Estate planning is planning for your estate while you are alive and well, if you become incapacitated, and after your death. It involves the management of your assets while you are still alive and the distribution of those assets after you die. This planning allows for the orderly administration and disbursement of your estate, and includes taking actions that will minimize taxes and distribute assets to the appropriate heirs. However, good estate planning is much more than that.
It should also:
• Include instructions for passing your values (religion, education, hard work, etc.) in addition to your valuables.
• Include instructions for your care if you become disabled before you die.
• Name a guardian and an inheritance manager for minor children.
• Provide for family members with special needs without disrupting government benefits.
• Provide for loved ones who might be irresponsible with money or who may need future protection from creditors or divorce.
• Include life insurance to provide for your family at your death, disability income insurance to replace your income if you cannot work due to illness or injury, and long-term care insurance to help pay for your care in case of an extended illness or injury.
• Provide for the transfer of your business at your retirement, disability, or death.
• Minimize taxes, court costs, and unnecessary legal fees.
• Be an ongoing process, not a one-time event. Your plan should be reviewed and updated as your family and financial situations (and laws) change over your lifetime.
Here is a simple list of the most important estate planning issues to consider.
• Make a will: In a will, you state who you want to inherit your property and name a guardian to care for your young children should something happen to you and the other parent.
• Consider a trust: If you hold your property in a living trust, your survivors won’t have to go through probate court, a time-consuming and expensive process.
• Make health care directives: Writing out your wishes for health care can protect you if you become unable to make medical decisions for yourself. Health care directives include a health care declaration (“living will”) and a power of attorney for health care, which gives someone you choose the power to make decisions if you can’t. (In some states, these documents are combined into one, called an advance health care directive.)
• Make a financial power of attorney: With a durable power of attorney for finances, you can give a trusted person authority to handle your finances and property if you become incapacitated and unable to handle your own affairs. The person you name to handle your finances is called your agent or attorney-in-fact (but doesn’t have to be an attorney).
• Protect your children’s property: You should name an adult to manage any money and property your minor children may inherit from you. This can be the same person as the personal guardian you name in your will.
• File beneficiary forms: Naming a beneficiary for bank accounts and retirement plans makes the account automatically “payable on death” to your beneficiary and allows the funds to skip the probate process. Likewise, in almost all states, you can register your stocks, bonds, or brokerage accounts to transfer to your beneficiary upon your death.
• Consider life insurance: If you have young children or own a house, or you may owe significant debts or estate tax when you die, life insurance may be a good idea.
• Understand estate taxes: Most estates more than 99.7% won’t owe federal estate taxes. Also, married couples can transfer up to twice the exempt amount tax-free, and all assets left to a spouse (as long as the spouse is a U.S. citizen) or tax-exempt charities are exempt from the tax.
• Cover funeral expenses: Rather than a funeral prepayment plan, which may be unreliable, you can set up a payable-on-death account at your bank and deposit funds into it to pay for your funeral and related expenses.
• Make final arrangements: Make your end-of-life wishes known regarding organ and body donation and disposition of your body burial or cremation.
• Protect your business: If you’re the sole owner of a business, you should have a succession plan. If you own a business with others, you should have a buyout agreement.
• Store your documents: Your attorney-in-fact and/or your executor (the person you choose in your will to administer your property after you die) may need access to the following documents:
III. insurance policies
IV. real estate deeds
V. certificates for stocks, bonds, annuities
VI. information on bank accounts, mutual funds, and safe deposit boxes
VII. information on retirement plans, 401(k) accounts, or IRAs
VIII. information on debts: credit cards, mortgages and loans, utilities, and unpaid taxes
IX. Information on funeral prepayment plans, and any final arrangements instructions you have made.
Probate is a legal process that deals with the assets and debts left behind after someone dies. By default, probate is supervised by a court, called the probate court. Note that the term “probate” can be used to describe the legal process, the court in which the process takes place, or the distribution of assets. The probate process can include all aspects of estate administration, such as:
• Proving the validity of a will, if it exists,
• Choosing an estate administrator, executor, or representative,
• Totaling all assets both in and out of the estate,
• Paying all applicable estate taxes and other debts,
• Identifying all heirs and other relatives,
• Distributing any remaining assets to the heirs as described in the will or intestacy statutes.
Probate typically begins when the deceased’s representative files a petition along with the death certificate in the probate court. The process generally ends when the court formally closes the estate.
Probate: Pros and Cons
The cons of probate are what drive people to try to avoid it specifically, that probate is time consuming and expensive. Many states require 30 to 90 day waiting periods as part of probate. If a relative or potential heir decides to contest the will or the court’s asset distribution, the process can take even longer. In addition, the court, attorneys, assessors, and other professionals involved all charge fees for processing an estate. These fees typically come out of the estate itself. There are, however, some benefits to the probate process. First, for certain estates in some jurisdictions, probate may be required. It’s best to check with a local probate attorney to determine whether probate is necessary in your jurisdiction. Second, the formality of probate court often gives some degree of certainty to the deceased’s family. If there was ever a question about whether a will is valid or about the worth of a particular asset, the probate process will find an answer.
Ways to Avoid Probate
One way to avoid it is to set up a trust, which isn’t required to go through probate. Another option to avoid probate is to take advantage of payable upon death options available on certain types of accounts. Owning property jointly with the person you want to leave the property is yet another way to avoid probate. Upon the death of one co-owner, the joint property goes automatically to the surviving joint owner. Besides the general the general ownership of joint property with right of survivorship, there are other common forms of joint property ownerships that are available to married couples. A married couple can have a tenancy in the entirety and in states that have community property laws; any community property automatically goes to the surviving spouse. Finally, a person can avoid probate by gifting items and money before death. It’s important to note that a person is only allowed gift a certain amount of money tax-free. Transferring assets outside of the probate process can not only save the estate a lot of time and expense, but can also help loved ones avoid years of legal hassle. There are general ways to pass on your property and avoid the probate system:
• Joint Property Ownership
• Death Beneficiaries
• Revocable Living Trusts
Joint Property Ownership
Jointly owned property with the “right of survivorship” avoids the probate process for one very simple reason: upon death, the deceased joint owner no longer owns the property and it passes to the living joint owner. There are several ways to do this, and the chosen method will depend on what a particular state recognizes. To create any of these forms of joint ownership with a right of survivorship, states typically require a written document that sets out the joint ownership relationship, the property that is jointly held, and the right of survivorship. Here are the most common forms of joint property with a right of survivorship:
• Joint Tenancy with a Right of Survivorship: as the name suggests, you take property as “joint tenants” and upon the death of a joint tenant, the surviving tenant takes the deceased tenant’s portion.
• Tenancy by the Entirety: this is a form of ownership only available to married couples (and some same-sex couples in a few states). It works in much the same way as a joint tenancy with a right of survivorship, in that effectively upon the death of one spouse; the living spouse takes the deceased spouse’s portion.
• Community Property: in community property states, married couples can hold property as community property with the right of survivorship. It has the same effect upon the death of one spouse as a tenancy by the entirety, where the surviving spouse takes full ownership of the property.
Many types of financial assets and instruments allow you to designate a beneficiary upon your death. Upon your death, these assets become the property of whomever you designate as the beneficiary, are no longer a part of your estate, and thus avoid probate entirely. Here are some of the most common financial assets that allow you to do this:
• Payable on Death (POD) Accounts: as the name suggests, POD accounts are simply accounts with an instruction that upon your death, the account shall be inherited by a beneficiary that you name. They are extremely simple to setup, with most banks simply requiring that you fill out a form naming the beneficiary. The beneficiary simply shows up to the bank with the proper identification and collects the account upon your death.
• Retirement Accounts: an increasingly popular option to avoid probate is the use of retirement accounts, specifically IRA and 401(k) accounts. When you establish these accounts, you will be asked to name a beneficiary of the account upon your death. As a single person, you are free to name whomever you want, but be aware that as a married person, your spouse may inherently have a right to some or all of the money in a retirement account.
• Transfer on Death Registrations: many states allow you to transfer securities (stocks, bonds, brokerage accounts) as well as vehicles without going through probate. Much like POD accounts, you will sign a registration statement that declares who you want your securities or vehicles to pass to upon your death.
Revocable Living Trusts
A revocable living trust occurs when you transfer property to someone else (the trustee) to hold it for your benefit, but you reserve the right to revoke the trust. This means that the trustee actually owns the property, but must use it for your benefit under the terms and conditions of the trust. By giving ownership of the property to the trustee, the property is no longer a part of your estate and can avoid the probate process entirely. You can instruct the trustee that, upon your death, he or she should transfer the property to your family and friends. This effectively transfers property without going through probate. Trusts are set up in formal documents, much like a will, so make sure that you are complying with your state’s requirements for a trust when setting one up.
Finally, one of the most obvious but often overlooked ways to avoid probate is to simply give your property away before your death. This requires a certain amount of planning and forethought, and even the best plans may be thwarted by unseen circumstances. As a result, you should generally only consider using gifts to avoid probate on smaller, less valuable assets. Also be aware that gift taxes apply if the gift is in excess of a certain amount, so this is typically a good option only if the asset is below the gift tax threshold.
Hiring a Probate Attorney
If you’ve been named the executor or personal representative in a will, it can be helpful to consult with a probate attorney to help you through the probate process. In order to be of assistance, the attorney will need some basic information about the deceased, the deceased’s estate plan, and the deceased’s assets and liabilities.
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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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