power of Attorney?

Things can happen in an instant, and your mental clarity can be lost. When this happens, it could leave you unable to handle certain business affairs – managing investments, paying bills, and making important financial decisions.

When you grant someone you trust the power of attorney, this person – known as your “agent” – is able to manage your financial affairs for you.

Your agent is able to sign your name and be your fiduciary. This means that they will act in your best financial interest and will follow your wishes.

While there are various types of powers of attorney, there are two primary kinds in estate planning:

  • Springing power of attorney: This type of power of attorney will go into effect under any circumstances specified by you, such as being incapacitated.

This may mean that your agent is unable to act until they have obtained a letter from a physician, stating that you are unable to make decisions on your own.

  • Durable power of attorney: This type of power of attorney will go into effect immediately. They do not usually need to prove your incapacity in order to begin signing your name for you.

An attorney can help you determine which form is best of your circumstance. Ensure that you have chosen a trusted agent. This person should be willing to take on your affairs and any burdens that come along with the job.

You will most likely not need to pay if you chose a friend or relative as your power of attorney. If you chose a lawyer, bank, or any outside party, you will have to set up compensation. This can include a percentage of your assets paid annually or paid hourly.

Living Wills and Health-Care Proxies

A living well, or medical directive, is a document stating your wishes for the type of medical intervention you want, or do not want, if you ever become terminally ill or do not have the ability to communicate.

Most states define living wall statutes that will state exactly when the living will goes into effect. For example, a person who only has 8 months to live may be under these statutes. Some state laws will also restrict medical interventions associated with some directives.

Specific conditions and terms under your directive may also be subject to interpretation. Different physicians and institutions may have different views on your directive.

As a result, some conditions under a directive may not be followed, but are taken very seriously. Having an advanced medical directive is a great way to fulfill your medical care wishes that you are not able to express yourself.

When you have a health-care agent advocating in behalf of you, your chances of enforcing your directive properly is increased.

You can name an agent by using a health-care proxy or by assigning that person as your medical power of attorney. By signing a legal document stating your medical power of attorney, that person is able to make medical decisions in the event you are not able to do so yourself.

Health-care proxies apply to any instance in which you become incapacitated, not only if you become terminally ill.

Choose a health-care agent carefully. Your health-care agent should be a trusted person with the ability to do several key things: understand important medical information about your illness or treatment, keep your best interest in mind when making decisions, and handle the stress of making difficult decisions.

Estate Planning: Is a Trust Beneficial

Trusts may be helpful in estate planning if your families’ networth is $100,000 or more and meet one of the following conditions:

  • A good percentage of your assets are in real estate, an art collection, or a business.
  • You want to leave your estate to your heirs, but do not want the entire estate given to them upon your death. For example, you want them to get the estate after graduating from college or in three separate parts.
  • You want to leave support for your living spouse, but also would like to leave part of your estate to specific heirs after your spouse is gone.
  • You and your spouse would like to increase your estate-tax exemptions.
  • You would like to give to a disabled relative without disqualifying him or her for government assistance, like Medicaid.

Trusts have many key advantages, they let you:

  • Have written conditions that state when and how your assets are distributed upon your death.
  • Reduce gift and estate taxes.
  • Distribute assets to chosen heirs without the delay, cost, or publicity of probate court, which can cost 5 to 7 percent of your estate.
  • Better project your assets from lawsuits and creditors.
  • Name a successor trustee who will manage the trust and assets if you are no longer able to do so.

Trusts are complex, varied, and flexible. Each type of trust has advantages and disadvantages which should be discussed with your estate-planning attorney prior to creating one.

Basic trust plans can run anywhere from $1,600 to $3,000, or more depending on the trusts’ complexity. A proper plan should consist of a will, trust set-up, a living will, and a health-care proxy. Fees may also be paid to amend the trust or to administer a trust once you are gone.

Basic Forms of Trusts – They Include:

Credit shelter trust: A will is written bequeathing an undermined amount to the trust that can be up to, but not exceed, the estate-tax exemption. The rest of the estate is then passed onto your spouse without tax.

Generation-skipping trust: Allows you to transfer a undetermined amount of money tax-free to chosen beneficiaries who are at least two generations your junior.

Qualified personal residence trust: A QPRT is able to remove the value of your house from your estate. This is useful for homes that appreciate in value.

Irrevocable life insurance trust: A ILIT can remove life insurance from your taxable estate; provide your heirs with cash, or help pay estate costs.

Qualified terminable interest property trust: A QTIP allows you to direct your assets to particular relatives. This is helpful if you’re part of a family where there have been divorces, marriages, or stepchildren.

Estate Planning: Best Ways to Give Money Now

Estate planning isn’t just about how you would like assets distributed once you are gone; it’s also about deciding how much you want to give when you are still alive. Giving allows you to provide advance help to beneficiaries and can reduce your taxable estate.

There are several ways to give gifts without dealing with gift tax:

  • You can pay an unlimited amount of education or medical expenses for a person, as long as the funds go directly to the institutions.
  • You can give up to $13,000 per year in assets or cash to anyone you would like.

If you give more than $13,000 annually to any one person, you must file a gift-tax return and the excess amount will be billed towards your gift-tax exclusion, which is $1 million per lifetime.

If the gift exceeds that exclusion at any point, you must pay a gift tax on the excess amount. The top gift tax rate is gradually declining and in 2010, fell to 35 percent.

Gifts given within the first three years of your death that exceed the lifetime gift-tax exclusion can reduce the amount of funds you can leave to your heirs tax-free.

The tax consequences of giving large gifts can become complicated. Consult with a tax planner if you have a large estate to see how much you can give without having a big tax bill.

Giving charitable donations is another way to decrease your estate. Donations can stretch beyond your death if you decide to invest in a community foundation or charitable gift fund.

You can also set up a charitable lead trust, which is a when a charity receives the income while your heirs are the principals. A charitable reminder trust is when your heirs receive the income and the charity gets the principal.

QR Library

QR Code

What is QR code?

Read More

QR Code

QR code: Advantages and Disadvantages

Read More

QR Code

2 Dimensional barcodes

Read More

QR Code

QR code and Plant Specimens

Read More

More Information

QR Code

Estate Planning Resources

Read More

QR Code

Guide to a Happy and Healthy Aging

Read More

QR Code

Real Estate Resource Library

Read More

QR Code

Money 101: Estate Planning Guide

Read More