Estate planning is more than just a will. It is a continuous planning process to mitigate the financial impact of your death on those you leave behind.
By spending just a few hours and dollars now, you can save your loved ones or beneficiaries from paying a 35% property tax. But a well-constructed estate plan can not only reduce tax liability, but also help your loved one understand, resolve and prepare for the many issues that arise when settling an estate. We show you where to start.
Dying without will
Dying without a will is called dying. If this happened in the U.S., sibling succession laws would come into play, and your relatives would have to go through probate to claim ownership, perhaps even fighting over assets. The state would determine how your property is passed on to your heirs. If no heirs fit the state's formula, your assets may become property of the state. A will can help you avoid the pitfalls of dying. However, even if you have a will, your assets will still be subject to the timely and costly probate process (court involvement).
How a will can help
A will primarily allows you to control the distribution of your assets and formulate your final wishes.
A very important benefit of a will is that you can recommend a guardian to care for your children or other dependent beneficiaries in the event of your death. Since this is an overwhelming responsibility, you should carefully select your guardian(s) and obtain their consent before listing them in your will. Although the final decision on guardianship is made by the court, the courts give great weight to the parents' decision in their wills.
Other important points about your will are clauses that clarify the will and its purpose. In the exordium clause, for example, you state your name and residence and officially declare the document a will. Be sure to note in this clause that the will supersedes all previous wills, making them null and void.
In the will, you should also name the executor/administrator of your estate and how you would like that person to distribute your assets, including how all your debts, taxes and funeral costs are to be paid. To avoid family disputes, add a non-contestability clause that says if a beneficiary contests the test, his or her share becomes null and void. Of course, a no contest clause is not appropriate for all family circumstances.
Here's how to get started with your estate planning
After you understand the importance of a will, here is a list of steps that provide an overview of the estate planning process:
- Make a list of all your assets and liabilities.
- Open a family discussion about who should be the guardian for your children.
- Review and update your current beneficiaries (those eligible for IRAs, life insurance, etc. are determined).
- Find out the current exemption limits for real estate transfer tax exemptions (see below).
- Determine how to distribute your assets after you die (family, charity, etc.).
- Discuss your funeral arrangements with your spouse or family.
- Get the help of a certified estate administrator.
A simple will can cover all your estate planning needs if the value of your estate falls substantially below the probate amount. The federal estate tax is an excise tax imposed on the transfer of an individual's assets that exceed a certain amount at the time of that individual's death. If your estate is worth more than the tax exclusion amount, the tax can be hefty.
As such, you need to seriously consider your personal situation, and if your estate is more than the tax exclusion, you should look at other estate and planning techniques to help your beneficiaries avoid estate taxes. (We discuss these techniques below). Remember that direct transfers to your spouse are not taxed – these assets are only taxed after death (this is called a family deduction). (See also: who is the beneficiary of your account? )
Estate reduction and planning options
Let's take a look at some estate planning tools and estate reduction techniques:
- Use trust positions to maximize the exclusion and avoid the trial date. Trusts help you do this because they are intended for a beneficiary.
- Use charitable giving to reduce your assets.
- Use your estate to pay for family education and medical expenses, as these are tax deductible.
- Lend assets to family members to minimize your estate.
- Buy life insurance to pay taxes, but remember that life insurance only pays out under certain conditions (executor or beneficiary should be owner).
- Use annual gifts to minimize taxes and maximize value for your loved ones.
- Set up durable powers of attorney.
- Set up your funeral and burial plans.
- Seek professional help from your financial advisor, an estate specialist or an attorney who specializes in estates.
Sometimes changes in your life – such as a sudden increase in wealth, a new marriage or remarriage, the birth of a child, a serious illness, or a death in the family – may trigger the need to evaluate your estate plan. All of these factors may impact your current plan and need to be revised or added to.
Summary
Estate planning is primarily for the benefit and care of your loved ones, making legal and financial problems easier to deal with when you die. Since death planning is not always priority 1, we tend to put off creating legal documents. But at the very least, every competent adult should have a will in place. The problems associated with probate, creditors, con artists, lawsuits, lawyers and death taxes can prolong the settlement of your estate.Don't wait to set up your plan until you've heard someone else's horror stories.