Lasting Situations of Wealth

Estate Planning: A Pebble That Can Ripple for Generations

It is an indelicate question, one that almost seems impolite to ask…

What will happen to your stuff when you die?

As much as it might seem crass or rude, this is a legitimate and critical question for spouses, children, creditors, business partners, charities, even the government. The resolution of assets and obligations at one’s death is a matter of great importance for all interested parties. In some cases, the impact of estate planning may reverberate through several generations.

Because of the significance of these end-of-life decisions, the disposition of one’s estate has long been regulated by law. (In an 1854 essay on the purpose of government, Abraham Lincoln wrote that one of the legitimate purposes of government, along with law enforcement, public roads and highways, was to administrate “the estates of the deceased.”)

These legal parameters are meant to protect rightful heirs, repay creditors and discourage theft and fraud. In some instances, these regulations also include determining if the estate should be taxed. In order to receive these legal protections, estate plans must be made in accordance with the law and, in the absence of a legally valid plan, the government reserves the right to administer an estate according to its own standards.
Conclusion: If you are going to establish an estate plan, you must make sure it is done correctly.

The Purpose of an Estate Plan

An estate plan serves as a legal road map for the disposition of your assets and obligations at the time of your death. Done properly, an estate plan not only ensures that all property will be distributed according to your personal wishes, but also attempts to deliver the largest distributions possible with a minimum amount of delay to the appropriate parties. Besides providing financial certainty for beneficiaries, estate planning encourages individuals to settle other important end-of-life decisions, such as guardians for minor children, healthcare preferences, and funeral arrangements.

Considering the wide range of topics that impact the disposition of an estate, a typical estate plan will often require consultation with a number of professionals, including lawyers, financial counselors, accountants and life insurance representatives. Estate planning is not a do-it-yourself project.

Basic Estate Planning Instruments

Each estate plan is unique, and the legal and financial instruments that comprise the plan will depend on the size of the estate, the number of beneficiaries, and the purpose of distributions. However, most estate plans will probably include some form of the following:

A Will. The most common estate-planning instrument is the will. A will sets forth who will inherit an individual’s property at their death. Additionally, wills often appoint guardians for minor children, name financial representatives, specify funeral arrangements, and may enumerate other end-of-life details.

To ensure that all of an individual’s assets and incidents of ownership are properly transferred, wills pass through a legal process known as probate. Depending on the nature of the assets and the parties involved, probate may be lengthy and expensive. This may result in considerable delays for beneficiaries receiving distributions, and possibly diminish the amounts.

However, not all estate assets are subject to the probate process. Property owned jointly with right of survivorship (such as bank accounts, home, cars) is not usually probated. Instead, these assets pass directly to the control of the spouse, children, or business partner, etc. with whom the asset was jointly owned. Assets with named beneficiaries (life insurance death benefits, retirement plan benefits, individual retirement accounts, and annuities) also are typically transferred outside the probate process.

A Trust. A trust is a legal method of transferring property to an artificial legal entity. The person creating the trust is known as the settlor, and the individuals benefiting from the trust are the beneficiaries. A beneficiary may be a family member, a friend, a charity, even a pet. The person or institution who oversees the property and carries out the instructions of the trust is the trustee.
There are two kinds of trusts, revocable and irrevocable. If you (as settlor) name yourself as the sole Trustee of your Trust during your lifetime, you will be able to manage the Trust while you are alive. If the trust is revocable the settlor can change it or decide to take the property back any time during his/her life. If the Trust is irrevocable, the settlor cannot change it once it has been established.

As an artificial legal entity, a trust never dies. This means assets held in trust do not have to undergo probate, even when the settlor dies. Instead, the trust continues to operate according to its instructions on behalf of the beneficiaries. The avoidance of probate can be a major advantage in estate planning, and is one of the principle reasons many estate plans will include a trust.

Other Issues

Except for Federal estate taxes, most estate settlement issues fall under the jurisdictions of the individual states. Some states impose additional estate taxes at the state level, others do not. Definitions for the survivorship rights of spouses may differ substantially in each state. These ownership issues can be further complicated when individuals own property or have business partnerships in different states. It is essential that the individual and his/her financial and legal professionals are aware of these differences and have planned accordingly. 

Besides an awareness of the estate issues unique to their state(s), individuals and their advisors must also stay abreast of the constant fluctuation in federal estate legislation. In the past decade, the estate tax has been a political football, with several drastic changes as the result. After failing to agree on a long-term tax policy, Congress recently established new estate guidelines, but these are set to lapse after 2012. With each change in legislation, estate plans need a thorough review. Kelly Greene of the Wall Street Journal explained in an April 16-17 “Personal Finance” report,

All this means that families need to be prepared for any contingency. The way many estate plans are currently worded could cause them to backfire, either by triggering estate taxes or even accidentally disinheriting a surviving spouse.

SIMPLE QUESTION #1: DO YOU HAVE AN ESTATE PLAN?

SIMPLE QUESTION #2: IS THIS PLAN CURRENT?
YOUR PREPARATIONS WILL AFFECT FUTURE GENERATIONS.