What is Estate Planning?
Estate planning is the process of analyzing assets to determine what assets flow through your estate, establishing goals for managing your assets during life, determining the desired distribution of your assets upon death, devising a plan for managing wealth during life, minimizing taxes, distributing wealth upon your death, and then drafting legal documents to address potential disability, and to carry out the decisions you made in your plan. And lastly, assessing your insurance needs and making sure you are adequately covered.
Why is Estate Planning Important?
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Disposition of property
Who will inherit your property? If you don’t have a will, the state decides who will inherit your property. This decision can be complicated when there are children from a prior marriage or when your children have different needs.
Taking care of pets
There are many issues related to taking care of your pets in the event you suffer a disability and can’t take care of them on your own or upon your death. What is the standard of care you want to impose on person who is taking over for you, where should the animals be kept, how much money is necessary to pay for their care, who should care for the animals, whether person caring for them should also manage the money set aside for their care. In most cases if you have multiple pets, or horses, it is better if you establish a “pet trust” in your Will and make sure the power of attorney for financial purposes address the pet care needs.
Outright Distribution or in Trust
Whether your beneficiaries will receive their inheritance outright or in a trust or in trust depending upon having attained a certain age is one of the decisions you can make in the estate planning process. If you do not have a Will, anyone over the age of 21 will receive the assets outright.
Guardianship of Minor Children
Who will raise your children if you (and your spouse if you are married) predecease them? People with very modest estates or those with no probate estates still need a Will in order to name a guardian for their minor children. This may but does not have to be the same person you name to manage your children’s inheritance. You can provide suggestions, guidance and directives as to the standard in which you want your children raised and as to what are acceptable or non-acceptable expenditures. If you do not have a Will, the court will select who will be the guardian of your minor children.
Adequacy/Liquidity of Estate
Are your assets adequate to provide for your family and, if adequate, do they provide the liquidity necessary to pay death taxes, expenses of administration, and funds for family needs without forcing the sale of non-liquid assets at a disadvantageous time? Life insurance policies should be considered to meet these needs.
Asset Management Pre and Post Death
Who will manage your assets if you become incompetent? Who will manage your estate upon your death? Who will manage funds left to minor children? Who will handle the affairs of a special needs child?
Business or Farm Continuity
Are you concerned about the succession of ownership and control of a farm or closely-held business (owned by you and a few business partners) or family business? You should consider who will manage the farm or business in your absence. You should have a business succession plan in place. Typically, implementation of a business succession plan must start years before the transition is required in order to effectively transition management without incurring financial distress on your business. You may need a Buy/Sell Agreement and you may need life insurance to fund this Agreement. You may also want to consider a Family Limited Partnership or a Limited Liability Company to assure continuity and control.
Even with the new higher applicable exclusion amount and carryover of the unused portion to the surviving spouse’s estate under current law, there are many estate planning measures that can be taken to minimize or defer death taxes and to reduce income taxes for the surviving spouse. If you have a sizeable estate, you may incur estate taxes without proper planning. In addition, a marital property agreement may be used to reduce income taxes for the surviving spouse depending upon your asset structure.
If you desire leaving a legacy to charities of your choice there are various methods available to accomplish your goals. You can organize a private foundation upon your death in your Will or revocable trust or provide for charitable bequests., You can create a charitable remainder trust (one that distributes certain assets to a charity or charities following a term of years or life interest reserved to yourself or given to another family member), or a charitable lead trust.
Tax Issues Related to Estates
The transfer taxes applicable to individuals (federal estate tax, state estate and/or inheritance tax, generation skipping transfer tax, gift tax) are very complex and always changing.
When should I have a Will?
- If you have accumulated assets and net worth and you care about who receives your assets upon your death.
- If you have minor children and need to designate a guardian for those children upon your death.
- If you are in a second marriage and have children from a first marriage.
- If you have pets or horses and need to provide for their care.
If you are young, have no children, and have no wealth or assets accumulated and would give all your property to your parents upon your death, then it is probably ok if you do not have a Will at this time.
What if I die without a Will?
The state will appoint a personal representative and distribute your assets to your heirs as determined by state law. If you have minor children, the court will determine who should act as guardian of your children and appoint the guardian on your children’s behalf. If you have children and they are over the age of 21 the court will distribute the assets to them outright.
What if I Become Disabled or need Nursing Home Care?
Planning for disability and possible long-term care is part of the estate planning process. Disability planning takes several forms, having documents in place to manage your affairs when you are not able to for yourself and potentially purchasing disability insurance if you are not covered by an employer. Long-term care needs can also be addressed in several manners: purchasing long-term care contracts, or through medical assistance planning if a contract may not be obtained due to health conditions or financial considerations. The earlier you contract for long-term care, the better.