Estate Planning Basics I

1. Who needs estate planning?
2. What is estate planning?
3. What happens to my legacy when I die?
4. What are estate settlement costs?
5. Is there a way to avoid the negative impact of probate?

1. Question: Who needs estate planning?
Simply everyone. If you die without a will and/or trust you are exposing the people you care most about to serious financial risk.

66% of all Americans die without a will or trust . This means that two-thirds of all Americans leave their financial assets for the benefit of probate and the IRS.

So the bottom line is...your loved ones or the IRS? Seems simple doesn't it?

Upon your death will your family...

  • receive the maximum possible dollars
  • avoid considerable anguish and inconvenience
  • avoid possible financial burdens
  • have a clear dictate of your wishes

Did you know that you already have an estate plan and you may have done nothing? The state in which you live and the federal government have planned for you and as you can imagine, the results are probably not in your family's best interests.

Estate planning may seem to be a difficult and emotional issue. But in the long run wouldn't it be better to save your family thousands (or even millions) of dollars because you took the time to provide them with the legacy and security you had hoped? So, as you can see, everyone needs estate planning in some form.

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2. Question: So what exactly is estate planning?
Estate planning is a process of developing a "plan" that will accomplish the financial goals and objectives you have identified both while living and at your death.

Common goals might include:

  • providing a means to pay for federal estate taxes and other expenses related to your death
  • providing income to your loved ones
  • providing for the disposition of your business
  • distributing your assets to family members with the least amount of shrinkage or loss possible
  • providing for a child with special, long term needs

Estate planning can accomplish all of the above and more.

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3.Question: What happens to my legacy (property, savings, etc.) when I die?
Upon death probate occurs. Probate is a method of seeing that all outstanding debts are paid and transferring assets as provided in a will, or, if a person dies without a will, of transferring assets to his or her heirs in accordance with the laws of the state.

What this means is that the assets that are in the decedent's name alone must be probated in order for the transfer of title to occur.

If you have not properly planned for the disposition of your estate, your death may create a burden to those left behind:

  • If an individual has not planned properly, the following expenses may be incurred at a level higher than necessary:
    • Probate Administration Expenses: The probating of a will permits a court of law to supervise the transfer of assets from the descendant to his or her heirs. A typical probate lasts about one year, with a six month time frame generally being a minimum. Probating of a will includes numerous fees. These fees may include attorney's fees, court costs, tax return preparation, etc. Some states determine the fees based on the value of the assets passing through probate. Assets which typically do not pass through probate would include: joint tenancy, life insurance, assets in living trusts, etc.
    • Death Taxes: Estates which exceed certain amounts may be subject to both state and federal death taxes.
  • Estate Assets may be improperly arranged:
    • Liquidity issues may result in not enough liquid (cash type) assets to pay estate settlement costs.
    • Cash flow deficiencies may result in not enough income to care for loved ones left behind.
  • The transfer of assets may be negatively impacted in the following ways:
    • Probate may delay the transfer of assets
    • Probate may result in added expense at the time of transfer
    • Assets transferred to minors may be in cumbersome guardianship accounts until the child attains age 18 (or 21 in some states)
    • Additional death taxes may be paid because of no pre-death planning.
  • Minor children pose special consideration. For instance:
    • The day to day care of minor children can become threatened without formal planning
    • The financial aspects of the child's well-being may be hindered by the non-election of a qualified individual to manage assets on the child's behalf.

As mentioned above, probate takes a great deal of time. As much as two years. Unfortunately, during the probate period your assets are frozen and only occasionally can the family request a living allowance to help tide them over.

Probate is also a very public event. Upset relatives or other interested parties may contest a will which will increase the probate time frame and cause heirs unnecessary heart ache.

In the trust section of this site you can learn more about avoiding the pitfalls of probate.

So, as you can see there are many reasons to pursue estate planning. Proper estate planning can give you the peace of mind you deserve and insure that your legacy and wealth is preserved for years to come.

Now that you have a brief overview, let's look at some details involving:

  • estate settlement costs
  • minimizing probate
  • federal estate taxes
  • how assets are valued at the time of death

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4. Question: What are estate settlement costs?
Shortly after the death of an individual there are certain costs of settling an estate which must be paid in cash. A primary goal of estate planning is to decide in advance how these costs will be paid and to determine which methods are available to reduce the potential shrinkage of an estate.

Typical Estate Settlement Costs May Include:

  • The expense of the last illness, funeral, burial expenses and any debts of the decedent
  • Probate administration expenses: Such as attorney’s fees, executor’s commission, appraiser’s fees, court costs, tax returns preparation, etc. Some states determine the fees based upon the value of the assets passing through probate. Assets which typically do not pass through probate would include: joint tenancy, life insurance, assets in living trusts, etc.
  • Death taxes: A federal estate tax is imposed on estates exceeding a certain amount of assets. This amount changes each year as follows: $625,000 in 2000; $650,000 in 1999; $675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; $1,000,000 in 2006 and thereafter. In addition, individual states may also impose an inheritance tax or estate tax.

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5. Question: Is there a way for me to avoid the negative impact of probate?
The probating of a will permits a court of law to supervise the transfer of assets from the decedent to his heirs. A typical probate lasts about one year, with six months generally being a minimum time if everything proceeds according to schedule.

Because of high attorney’s fees, executor’s commissions, and court costs, the often unwanted publicity, and the time delay involved in probating an estate, many people attempt to avoid probate administration. Some of the methods of avoidance are as follows:

Joint Tenancy
A form of title arrangement, usually between spouses. Title passes automatically to the surviving joint tenant. There may be income tax disadvantages to this arrangement and the joint tenancy must be dissolved after one tenant dies. Creditors of either joint tenant can attach the asset. It may also frustrate estate tax savings which are anticipated from carefully drafted will and trusts.

Totten Trust
A method of passing savings accounts to heirs. Passbook accounts are held in trust for another. Typical wording would be: "John Doe, in trust for Johnny Doe."

Life Insurance
The proceeds of life insurance are rarely subject to probate administration, unless the insured’s estate is the beneficiary, or all of the named beneficiaries predecease the insured.

Lifetime Gifts
Even gifts made shortly prior to death will avoid probate. However, they may be brought back into the estate for death tax purposes. Also, gifts carry the donor’s basis to the donee, whereas appreciated assets in the decedent’s estate will generally get a new or "stepped-up" basis.

Revocable Living Trust
In many situations, the Revocable Living Trust is an effective method of avoiding probate. It has the additional advantage of providing management of the funds for the heirs for some time after the decedent’s demise. Also, in the event the person setting up the Living Trust (also called an Inter-Vivos Trust) becomes mentally incompetent or otherwise incapacitated, a Successor Trustee can take over management of the estate.

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