Estate Planning Basics
This is the first installment of a three-part series on estate planning.
Estate planning is not just for the super wealthy. Everyone has an estate, and everyone should have a plan for what will happen to their estate when they pass away.
Estate planning is the process of creating a plan to protect and preserve your assets during your lifetime and to control the distribution of your assets after your death.
An effective estate plan will:
- Ensure that your assets are distributed according to your wishes;
- Minimize taxes and expenses;
- Avoid or minimize probate; and
- Provide for the care of your minor children.
Below, we cover some of the basics of estate planning. It is never too early to begin planning.
The Importance of a Will
One of the most important aspects of estate planning is creating a will. A will is a legal document that allows you to specify how you would like your assets to be distributed after you die. Without a will, the state will determine how your assets will be distributed, which may not be in accordance with your wishes.
A will also allows you to designate a guardian for your minor children in the event of your death. If you die without a will, the court will appoint a guardian for your children, which may not be who you would have chosen.
In addition, a will gives you the opportunity to specify your wishes regarding funeral arrangements and other matters. If you do not express your wishes in a legal document, your loved ones may have to make difficult decisions during an already difficult time.
Creating a will is an important part of estate planning and is often a great place to start.
What is a Trust and Do I Need One?
In addition to having a will, it is often beneficial to put your estate in a trust. There are different types of trusts, but they all have one common goal.
A trust will help you manage your assets during your lifetime and distribute them to your beneficiaries after you die.
A trust is a legal arrangement in which you (the trustor) transfer ownership of property to a trustee. The trustee manages the property for the benefit of the beneficiary (or beneficiaries) according to the terms of the trust agreement.
Creating a trust can be an effective way to manage your assets and achieve your financial goals. Trusts can be used for a variety of purposes, such as reducing estate taxes, avoiding probate, and protecting assets from creditors.
If you’re considering creating a trust, it’s important to understand the basic concepts and terminology. Here are some key terms to know:
- Trustor: The person who creates the trust (also called the grantor or settlor).
- Trustee: The person or institution who manages the trust property for the benefit of the beneficiaries. The trustee has a fiduciary duty to act in the best interests of the beneficiaries.
- Beneficiaries: The people who benefit from the trust.
- Principal: The funds or property placed in the trust.
- Income: The funds generated by the trust property, such as interest, dividends, or rent.
- Corpus: The principal plus any accumulated income not yet distributed to beneficiaries.
Trusts can be revocable or irrevocable. A revocable trust can be modified or terminated by the trustor at any time during his or her lifetime. An irrevocable trust, on the other hand, cannot be changed once it has been created.
There are many different types of trusts, each with its own advantages and disadvantages. It’s important to work with an experienced estate planning attorney to determine which type of trust is right for you and your family.
What if You Have Children?
One of the most important aspects of estate planning is designating a guardian for your minor children. If something were to happen to you and your spouse (if you have one), you want to make sure that your children are cared for by someone you trust. You can name a guardian in your will, or you can set up a trust. You may also want to consider life insurance to provide financial support for your children if you are no longer around.
High Earners Not Rich Yet (HENRY)
Protecting your wealth is essential, especially if you have a lot of it or may in the future. Estate planning is one way to help shield your assets from taxes and other potential liabilities.
If you’re a high earner, you may not think you need estate planning. After all, why would you need to worry about protecting your wealth if you are “Not Rich Yet”?
However, estate planning is not just for the super wealthy. Anyone with significant assets or income should consider it. Even if you don’t have a lot of wealth, estate planning can still help protect your assets and ensure that they go to the people you want them to.
There are many different ways to approach estate planning, and the best way for you will depend on your individual circumstances. However, there are some basic strategies that can be helpful for high earners.
One common strategy is to create trusts as discussed above. Another strategy is to gift assets during your lifetime. This can be an effective way to transfer wealth to loved ones while minimizing taxes. However, it’s important to consult with an attorney before gifting any significant asset, as there are tax implications to consider.
What is included in “Net Worth”?
An individual’s “net worth” is composed of both their assets and their liabilities. The total value of their net worth is essentially their savings.
Their assets can include:
- The equity in their home
- Money in an IRA or other retirement account
- Stocks and bonds – including ownership in privately held companies
Their liabilities might include:
- A mortgage
- Credit card debt
- Car loans
To calculate net worth, simply subtract total liabilities from total assets. This will give you the value of your net worth.
How to avoid probate court
There are a few key ways to avoid having your estate go through probate court. One way is to create a living trust, which we discussed above. Another way to avoid probate is to name a beneficiary on key assets such as life insurance policies, brokerage accounts, and retirement accounts. When the account owner dies, the named beneficiary will receive the assets directly, without having to go through probate court.
It’s also possible to avoid probate by gifting assets during your lifetime. For example, you could give each of your children a certain amount of money every year, up to the annual exclusion limit (which is currently $16,000 per recipient). Once you gift an asset, it’s out of your estate and will not be subject to probate.
Finally, some states have what are called “transfer on death” (TOD) laws that allow you to designate a beneficiary for certain types of property, such as real estate or vehicles. TOD designation bypasses probate and allows the property to be transferred directly to the designated beneficiary upon your death.
Estate planning is a complex process, but it’s well worth the effort if you want to protect your wealth. By taking some time to understand the basics, you can create a plan that works for you and gives you peace of mind about your financial future.
If you want to learn more about protecting your wealth or have any questions, please contact us.