The steps involved in making an estate plan include the following:
Different people have different reasons for making an estate plan. Some of the most common reasons include the following:
You may also have other reasons to prepare for illness, injury, or death. Consider the issues most likely to affect you and your family if you get sick or pass away.
One of the key reasons for creating an estate plan is to make sure your assets are easily transferred to the new owners you’ve designated.
You’ll need to know exactly what assets you want to include in your estate plan. This will not only help to ensure that you have appropriate plans in place to transfer all of your wealth but also help your family members see exactly what you own so that nothing falls through the cracks.
Some of the assets you’ll want to address in your estate plan include:
When you make a list of assets, it can be helpful to determine how those assets are owned and whether you have any designated beneficiaries on the accounts.
For example, if you have a 401(k) account, you probably chose someone as a beneficiary on that account — so note that on your list. If you own real estate, you may own it jointly with someone else, and you’ll want to find out how your ownership of the property is structured and how much of a claim your inheritors may have to it.
You need to know these things because they will matter when it comes to how the accounts and property are treated upon your incapacitation or transferred upon your death.
Keeping your wealth safe is a key part of securing your legacy. It’s important to identify potential risks you could face during your lifetime that might lead to a loss of wealth and an inability to pass money or property on to your family members.
Some of the risks you may need to think about include:
Thinking about the risks to your wealth is beneficial so you can incorporate plans for asset protection into your estate planning process.
You’ll need to think about everyone you want to protect and provide for if something happens to you. This could include:
You need to make a list of the loved ones you want to consider in your estate planning because you may need to use special tools or take additional steps to protect certain family members or friends.
For example, if you have children who are under the age of 18, you’ll need to not only ensure that they’re financially provided for but also make certain you name a trusted person to act as guardian in case both parents pass away or become incapacitated before the children reach adulthood.
You’ll also have to consider whether you want charitable giving to be a part of your legacy. Consider organizations that you support and think about whether you want to donate any money or property to them. If so, you can identify the most effective way to make a gift as part of your estate planning process.
You could, for example, create a charitable remainder trust, which is a tax-exempt irrevocable trust that allows beneficiaries of your choosing to receive income from the trust for a period of time before the remainder of trust assets are donated to charity. Or, of course, you could also make a direct gift to a charity upon your death, or you could even choose to create and endow your own foundation with the help of an attorney.
Perhaps your loved ones are self-sufficient, and you can provide them with an inheritance just to improve their quality of life. In other circumstances, however, they may have specific needs that you must address as part of your estate planning process. For example:
In any situation where your heirs can’t just be given money or property when you die, you’ll need to identify the right estate planning tools for transferring wealth to your loved ones.
The federal government and some state governments charge taxes on assets transferred after your death. Generally, you can transfer as much money and property as you want to your spouse without owing any estate taxes. But if you’re going to leave assets to someone other than your husband or wife, you need to know the rules on estate tax.
In 2018, you can transfer up to $11,180,000 without triggering federal estate tax. Your estate tax exemption can be given to your spouse if you don’t use it. In other words, if a husband dies and leaves his entire estate to his wife, then he hasn’t used any of his $11,180,000. His wife now can transfer $22,360,000 to whomever she wants tax-free because she has her husband’s exemption plus her own.
However, some states charge estate tax on much smaller sums of money (though the thresholds are still in the millions). The states that tax your assets when you die include Connecticut, Delaware, Hawaii, Illinois, Massachusetts, Maryland, Maine, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington State, and Washington, D.C. If you live in one of these locales, check the threshold at which you’ll start to be an assessed estate tax.
If it looks as though your estate will be taxed, you may be able to use estate planning tools to reduce or avoid that tax. For example, you can make inter vivos gifts, which are gifts made during your lifetime. So long as you keep those gifts to each recipient below the threshold at which you trigger gift tax, you can reduce your taxable estate without having to pay any taxes on transferred wealth.
There are many creative approaches to transferring money while reducing or avoiding gift and estate tax. For example, some people create family limited liability companies, or family LLCs, and give the company investments or assets to manage. The owner of the assets is the controlling member of the LLC. Other family members are given an ownership interest in the LLC, but no control. Their interest is worth little because they don’t have control, but they get an ownership stake in the assets the LLC owns.
This technique can also be used to help protect assets from creditors — but it’s complicated, so you should have a lawyer help you set this up.
One of the key reasons many people make an estate plan is to transfer assets outside of probate. Probate is a process in which estates are settled. After almost any death, assets have to pass through probate unless the deceased had a very small estate — or unless the deceased made plans to transfer assets outside of probate.
When assets are passed through probate, the executor of the estate or a personal representative appointed by the court needs to file lots of paperwork with the court. An accounting of estate assets needs to be made. An opportunity is given for creditors to make claims. All potential heirs or beneficiaries have to be notified. The executor has to keep a careful accounting of estate assets. The will needs to be presented for probate, and there’s an opportunity for it to be contested. And the court oversees all of this.
The entire probate process can take months to complete and can lead to costly legal fees. And because it happens in court, court records are created that can become public record.
Plainly, there are many reasons to avoid probate at all costs. That means you can’t simply transfer assets through a will. You’ll have to use other tools, such as joint ownership, pay-on-death accounts, and living trusts that allow assets to be passed through trust administration. We’ll talk more about those tools later.
Estate planning involves not only making plans for your death but also preparing for incapacity. If something happens to you, there are a few key issues that need to be addressed:
When you name an agent using power of attorney, or when you name a backup trustee for your living trust, that person will have a fiduciary duty to act in your best interests. This is the highest duty owed under the law. It’s the same one a lawyer owes to a client.
Many people need to buy life insurance as part of their estate plan. You need life insurance if your death would create a financial hardship for people you care about.
For instance, you should purchase a life insurance policy if:
When you buy life insurance, you need to name a beneficiary who will receive the death benefits. Often, it makes sense just to name the person you want to receive the funds as your beneficiary. However, this isn’t always the case. If you want the funds to go to a minor or a disabled person, for example, this creates problems, because the disabled person or minor can’t manage the funds and typically cannot or should not inherit directly.
You can make a trust the beneficiary of the life insurance policy. The funds would then payout to a trust. A trustee you select could manage the funds for the benefit of the trust beneficiaries, which are the people whom you want the trust assets to benefit. In your trust document, you can provide specific instructions for how the money is to be used. For example, you could specify that the money is to be used only to cover the costs of your child’s education.
Think carefully both about how much money your loved ones will need after you’re gone and how best to give that to them when you purchase a life insurance policy.
Finally, you’ll need to decide what tools you actually need to use to implement your plans.
One of the most common tools in an estate plan is a trust. Trusts can be used to accomplish a wide array of goals, from protecting assets to facilitating the transfer of wealth outside probate.
When you create a trust, you create a trust document. You name a trustee, who controls the trust assets. You name beneficiaries, who ultimately receive the trust assets. You provide instructions for how the assets in the trust should be managed and distributed. You then transfer the ownership of assets to the trust.
If you make an irrevocable trust, you give up control over your assets but gain more protection for them. You cannot make any changes to the trust without going through a complicated process of amendments approved by trustees and beneficiaries. Someone besides you must be the trustee, and you must not be able to access the trust assets directly. This is the kind of trust you’d typically need to make to protect assets from creditors or to ensure assets in the trust don’t disqualify you from Medicaid. The key is you that cannot freely access the trust assets, which is why those assets are protected.
If you make a revocable trust, you don’t give up that much control over your assets. You can be the trustee who manages the assets (and can name a backup trustee who takes over in case of your death or incapacity). You can change the trust or end it at any time. Because you still have control over assets, they still count for the purpose of determining Medicaid eligibility and are still vulnerable to creditor claims. But after you pass away, the assets in the living trust can transfer outside of probate.
You should talk with a lawyer about whether you should use trusts and what kind of trust is right for you.
Other legal tools you may need to use include:
You need to be aware that if you use tools such as pay-on-death accounts or joint ownership, your designated beneficiaries or co-owners inherit automatically, regardless of what you might say in your will. You can’t leave a jointly owned house to your friend, for example; if your spouse is the co-owner, your spouse will get the house automatically, even if your will clearly states that your friend should inherit. And if you specify in your will that your daughter should inherit all your investment accounts but your son is the designated beneficiary on an account, your son will receive it.
You should work with an attorney to determine which tools are best for you and to understand the implications of using different kinds of legal tools to transfer assets, protect yourself, and protect your loved ones.
You’ll need to ensure that you’ve chosen the right tools and that the legal documents you create are enforceable. You don’t want to take a chance on having your will successfully contested or your trust declared invalid after you’ve passed away or become incapacitated. This is why it is important to get legal help from an attorney when you make an estate plan.
You’ll also need to ensure you keep your plan updated as your life changes. If you get divorced, for example, you’ll need to change your designated beneficiaries and update your will, trusts, and other estate planning documents. Be sure to keep on top of changes that need to be made so your plan always reflects your current wishes.
You need to put an estate plan in place before something happens to you. If you wait until you’re incapacitated, it will be too late for you to make a plan. If you don’t make a plan and you pass away, you’ll forever lose your chance to leave your legacy.
There is no guarantee as to how many tomorrows you’ll have. Put your plans in place now so you can protect your autonomy, keep your assets safe, and ensure that your family is provided for.
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.