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The Ultimate Guide to Estate Planning
For many people, the first thing that comes to mind when you hear the word estate is a fancy house with land in another country. But an estate is everything you own or control, including property, assets, and debts. And unless you plan to live forever, it’s best to have a plan.
Let’s take a walk through the basics of what your estate plan might include and what options are available. Estate planning isn’t just for the rich and famous. If you have minor children or pet, or any kind of property or assets, you likely want a say in what happens to them when you are gone. Your needs may vary but almost everyone can benefit from having an estate plan.
Table of Contents
What Does an Estate Plan Include?
An estate plan is more than just a plan for how to divide any property or assets you have once you have passed on. It’s easier to understand what an estate plan involves if you call it an end of life plan.
A full estate plan includes planning for carrying out your wishes if you should become incapacitated or otherwise unable to act for yourself prior to death along with what should happen to your assets and debts, pets, and minor children when you die.
Some things that may be part of your estate plan can include:
- Power of attorney
- Advance directive/Living will/medical power of attorney
- Guardianship directions
- Provisions for pets
- Transfer on death deed or accounts
- Beneficiary designations on insurance or retirement accounts
Do You Need a Will?
Whether you need a will versus a trust depends on a few factors that we will address in a minute. But having either a will or a trust is preferable to not having any kind of plan.
If someone dies without having a will (or trust) in place, it is said that they died intestate. What happens next, in that case, will depend on the state laws regarding intestacy, and which state laws govern could be the state where the person lived, the state where their property is located, or both. The property would pass through the probate process and be distributed according to the state’s laws regarding intestate succession. Information about your estate would be public and may open up your estate to inquiries from fake creditors.
What happens to your estate if you die intestate can get complicated, but the important thing to know is that if you do not have a will or trust, then your property may not get distributed in the way you had hoped or imagined.
What is a Will?
A last will and testament is simply a document setting forward your wishes regarding the distribution of your property and/or assets after you die. Getting a simple will in place is not difficult. You just need to be of “sound mind” (i.e. know what you are saying or agreeing to on paper) and have two witnesses. And even that isn’t always necessary—some states will accept handwritten (or “holographic” wills) as valid.
And your will can address more than just your probate-eligible property and assets. In your will, you can also:
- Choose guardians for any minor children
- Make financial and care arrangements for pets
- Give instructions for paying debts/liabilities
- Name an executor for your estate (the person who makes sure estate property is distributed and debts are paid)
What is not Included in a Will?
It may be helpful to understand what a will does not include. For instance, specifying your preferred funer a l arrangements in your will is not helpful, since wills are not usually read until after the funeral. This can be a separate part of your estate plan.
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You also cannot leave certain kinds of property or accounts to heirs in a will, such as payable on death accounts (POD), accounts with specified beneficiaries (like life insurance, 401(k), IRA, etc.), property held in joint tenancy, or property held as joint tenants with rights of survivorship. Those properties will pass to the beneficiaries outside of the probate process.
A will cannot be used to put conditions or timelines on gift either. Once the will passes through the probate process, the property and assets are distributed essentially all at once. The executor is not like a trustee, who may be involved in the administration or management of assets for years to come.
Should I Have a Will? Some Advantages
Whether you should have a will or a will and a trust depends on a number of factors: the size of your estate, protecting your children and/or spouse, potential tax liabilities, your state’s probate process, the possibility for family conflict, etc.
If you do not have a lot of assets or want to get the ball rolling on an estate plan with the most cost-effective plan for right now, then a will is a good move. It is easy to get at least a basic will in place, and a will gives you a substantial amount of control over what happens to your things when you die. You can always decide to set up a trust when you have the funds or desire to do so.
A will is also a good idea in states where the probate process is fairly straightforward and simple and if your estate does not approach the federal estate tax threshold, which is currently $11.4 million per individual (2020).
There are some disadvantages to having a will that are worth mentioning. For instance, if you have a will, then your estate will go through probate after you die. Probate is a lengthy, public process, and there may be delays in your heirs getting the property you intended for them. Because the estate details are made public, your estate may be susceptible to claims or inquiries from false creditors.
If you have an heir or heirs that you expect will not manage their inheritance well, and you would like to put some limits on it, then you probably need a trust fund . And if you anticipate conflict in your family because of the will that might lead to lawsuits, then perhaps a will is not the best choice.
Even if you decide to put all of your assets in a trust, an estate planner would tell you to have a pour-over will in place in case there are assets at the end of your life that were not placed in the trust.
What Does an Executor Do?
The executor of the estate is responsible for making sure the will is enforced after the person who wrote it die (dies). This includes locating the will and filing a copy with the probate court, contacting banks, creditors, and relevant government agencies (like Social Security Administration) to let them know decedent has passed away, making sure debts and taxes are paid, maintaining will property, making and filing a property inventory with the court, and distributing assets and property, among other things.
The executor is typically paid out of estate assets, though the amount varies by state.
Choosing an Executor
You can choose who you want to be the executor of your will, as long as it is someone of some mind over the age of 18. But remember to revisit your will later—the person you would choose at 30 may not be the same person you would choose at 60.
If you die intestate , the court will appoint someone as an administrator or personal representative, according to state law. The administrator carries out the same duties that an executor would. Many states have a priority list to follow for appointing an estate administrator. In most states, the surviving spouse would be named as the administrator. The person named as an administrator can refuse to serve in that position, and then it would pass on to the next priority relative.
Probate is the process of having a will legally be recognized and appointing an executor or administrator to manage the estate and distribute assets to beneficiaries according to a will or state law. This process varies from state to state. In some states, it is somewhat drawn-out and expensive, but in many states, it is relatively fast and inexpensive.
In states where the probate process is simple and relatively streamlined, there is less cause to try to avoid probate but transferring assets to a trust or putting them in special accounts that payout or distribute directly to beneficiaries at the owner’s death.
What is Included in the Probate Process?
The probate process varies somewhat from state to state, as mentioned earlier. But the basic steps are the same.
First, a petition is filed with the court to admit the will and appoint the executor, or to appoint an administrator is there is no executor. Notice of a court hearing to admit the will should be given to all the heirs and beneficiaries, and notice is usually published in the newspaper as well, in case there are unknown creditors.
Next, the executor or administrator takes inventory of all estate property and informs creditors of the death of the decedent to allow them time to make a claim. The inventory may be done by a court-appointed appraiser or by a third party.
Then, all debts, liabilities, taxes, and expenses incurred by the estate or the decedent must be paid out of estate assets.
Finally, remaining estate property and assets are distributed to heirs according to the will or to the state laws regarding intestacy (if there was no will).
Regardless of what the will may say, certain property must go through probate, and other property skips probate. It generally depends on if it is shared with someone else and whether or not there is a beneficiary designation.
Probate property includes:
- Real property for which the decedent was the only owner or was designated as tenant-in-common (and not designated as trust property)
- Bank accounts in decedent’s name only
- Interests in partnerships, corporations or limited liability companies
- A life insurance policy that lists the estate or the decedent as the beneficiary
- Other property, such as vehicles, furniture, automobiles, etc.
Non-probate assets or property are those that have some kind of survivorship or beneficiary designation. For example, if you have a life insurance policy, there is a specific beneficiary named in the policy. When you die, the benefit gets paid out to the beneficiary without going through probate.
Similarly, if you have a property that you own with your spouse, for example, as joint tenants, or joint tenants with rights of survivorship, that property passes to your spouse when you die.
Other types of assets that are non-probate assets include retirement accounts with a named beneficiary, such as 401(k), 403(b), and IRA accounts, any bank accounts that have a payable on death (POD) or transfer on death (TOD) designation, and assets held in trust.
Converting Probate Property to Non-Probate
You can convert many kinds of assets and property from probate to non-probate by switching it to non-probate accounts. For instance, you can shift cash in your bank account to an account with a POD or TOD designation.
For property and other assets that you cannot convert to non-probate otherwise, you can set up a trust and use the property or assets to fund the trust.
Why would you want to do this? For the same reasons listed above about why you may want to avoid probate. And also, because certain non-probate assets, such as a life insurance policy with a beneficiary who is not the estate or the decedent, are generally protected from being seized by creditors. Your situation may vary based on your estate and the state you live in.
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Trusts are generally positioned as a will alternative, but they can exist in addition to a will or serve the function of a will. A trust can assist your estate planning in various ways.
A trust is a fiduciary arrangement where you (the grantor) give a third party (the trustee) legal title to the property to manage on behalf of someone else (the beneficiary). The trustee is responsible for managing the trust for as long as there are trust assets. The trustee’s duties vary based on the trust assets but can include making investments, paying bills, and managing and maintaining real estate property.
Different Types of Trusts
Trusts can be classified into two types: revocable and irrevocable. A revocable trust is one that the grantor can change (or “revoke”) while alive. The grantor retains a great degree of control over a revocable trust. The revocable trust usually does not have a tax advantage, but it does allow property in the trust to avoid probate. A revocable trust automatically converts to irrevocable when the grantor dies.
An i rrevocable trust is one that cannot be modified without the beneficiary’s permission once the trust is set up and funded. The grantor does not retain control over an irrevocable trust, and many people use irrevocable trusts to remove property from the taxable estate in order to reduce tax liability and/or protect assets from creditors.
Advantages of Having a Trust
There are a number of advantages to having a trust. One is more control over your assets, where they go, when, and how they are used. If you have a potential heir but you have concerns about giving them a large amount of money or property all at once, you can set up the trust, title your asset in the name of the trust (thus funding it) and give the trustee instructions on how and when you would like it distributed.
Another advantage is privacy. The probate process is public and putting property that would otherwise be probate property into a trust helps keep the distribution of your estate private.
If you have minor children at the time you pass away, having a trust in place can make sure that your children are provided for over many years.
Some estates have a lot of expenses or debts to pay, and some of the biggest assets may not be liquid, so if you have a trust fund with assets, some of that would be used to pay estate expenses. For example, you could have a trust that is funded by a life insurance policy, and by having the death benefit pay into the trust, you can avoid possible gift or inheritance taxes on the payout while also making those funds available to pay fees on the estate.
And one of the biggest reasons that people set up trusts is for tax benefits. If you have a large estate, you can possibly reduce or avoid capital gains tax, gift tax, or estate tax liability, and/or claim a charitable giving deduction.
Disadvantages of Having a Trust
Having a trust can be extremely useful and beneficial, but it’s not for everyone. Creating, maintaining, and distributing a trust can cost money, and you would have to decide if the benefits are worth the cost.
Additionally, depending on the type of trust and the assets that fund it, the trust could potentially be taxes annually on income.
It’s possible that a trust is unnecessary for you, and that because of the nature of your assets and other factors, you are just fine with a will.
How to Fund Your Trust
A trust is useless if there are no assets or property that belong to it. You need to fund your trust in order for it to function. So once the trust is set up, retitle all of the assets that you want in the trust in the name of the trust. It may look like a lot of work, but just start with the biggest asset and work your way to the smallest.
Some accounts you can retitle in the name of the trust include:
- Bank accounts
- Investment and brokerage accounts
- Business interests
- Real property
If you plan on adding real estate to the trust, you generally need a quitclaim deed to transfer it. It should be done according to the laws in the state where the property is located.
If an asset is not titled in the trust’s name when you die, it may go through probate and may not be distributed as you intended.
Make sure you choose a trustee carefully, especially if they are part of your family. Consider what position it might put them in with the family if they are solely responsible for the administration of trust assets.
Checking in on Your Trust
Just like you should do with your will, revisit your trust periodically to make sure it is established the way you wanted. You may want to change the trustee, for example, if you appointed Uncle Bob and it turns out he is careless with other people’s money.
Guardians for minor children have been mentioned several times, but having a provision for who should be the guardian of your minor children, if you have them, is a prime reason for people to get a will or trust before they think they have the assets to warrant it.
No one can tell you how to choose a possible guardian for your children, and those with children hope that it never becomes a real issue. But try to make a wise choice for a guardian among your family and friends, and then check with them if it’s OK. In the worst-case scenario, if your minor children lose their parents, you may not want them to be raised by someone who would have never agreed while you were alive.
If you don’t name a guardian, the court will appoint one for your minor child(ren).
Your pets can’t inherit property, though some pet owners have tried to pass it on to them. You can specify in your will who you would like your pets to go to, if alive, and earmark money for the caretaker for that purpose, or you can set up a trust for longer-term care by setting up a trust.
Preventing a Will or Trust Contest
One of the things that will have the most impact on your estate, and that you have the least control over, is having heirs go to court to contest the will or trust. There are a few ways you can avoid this.
You may have strong opinions about how you want to divide your estate, but think two or three time before you divide your estate in a way that appears to favor one person over another, because an uneven division of your property is likely to result in a subsequent lawsuit, which could end up reducing the size of your estate.
If you still prefer to distribute your property and assets unequally to your heirs, you might consider setting up a trust for the inheritance of an heir that is problematic or that you prefer to gift with less.
Power of Attorney, Living Wills and Other End of Life Planning
The last part of estate planning is a very important part—it addresses decisions to be made before you die, but at the end of your life.
No one hopes to get to a point where they cannot make their own decisions or express their opinions on medical, financial, and other matters, but it happens. Before you arrive at a point where you are incapacitated, make sure you have a living will in place.
These documents and powers are called different things in different states, and sometimes to different effects, but the basics are the same. In the event that you become incapacitated, you will want someone who can call the shots for you.
The following documents will help you achieve that:
- Durable power of attorney (POA)
- Medical power of attorney or Healthcare Proxy (HCP)
- Advance health directive
- Guardianship for adults
- Certification of trust/declaration of intent
Durable Power of Attorney
A general power of attorney allows someone to sign and make business and financial decisions on your behalf—but only while you’re well and able to communicate and act for yourself. A general power of attorney is just a matter of convenience in doing business. What you need for an end of life planning is a durable power of attorney , which is like the general power of attorney, but it stays valid even if or when you become incapacitated.
Medical Power of Attorney
A medical power of attorney, sometimes called healthcare power of attorney, is by definition a durable power of attorney. It only kicks in after you become incapacitated, and only for medical decisions.
The durable power of attorney for finance, etc. and medical power of attorney do not cross over in responsibilities, they are totally separate. For both documents, make sure you choose someone you trust, and make sure they are aware of what your preferences are.
Once you grant someone durable power of attorney, it is not set in stone. You can revisit and reassign at any time, as long as you are still in possession of your faculties.
Advance Health Directive
An advance health directive is a document with instructions for what you want to have done in certain medical situations. That can include a “Do Not Resuscitate” order if you do not want them to shock you or perform CPR on you if you go into cardiac arrest while on a hospital stay. It can include orders not to intubate or not to keep you alive using a breathing machine or other means if your organs are failing.
What you put in your directive is up to you, but it is important to have someone who has medical power of attorney as well—if you just have an advance health directive, your wishes may not be followed. Your medical power of attorney can be your advocate to make sure you get the care and treatment you wish for and deserve at the end of your life.
Guardianship for Adults
Having a guardianship document is also important in the event you become incapacitated, and it would only take effect in the event that that happens. Having someone who is appointed your guardian if you become incapacitated allows you to let someone who knows you and knows what you would if you could communicate.
Some of the decisions that a guardian can make in your stead include:
- What facility you go to
- Refusing or consenting to medical treatment
- Where you will live
- What medical facility you will go to
- Filing, defending, or settling lawsuits
- Borrowing or lending money
Certification of Trust/Declaration of Intent
These last two documents help protect your trust, if you have one, to make sure they function as you intended. A certification of trust states who the trustees are and who will succeed them after you are gone.
A declaration of intent document states that you intend to put all of your titled and non-titled assets in the trust that you set up. That way, if there are any assets that were meant to be a part of your trust, they can be added by your agent or guardian.
There are a lot of parts that go into estate planning, but if you start now, and start with what is most important to you, you can get it settled.
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The Money Mix is a resource dedicated to money and personal finance. Our mission is to create a healthy conversation about strategies to make and save money, build wealth and how to achieve life-changing goals through taking control of your life.
Where (and why) the super-rich are investing in real estate
January 17, 2020
Land ownership is, perhaps, the most ancient expression of wealth. Throughout history it has provoked conflict and inspired grandeur, from civic monuments and sacred spaces to egotistical towers and pleasure palaces. Today the relationship between land – or property – and wealth is more complex and more commercial than ever before. Since the economic crisis of 2008, real estate has attracted many of the world’s super-rich who have sought a safe haven, and a means of diversifying assets, and a very visual symbol of power and sophistication.
In 2008, $146bn of global private wealth was invested in the large-deal (above $10m) real estate market and by 2020 this had increased by 111 per cent to $308bn. Meanwhile, corporate investment in the same sector rose by only 43 per cent to $594bn over the same period. These figures, detailed in a new report by Savills in partnership with Wealth-X, a Singapore-based consultancy, reveal the increasing importance of private investment in the world of property.
“It’s a case of push and pull factors,” says Yolande Barnes, director of residential research at Savills. “I just saw a list of the top dealers [relating to deals made in 2020, compiled by Real Capital Analytics] on the buy side and the sell side. You look at the sellers and you’ve got JPMorgan, Lehman receivers, Deutsche, all the big bank names . . . and on the buyer side, the new big names are private Chinese companies and US Reits [real estate investment trusts].”
A key factor in this trend is the extraordinary wealth creation in Asia in recent years. According to Knight Frank, the number of high net worth individuals (HNWI, defined as those with net assets of at least $30m) increased by 35.6 per cent between 2007 and 2020, and they have demonstrated a keen interest in property.
The Savills report states that 28 per cent of wealth held by Asian ultra high net worth individuals (UHNWI, also defined as those with net assets of at least $30m) is in the real estate industry, compared with 8 per cent of wealth held by UHNW Europeans and 6 per cent of wealth held by UHNW North Americans. Consequently, a growing proportion of Asian wealth is now being channelled into direct property holdings and trophy homes.
The report divides Chinese overseas investors into three waves: the first, those buying homes in countries where they have business interests; the second, those buying for their offspring or to secure permanent residency; and a predicted third wave looking to buy property in an ever wider range of locations. It is certainly worth considering the huge potential for growth in the Chinese market, and Asian buyers more generally, but these expectations are based on an assumption that the spending power of Asian UHNWI will continue to increase, and that the tastes of these buyers will broaden as their wealth matures.
In recent years, Asian buyers have made an impact on cities around the world, with Hong Kong, Singapore, Mumbai and London among the top locations for residential investment.
Adam Challis, of Jones Lang LaSalle in London, says he is seeing high demand from Singapore and Kuala Lumpur, while interest from Hong Kong and China remains strong. “It’s fair to say that the demand is much bigger than this city, or any individual city in the world, can reasonably meet,” he says. “The anecdote I use is from [London mayor] Boris Johnson’s tour a few months ago when he launched London.cn [London’s official Chinese-language website]. We had one of our colleagues there as part of the trade mission and in her blog report she said that in the first 24 hours of the website going live there were 82m hits.”
Additional research by Savills into the buying habits of Asian UHNWI highlights the growth potential if they were to diversify their portfolios. Currently, 64 per cent of property owned by wealthy North Americans and Europeans is located in cities, 15 per cent in towns and suburbs and a combined 21 per cent in waterside, rural leisure and ski locations. Meanwhile, 95 per cent of property owned by wealthy Asians is located in cities, with just 2 per cent in towns and suburbs and a mere 4 per cent in waterside, rural leisure and ski locations. Savills suggests that if Asian buyers could be encouraged to acquire suburban and leisure properties in the same proportions as westerners it could create a market for about $804bn of residential real estate globally.
“All these things are heading in one direction, which is upwards, because it’s coming from a low base and the potential size of this market is enormous,” says Liam Bailey, head of Knight Frank residential research. “It may not be rapid growth, but it would be surprising if we didn’t see more Chinese owners of properties in rural France or rural Italy, or even outside the big cities in America.”
However, much of this expected growth is still tempered by cultural conventions. Newly wealthy in mainland China, for example, prioritise security and investment diversification, so will tend to buy second homes in established “global cities” before they look at holiday homes. And in a country where rural dwellings are still associated with poverty, and a taste for sunbathing and winter sports is yet to flourish, the demand for leisure locations or country houses (French vineyards aside) remains limited. That said, the country’s own leisure industry is beginning to develop, and over the coming years, rich Chinese buyers might look to invest closer to home.
“You’ve got the tip of the iceberg at Hainan Island,” says Barnes, referring to the Chinese resort island which was made a special economic zone in 1988 with the aim of increasing domestic and foreign investment. “I think it’s very interesting that the early adopters there have been retirees, or about to retire, and that may be the first area that Chinese leisure takes off.”
Throughout the past decade, China has asserted itself as Asia’s economic powerhouse and Chinese buyers have made the most of exchange rate advantages and the revaluing of European and US real estate. At the start of 2020 the Chinese economy slowed, and this appeared to impact the rate of wealth creation at the very top. A report by Wealth-X and UBS published in September last year notes that although the number of UHNWI in Asia rose from 42,895 to 44,505 in 2020, in China numbers fell from 11,245 to 10,675. Meanwhile, as old-world economies begin to show signs of recovery, the UHNW population has increased by 5,225 and 4,625 in the US and Europe respectively.
Then there are the wider economic factors to consider. Many believe the US Federal Reserve’s decision to begin tapering its monthly asset purchases from $85bn to $75bn will damage local property markets, as liquidity conditions tighten and interest rates begin an expected rise.
Even before the announcement was made last month, Knight Frank predicted that prices of top-end homes in Hong Kong would drop 5 to 10 per cent in 2020, with mass residential prices falling 10 to 15 per cent, as housing yields fell and the government continued its cooling measures.
“At the start of 2020, when 10-year bond yields were at 1.76 per cent, one could make the argument that to buy a luxury home and to get a rental yield of 2.3 per cent still seemed to make sense,” says Paul Louie, head of property equity research for the Asia ex-Japan region at Barclays Hong Kong. “But as you add tapering, resulting in the 10-year bond yield going up about 3 per cent, how do you justify buying a home which only yields 2.3 to 2.8 per cent and very little growth profile?” He does not believe that the downward spiral in Hong Kong will trigger major price falls in mainland China, but notes that it could prompt a correction of house prices in Singapore, a market that is closely aligned.
Others, however, are keen to point to the positives behind the tightening of monetary conditions. Yolande Barnes admits that it “spells the end of the top-end bonanza”, but she points to the improvement in the US and UK economies and, in turn, rising incomes in more mainstream markets.
“In 2020 we started to see this in London, where the ultra-prime market is still growing but at a slower rate than some other prime markets,” says Barnes. “That’s a very strong indication that it’s beginning to be London-generated wealth rather than overseas-generated wealth, or high-end-generated wealth, that is feeding the market and I think that’s going to be a pretty powerful force and factor in 2020.”
Should this be taken to mean a more even distribution of wealth over the coming years, a slight sapping of power from the super-rich, it is perhaps necessary to end with this sobering thought: Wealth-X predicts that in 2020 the world’s population of UHNWI will exceed 260,000. Their combined wealth? More than $40tn.
Laura Battle is deputy editor of House & Home
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5 Reasons You Need an Estate Plan
While there are a variety of reasons why people decide to meet with an estate planning attorney and create an estate plan, here are five of the most valuable reasons.
A probate is the process of validating a deceased person’s will and placing a value on their assets, paying their final bills and taxes, and distributing the rest to their beneficiaries. Avoiding probate is by far the most common reason why people seek out the advice of an estate planning attorney. While many have never dealt with probate, they still know one thing: they want to avoid it at all costs. This stems from probate horror stories covered by the media or told by neighbors, friends, or business associates. For the vast majority of people, avoiding probate is a very good reason for creating an estate plan and can be easily achieved.
Reduce Estate Taxes
The significant loss of one’s estate to the payment of state and federal estate taxes or state inheritance taxes is a great motivator for many people to put an estate plan together. Through the most basic planning, married couples can reduce or even possibly eliminate estate taxes altogether by setting up AB Trusts or ABC Trusts as part of their wills or revocable living trusts. Also, a variety of advanced estate planning techniques can be used by both married couples and individuals to make the estate or inheritance tax bill less burdensome or completely go away.
Avoid a Mess
Many clients seek the advice of an estate planning attorney after personally experiencing or seeing a close friend or business associate experience a significant waste of time and money due to a loved one’s failure to make an estate plan. Choosing someone to be in charge if you become mentally incapacitated or die—and deciding who will get what, when they will get it, and how they will get it—will go a long way towards avoiding family fights and costly probate court proceedings.
There are generally two main reasons why people put together an estate plan to protect their beneficiaries: To protect minor beneficiaries, or to protect adult beneficiaries from bad decisions, outside influences, creditor problems, and divorcing spouses. If the beneficiary is a minor, all 50 states have laws that require a guardian or conservator to be appointed to oversee the minor’s needs and finances until the minor becomes a legal adult—at age 18 or 21, depending on the laws of the state where the minor lives.
You can prevent family discord and costly legal expenses by taking the time to designate a guardian and trustee for your minor beneficiaries. Or, if the beneficiary is already an adult that’s bad at managing money or has an overbearing spouse or partner who you fear will squander the beneficiary’s inheritance or take it in a divorce, you can create an estate plan that will protect the beneficiary.
Asset protection planning has become a significant reason why many people, including those who already have an estate plan, are meeting with their estate planning attorney. Once you know or suspect that a lawsuit is on the horizon, it’s too late to put a plan in place to protect your assets. Instead, you need to start with a sound financial plan and couple that with a comprehensive estate plan that will, in turn, protect your assets for the benefit of both you during your lifetime and your beneficiaries after your death.
You can also provide asset protection for your spouse through the use of AB Trusts or ABC Trusts and your other beneficiaries through the use of lifetime trusts. This can also include electronic assets.
Estate planning: Not just for the 1%
There’s a common misperception that estate planning is reserved for the wealthy, as an attempt to shield assets from the grasp of Uncle Sam—but nothing could be further from the truth.
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In fact, estate planning is giving what you have to whom you want, the way you want, when you want and with the least amount of taxes and expenses possible.
Keep in mind that your estate is anything you own or have control over. That would include equity in your house, retirement accounts, a business or the proceeds of a life insurance policy. The manner in which you title these assets can have a profound financial and emotional impact on the beneficiaries.
In truth, everybody already has an estate plan—some voluntarily; others involuntarily. A will is a legal declaration that names the person who will distribute an estate and determines the recipients. It is generally recommended that everybody, regardless of circumstances, delineate their desires in a will.
In the cases of those who die without a will and have assets that exceed debts and funeral expenses, their estates will be subject to “intestacy,” a process whereby state laws determine how the assets are distributed.
In this instance, lineage usually takes precedence over what the decedent would have preferred. It has a tendency to stray from common sense and cause family discord, and it should be avoided.
Failure to execute a plan can have dire consequences. A married couple with two children may have sufficient life insurance and a will that leaves all the assets to a surviving spouse. Should the husband pass away, his surviving spouse and their children are provided for properly.
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However, if his widow remarries, puts her assets in joint name and then predeceases her second husband, her children from her first marriage are effectively disinherited—because assets in joint name pass by way of contract and usurp the terms of a will.
Instead, parents can establish a revocable living trust that segregates any existing assets from those of a future new spouse and protects their own children from the negative impact of a second marriage. A deceased parent, in essence, can govern from the grave.
Trustees responsible for managing such trusts have a fiduciary responsibility to adhere to their terms and are personally liable if derelict in their duties.
A living trust also sets the terms according to what the parent thinks is in his or her children’s best interest. If I’d inherited $500,000 when I was 18, I would have had a red, shiny Porsche—not all beneficiaries are prepared to manage a lump sum at a young age. My living trust, therefore, pays for all of my son’s college expenses but will only match his W-2 income if he doesn’t graduate.
Who are your beneficiaries?
If a child is one, who makes decisions on his or her behalf? It’s also not unheard of for ex-spouses to inherit life insurance benefits long after the divorce. Where is your will, and would your family be able to find it? If the will is locked in a safe deposit box, how would the executors prove they have the authority to access it—especially if that authority is, ironically, granted in the locked-up will itself?
For those who are self-employed, who will run your business if you pass away? How much is it worth? Are you just guesstimating?
A business is an asset that could disappear without establishing a value while the owner is still alive. If there is more than one owner, they can each own life insurance on the other and agree to use the death benefit to buy out the decedent’s share of the business at a predetermined price, ensuring the family receives its fair share.
“Half of all states impose a tax on estates at thresholds much lower than the federal allowance, with many ranging between $1 and $2 million.”
Finally, there is a matter of estate taxes. Federal estate taxes are not due if the estate is valued at less than $5.34 million in 2020. Moreover, a surviving spouse can inherit an unlimited amount of money.
That sounds like a lot, but check your state to see if it has a death or inheritance tax. Half of all states impose a tax on estates at thresholds much lower than the federal allowance, with many ranging between $1 million and $2 million.
Why is this important? If you’re single, have a $500,000 401(k) plan account, $250,000 in home equity and a $1 million life insurance policy, you may not feel rich, but your estate is worth $1.75 million. In some states, your beneficiaries would have to write a check to the state treasury.
Fortunately, these circumstances can easily be avoided with the proper planning, and you’ll likely sleep better at night when the process is complete. It’s advisable to use an estate-planning attorney, as these matters require the attention of a specialist. While none of us will live forever, all of us—without question—should plan for a smooth transition upon our death.
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