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Families
delay doing critical estate planning for a
variety of reasons: much of it deals with death
or incapacitation; they don’t think they need
planning, or it raises touchy family issues.
And they don’t understand the complicated jargon.
Here are brief explanations of a few basic
estate planning concepts and terms that may
help you feel less reluctant to do this important
aspect of financial planning.
Will.
A will directs where and how you want your
estate property distributed when you die, and
who will take care of your children. Without
one, the state will decide according to statute.
A will does not control some property with
beneficiary designations such as life insurance
benefits, retirement accounts, and trust assets.
Probate
estate. The court process that ensures that
the portion of an estate passed by a will is
properly settled. Advanced estate planning
can reduce the amount of an estate that must
pass through probate (subject to potential
challenges by heirs), thus saving time and
fees.
Executor(s)
or personal representative. The person or persons
who administer your final estate. Choose wisely,
because the person oversees not only financial
matters, such as filing a final tax return
and distributing assets, but may have to deal
with raw family emotions and conflicts.
Advanced
directives. The two key advanced directives
are a living will and a medical power of attorney.
The living will is your expression of what
life-sustaining medical treatment you want
or don’t want should you become permanently
incapacitated. Though not always honored, a
medical power of attorney gives a third party,
such as a spouse or adult child, the power
to make medical decisions on your behalf.
Power
of attorney. This gives another person, such
as your spouse or a child, the legal power
to act financially on your behalf should you
become incapacitated. This can be as restrictive
(bill paying only, for example) or as comprehensive
(able to sell property, file tax return) as
you wish to make it.
Titling.
Improperly titled assets could mean property
being transferred contrary to your wishes or
could result in higher estate taxes or probate
costs.
Trust.
A legal entity for holding property for the
benefit of the creator of the trust or other
beneficiaries. Trusts are used for everything
from avoiding probate and helping heirs manage
assets, to saving estate taxes and making sure
certain assets go to certain heirs.
Trustee.
The person, who owns, controls and manages
a trust’s assets. This may be the creator,
a relative or friend, or a financial institution.
Revocable
and irrevocable trusts. A revocable trust means
the creator of the trust can change fundamental
aspects of the trust or even dissolve it. An
irrevocable trust is where the creator is severely
limited in what, if any, changes he or she
can make in the trust document. Irrevocable
trusts typically are used to reduce estate
taxes.
Testamentary
and inter vivos trusts. A testamentary trust
is established upon the creator’s death and
an inter vivos trust is established during
the creator’s lifetime.
Estate
tax and gift exemption amounts. The amount
of an estate’s value passed to heirs subject
to estate tax depends on the size of the estate.
In 2003, the amount of estate exempt from taxation
was $1 million, rising to $3.5 million by 2009.
It’s repealed completely in 2010 but returns
to $1 million in 2011. These exempt estate
tax amounts are reduced by any gift-tax exemption
amounts taken during lifetime. Exempt
amounts are important when designing trusts
aimed at reducing estate taxes, such as a marital
trust.
Annual
gift exclusion. Each person can donate a maximum
tax free amount (indexed for inflation) a year
to as many people as they choose. The annual
exclusion does not count against the lifetime
gift-tax exemption amount.
Generation-skipping
transfer tax. This tax discourages wealthy
grandparents from passing estate assets directly
to their grandchildren or other second-generation
heirs in order to skip a generation of estate
taxes.
The
purpose of this newsletter is to stimulate
thought for our clients and professionals
with whom we network. One should consult
with a qualified financial planning professional
prior to implementing any financial
planning strategies. If you are a legal,
mortgage, insurance, real estate or tax professional
receiving this newsletter or know of one,
please contact our office to introduce yourself
and your services to us. We are always
seeking to grow our referral network and
expose professional services to our client
base. |
