According to surveys, the majority of American adults are going through life without properly executed estate plans. Many people don’t even know exactly what estate planning is, or why it is important.
Everyone is going to pass away someday. This may not be the most pleasant subject to contemplate, but it is simply a fact of life. You must prepare for this inevitability in advance, and it requires the execution of certain legally binding documents.
Vehicles of Asset Transfer
Estate planning involves arranging for the transfer of your financial assets after you pass away. There are numerous different ways to get assets into the hands of your loved ones. The best course of action is going to vary on a case-by-case basis depending on your unique personal situation.
The most commonly used asset transfer vehicle is the last will or last will and testament. In this estate planning document, you record your wishes regarding the transfer of your property. You also name an executor or executrix who will be in charge of handling the business of the estate.
If you are a parent of a dependent child, you would want to nominate a potential guardian when you create a last will. This individual would care for the child if both parents were to pass away.
Revocable Living Trusts
An alternative to a last will as a vehicle of asset transfer is a revocable living trust. You can act as the trustee while you are living, so you retain control.
With these trusts you name a successor trustee to administer the trust after you die. You can name an individual, but many people prefer to use a bank or a trust company.
The trustee that you select distributes assets to the beneficiary or beneficiaries that you name in the trust agreement. You decide on the nature of these distributions when you are drawing up the trust.
Many people think that trusts are only for wealthy individuals. In fact, revocable living trusts do not address many of the concerns that wealthy people have. This type of trust is utilized to enable the transfer of assets outside of the probate process.
Probate is the legal process of the estate administration. It takes place under the supervision of the probate court. Probate avoidance is appealing because probate is time-consuming, it can be costly, as it is a public proceeding.
Estate Tax Efficiency
We have a federal estate tax in the United States, and it can reduce the value of your wealth considerably as it is being passed on to your heirs. At the present time, the maximum rate of the federal estate tax is 40 percent.
The amount of the estate tax exclusion in 2016 is $5.45 million. The portion of your wealth that exceeds $5.45 million in value would potentially be subject to the federal estate tax.
Estate planning can involve positioning your assets in a tax efficient manner so that your estate tax exposure is mitigated.
Estate planning can include efforts to protect assets from creditors and claimants. There are various different ways of accomplishing this goal. The creation of a family limited partnership can be a way to protect assets. Limited liability companies are also used for asset protection.
Your family dynamic will play a role when you are planning your estate. For example, if you have a person with a disability who is receiving government benefits on your inheritance list, you must tread lightly. A direct inheritance could lead to the forfeiture of these benefits.
This type of situation is addressed through the creation of a supplemental or special needs trust.
There is also the matter of a spendthrift heir. You may have someone in the family who is prone to burning through money quickly. He or she may squander a direct inheritance in short order.
You can protect a poor money manager from his or her own bad decisions by making this individual the successor beneficiary of your living trust with a spendthrift provision. The trustee would handle the assets, and the beneficiary would have no control over them. Measured distributions would be made to the beneficiary in accordance with your wishes.
These are a couple of examples of special circumstances, but there are others.
Arranging for the transfer of your financial assets is at the root of estate planning. However, it also involves preparing for the twilight years that will precede your death.
Incapacity is possible. You can prepare for this eventuality by empowering decision-makers to handle your affairs in the event of your incapacitation. This is done through the execution of documents called durable powers of attorney.
You should also execute a living will stating your preferences regarding the use of life sustaining measures.
Schedule a Consultation
Now that you have absorbed this overview, you may be ready to take action. Send us a message through our contact page or call us at 239-225-7911 if you would like to schedule a consultation.