A carefully implemented estate plan can:
Have liberalized estate tax rules made estate planning irrelevant? Not according to the experts. In addition to the obvious benefits, an estate plan can:
Avoid conflict. The way assets pass to family members or other heirs can be complex. Clear
documentation of an estate owner’s decisions concerning the distribution of assets can help avoid
conflicts by minimizing the sting of unfulfilled expectations while ensuring that plans steer clear
of unintended consequences.
Expedite settlement. By providing executors and administrators with a blueprint of wishes, an estate owner can considerably reduce the time required for estate settlement.
Shrink expenses. Written directives ensure efficient estate transfer, which can minimize
expenses, conserve estate assets, and provide for an orderly distribution of the estate.
Realize philanthropic goals. Comprehensive estate planning allows for the fulfillment of
charitable intentions if estate owners choose to distribute assets to personally meaningful
organizations or institutions.
It is clear that estate planning is not just for the super-rich—after all, avoiding large estate tax bills is only one item on a long list of benefits. Instead, estate planning is important for anyone who needs to provide for loved ones or wants the opportunity to decide how their assets will be distributed after death. In other words—estate planning is for everyone!
What Is Included in an Estate?
At the most basic level, a person’s estate includes everything that person owns. The estate owner’s possessions may include:
Even without being one of the ultra-rich, a business owner is likely to have accumulated a sizable estate. Estate planning gives the business owner the opportunity to protect those assets during life and control what happens to them after death.
Reducing the Estate: Estate Expenses
A typical estate also faces a variety of expenses, and most are due almost immediately after death. These expenses can add up to a substantial sum.
Probate charges These include court costs, attorneys’ fees, executors’ commissions, administrative costs, appraiser’s fees, and accountants’ fees. Probate costs vary significantly by state. Unless the estate is complex or the plan is ambiguous or nonexistent, probate costs typically run between 5 percent and 10 percent of the total estate. For a $1 million estate, that could mean costs of between $50,000 and $100,000—and that’s without any
Debts The estate must settle all debts of the deceased, including mortgages, car loans, and credit
Using Trusts to Meet Unique Needs
trust is a common legal entity created to hold and manage assets on behalf of named
beneficiaries. The trust’s creator (called a grantor) may be the beneficiary, or the grantor may name others to receive the assets. When a grantor puts assets into a trust, the trust—not the grantor—owns those assets. This effectively removes them from the grantor’s estate.
Trusts are versatile. An individual can set up a trust during life (a living trust or inter vivos trust) or through a will at death (a testamentary trust). Trusts can be revocable or irrevocable. They can meet important needs when it comes to planning for minor children, spendthrift heirs, retirement, tax minimization, or gifts to charity.
Planning Benefits beyond a Will
Creating trust is more expensive than writing a will, but also offers benefits that a will does not. Trust can:
Revocable vs. Irrevocable Trust
A revocable trust provides flexibility. It gives the grantor the freedom to change trust provisions or to sell, spend or give away trust assets. The grantor can instruct an attorney to prepare a written amendment to the trust at any time without tax or other penalties. In addition, the grantor can revoke the trust entirely at any time and reclaim outright ownership of the trust property. This provides added security for individuals who are concerned about not having access to assets in case of a future emergency.
An irrevocable trust, of course, requires the grantor to give up all control of the assets, with no
opportunity to make changes in the future. Assets transferred to the trust are treated like a gift and are subject to the federal gift tax. In exchange, the grantor receives an exemption from federal estate taxes. This works out well for grantors who wish to give assets to children or grandchildren while minimizing estate taxes.
A Substitute for a Will
Some estate owners decide to use a revocable living trust as a substitute for a will. A revocable living trust accomplishes important estate planning objectives:
Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn’t as hard as you might think.
Irrevocable Life Insurance Trusts
Providing Liquidity, Avoiding Taxation
Individually owned life insurance faces exposure to creditors during the owner’s life and estate taxes at death. An irrevocable life insurance trust (ILIT) keeps the policy out of reach of creditors and keeps the proceeds out of the estate. Typically, a business owner would use an ILIT to:
How Does an ILIT Work?
The grantor creates the irrevocable life insurance trust during life and funds it with a life insurance policy on the grantor’s life. It may be an existing policy that the grantor gifts to the trust, or a new policy purchased by the trustee using cash that the grantor transfers to the trust for that purpose. (The grantor cannot be the trustee of an ILIT.)
The trust document authorizes the trustee to make the proceeds available to the executor upon the grantor’s death by:
Either way, cash flows into the estate when it is needed most to pay funeral costs, final medical bills, taxes, probate expenses, etc. However, it is important that the trustee is only authorized to make the proceeds available. Requiring the trustee to do so would make the proceeds includible in the estate, defeating the purpose of the trust.
A carefully implemented estate plan can:
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