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Tax Planning And Estate Plans

Tax Planning And Estate Plans

Estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law. Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated. Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for a surviving spouse and children, funding children’s or grandchildren’s education, or leaving their legacy behind to a charitable cause.

The most basic step in estate planning involves writing a will. Other major estate planning tasks include the following:
• Limiting estate taxes by setting up trust accounts in the names of beneficiaries
• Establishing a guardian for living dependents
• Naming an executor of the estate to oversee the terms of the will
• Creating or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
• Setting up funeral arrangements
• Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate
• Setting up a durable power of attorney (POA) to direct other assets and investments

Writing a Will

A will is a legal document created to provide instructions on how an individual’s property and custody of minor children, if any, should be handled after death. The individual expresses their wishes through the document and names a trustee or executor that they trust to fulfill their stated intentions. The will also indicates whether a trust should be created after death. Depending on the estate owner’s intentions, a trust can go into effect during their lifetime (living trust) or after their death (testamentary trust). The authenticity of a will is determined through a legal process known as probate. Probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries. When an individual dies, the custodian of the will must take the will to the probate court or to the executor named in the will within 30 days of the death of the testator. The probate process is a court-supervised procedure in which the authenticity of the will left behind is proved to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which, in turn, gives the executor the legal power to act on behalf of the deceased.

Appointing the Right Executor

The legal personal representative or executor approved by the court is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternative valuation date, as provided in the Internal Revenue Code (IRC). A list of assets that need to be assessed during probate includes retirement accounts, bank accounts, stocks and bonds, real estate property, jewelry, and any other items of value. Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death.

The exception is real estate, which must be probated in the county in which it is located. The executor also has to pay off any taxes and debt owed by the deceased from the estate. Creditors usually have a limited amount of time from the date they were notified of the testator’s death to make claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say as to whether or not the claim is valid. The executor is also responsible for filing the final personal income tax returns on behalf of the deceased. After the inventory of the estate has been taken, the value of assets calculated, and taxes and debt paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries.

Planning for Estate Taxes

Federal and state taxes applied to an estate can considerably reduce its value before assets are distributed to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments. During the estate-planning process, there are significant steps that individuals and married couples can take to reduce the impact of these taxes.

AB Trusts

Married couples, for example, can set up an AB trust that divides into two after the death of the first spouse.

Education Funding Strategies

A grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity, such as a 529 plan, for the purpose of current or future education funding. That may be a much more tax-efficient move than having those assets transferred after death to fund college when the beneficiaries are of college age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids.

Cutting the Tax Effects of Charitable Contributions

Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus lowering the estate tax bill. As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes. Estate planners can work with the donor in order to reduce taxable income as a result of those contributions, or formulate strategies that maximize the effect of those donations.

Estate Freezing

This is another strategy that can be used to limit death taxes. It involves an individual locking in the current value, and thus tax liability, of their property, while attributing the value of future growth of that capital property to another person. Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild. This method involves freezing the value of an asset at its value on the date of transfer. Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes.

Using Life Insurance in Estate Planning

Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), so at the very least a will should be set up—even if the taxable estate is not large.

Key Elements of Estate Planning

There are four main elements of an estate plan; these include a will, a living will and healthcare power of attorney, a financial power of attorney, and a trust.

Last Will and Testament

An estate plan commonly includes a last will and testament, commonly known as a will, which outlines your wishes for the assets that you own at your passing. It allows you to name the people you’d like to leave something to upon your death. In most states, without a will, your assets follow a process called probate, in which the state determines how your assets are distributed based on state law. A will allows your assets and family to skip the probate process and be distributed as you wish. As you are creating your plans to leave your possessions to family and friends, consider discussing your plans with a few of your closest and more trustworthy heirs to alleviate any issues or disagreements that may present themselves after you pass. It is best to draw up your will when you have significant life changes, such as getting married or divorced; once you have a child it is imperative to create a will and establish a chain of legal guardianship for your child if something were to happen to both parents.

Healthcare Power of Attorney and Living Will

A healthcare power of attorney (HPOA) is a signed legal document in which you name a single person as your healthcare decision-maker in the event that you can’t make decisions yourself. A living will, also known as an advanced medical directive, outlines your wishes regarding medical care in the event that you are incapacitated, terminally ill, or unable to communicate. This is a statement of your wishes as they relate to decisions about life support and any kind of life-sustaining medical intervention that you do or don’t want. It is generally best to get these documents drawn up at the same time as your will. If you have specific requirements that need detailed documentation, seeing an estate attorney is more suitable.

Financial Power of Attorney

Similar to the healthcare power of attorney, a financial power of attorney outlines who you want to make your financial decisions on your behalf should you become incapacitated. Without this document, no one will have the authority to step in and handle bill-paying, investment decisions, or other financial matters. Like the HPOA, it’ best to create this document at the same time as your will. If you have specifications or large financial assets that require detailed financial documentation, it’s best to see an estate attorney.

Establish a Trust

A trust is a legal entity that can own your assets (while living or at death) and be controlled based on your wishes outlined in the legal document that created the entity. For example, a trust would allow you to dictate how you wanted your child to benefit from your assets throughout their life. You may want to include stipulations that assets are used in a certain way or received at a certain time. A trust is a way to protect assets from being used in a way that you would not see fit if you were in control of them. There are several advantages to having a trust; however, it is not necessary unless you are worried about the oversight or care of your assets at your passing. Ultimately, you trust your heirs to manage and use your assets properly should you pass away. If you have a sizeable insurance policy or estate and/or children, a trust is worth discussing with an attorney to determine the right parameters and language for your situation.

Role Of An Estate Planning Attorney

This means that its estate planning attorneys are able to assist clients with developing an estate plan (creating the documents for a trust, will, durable power of attorney, medical directive, etc.), or if a client already has an estate plan, with making changes or revisions to estate planning documents. In addition to legal expertise in the areas of estates and trusts, an estate planning attorney (or estate planning lawyer) should also have knowledge of other areas of the law pertaining to business organizations and entities, real property, family, other types of property, investment and insurance, and even knowledge of taxation. During the process of creating a well-developed estate plan, the client will not see or hear about many of the tasks that an estate planning attorney will do.
During the estate planning process, it is not unusual for the estate planning attorney to do the following varied and many and tasks:
• Specializes in Estate Planning: Some lawyers who have little or no experience in trust and estate planning will simply input your information into a software program without completely knowing the ways in which laws of your state can impact your estate. These types of lawyers may be skilled at handling divorces, personal injury cases, traffic tickets, or bill collection, but estate planning is not their main area of practice. A great family estate attorney is one who only focuses on estate planning. Because these specialized lawyers should also have many years of experience and continuing education dedicated to this field, they are more likely to be fully knowledgeable about the laws in your state. If they are not well-versed and up to date on estate laws, your estate plan may not be approved by the courts after you die. For extra assurance and peace of mind, make sure that he is certified as a specialist in probate, trust, and estate planning law in the state in which you live. The most qualified family trust attorney must have extensive knowledge of this area of law in his state.
• Offers a Fixed Price to Create an Estate Plan: Before embarking on the estate planning process, you want to make sure that the lawyer you are hiring is charging you a fixed price for all of the work that he is performing. A flat upfront fee will ensure that there will not be any surprise fees since you will know the exact cost of the services beforehand. As long as you know what the flat fee does and doesn’t cover, you shouldn’t encounter hidden costs. Although it’s rare these days, a trust planning attorney may charge an hourly rate for providing estate planning services. In most cases, a family estate attorney offering hourly rates are probably not acting in your best interest as he will may be more likely to require many office consultations and multiple drafts of documents to ultimately increase his pay. Whether he charges a flat fee or an hourly rate, make sure that you do not sign a fee agreement until you completely understand its terms.
• Performs a Wide Range of Tasks: The practice of estate planning includes an extremely wide range of topics from probates to trust administration. A highly skilled trust attorney will be able to establish trusts for loved ones, minimize estate taxes, avoid probate, create wills, plan for disability, and much more. Sometimes it’s necessary to work with attorney who has experience in multiple areas.
• Prepares Estate Plans Quickly and Efficiently: A good question to ask an estate planning attorney is the amount of time it will take him to prepare the plan. If you are prepared and organized, most experienced attorneys can prepare a first draft of the plan within a couple of weeks. It will usually take him another two weeks to have corrections made. Depending on your specific situation, you may not have that luxury of time. For instance, if you or a closed loved one is seriously ill, you need a lawyer who can prepare the necessary documents as soon as possible. An estate planning attorney that you can trust will be able to excite an estate plan in a timely manner.
• Maintains a Friendly and Understanding Demeanor: An excellent trust estate attorney’s primary goal is to learn as much information as he can about your family and planning goals so that he can create an estate plan that incorporates your objectives. In fact, most attorneys will begin the estate planning process by asking you some intimate questions about your current assets, family tree, and physical/mental health; as a result, he should make you feel extremely comfortable disclosing this information to him. An empathetic attorney will understand that disclosing your life insurance policy, savings/checking accounts, and real estate may be invasive, so he will take this opportunity to explain why an estate plan should account for every single asset. Instead of speaking in legalese, he will speak in easy to understand language so that you will feel extremely comfortable with the process.
• Guides You Through the Entire Process: Once you have disclosed your pertinent information, your estate planning attorney will assist you with completing the beneficiary designation forms for retirement plans and pensions, real estate, bank accounts, and property titles. The attorney should also ensure that you complete formation documents for a revocable living trust. Make sure to inform your trust planning attorney that you want a living trust that avoids probate when you die. In addition, a skilled attorney will set up your plan in such a way to minimize estate taxes as much as possible. Other issues that he may want to discuss with you are guardianship of dependents, charitable giving, life insurance, healthcare decisions, and powers of attorney. During this process of creating an individualized plan together, he should make sure that you thoroughly understand its specific details. Following the completion of the many documents, your attorney should let you know who should receive copies and where to store the originals. Many attorneys retain a copy in their file. Ensuring that your loved ones can access your important documents when needed is just as important as creating the estate plan in the first place.
• Keeps in Contact with You: Many average family estate attorneys view estate planning as a one-time process. Most are unwilling to keep in touch unless you pay them another fee. Even if your attorney drafts the perfect plan for you, he should still check in with you about every five years to determine if your goals and situation have changed. A formal periodic review process should also be conducted when the laws in your state have been altered.

Utah Estate Planning Lawyer

When you need legal help with a Utah Estate Planning Lawyer, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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