Estate Planning 101: Everything You Need To Know

July 13, 2022

Estate planning is the process of determining how to preserve, manage or distribute an individuals assets after death or incapacitation. Although complex the estate planning process is an important one if you truly want to maximize the amount of money left to your beneficiaries. Things such as making a will, setting up a trust, making charitable donations, naming an executor and beneficiaries, and setting up funeral arrangements can all be considered part of the estate planning process. Getting legal and financial advice is highly recommended for this process to optimize your plan and reassure certain outcomes.

Estate Planning

What is a Will? 

A will is a legal document that lays out how the deceased assets will be distributed. A will is essential for anyone not just those with million dollar estates. If there isn’t a Will at the time of death, your assets will go into Probate which is a long and sometimes painful process involving courts, lawyers, and tons of fees. Creating a Will is simple with the help of an expert. They will help you understand and achieve your goals and make them into a legal document.

A main component of any Will is the designation of the executor, this is the person given the responsibility of carrying out what is described in the will. The executor’s duties will depend greatly on the complexity of your estate, and what your wishes are. They’re responsible for overseeing and making sure everything happens correctly after death. And even before your will is given to the court, they’ll have some work to do. For example, they might have to:

  • Obtain certified copies of your death certificate
  • Locate your last will and testament and file it in probate court
  • Inform your heirs and relatives of the open contest period — the timeframe when they can challenge the validity of your will
  • Take inventory of your estate and distribute your belongings to your heirs
  • Notify banks, government agencies, insurance companies, and creditors of your passing
  • Use estate funds to settle any outstanding debts if you have them
  • Maintain your property until the estate is settled
  • File your final income taxes
  • Make court appearances on behalf of your estate

Because your executor may have many responsibilities, you’ll need to make sure they understand and are prepared for the job. 


Beneficiaries: Why  they’re important

Beneficiaries are named on many accounts such as IRAs, 401ks, 403B, and many more. It’s extremely important to have your designations in order because if no one is named your assets will go through probate which is a long and sometimes painful process. The beautiful thing about naming a beneficiary is that you no longer have to worry about probate, and it also takes care of the need to include those assets in your will. It’s extremely important to name beneficiaries on accounts such as IRAs when you open the account. This will not only ensure your assets are directed to the right individuals or organizations when you pass away but also ensure you avoid conflict in court which can take years and be expensive. 

It’s important to note there are multiple types of beneficiaries, and it’s often prudent to name more than one individual when designating a beneficiary.

  • A primary beneficiary is first in line to receive your assets when you die. You can of course name multiple primary beneficiaries as long as you discern what percentage of the pie each will receive. For instance, if a mother wants to pass her assets on to her three sons, she might make them all primary beneficiaries of her account with 33.3% each.
  • A contingent beneficiary is equally as important to name. They are second in line to receive your assets if the primary beneficiary dies at the same time as the account owner. This can happen in some situations. Many times a married couple will name their spouse as the primary beneficiary to their account, however, if they tragically die in an accident together, the contingent beneficiary will receive the proceeds from the account.

What is a Trust?

Trusts are a huge part of the estate planning process because they allow you to pass on assets without going through the probate process. Trusts can vary greatly to allow for different functionality but they all include a trustee, who is a fiduciary required to act in the best interest of the beneficiaries. The rules of a trust depend on which of the categories it falls into. 

Trusts can be living or testamentary, revocable or irrevocable and this will determine things like ability for distributions, taxes and much more. Let us take a deeper look at each:

  • A Testamentary trust is one based on the will of an individual. This type of trust doesn’t go into effect until after an individual dies.
  • A Living trust is a document created while the individual is still alive (never would’ve guessed that, huh?). Many times creating a living trust means the individual has access to the funds while they’re alive but ensures the assets will not go through probate after death

Living trusts can be both revocable or irrevocable. As the name sounds, revocable trusts can be changed or terminated by the trustor during their lifetime. An irrevocable trust can be extremely desirable to those with large estates. These trusts are considered to have moved all assets out of the trustors possession and cannot be undone, therefore, estate taxes can be minimized or avoided altogether. Assets received in a trust benefit from a stepped up cost basis. Meaning the beneficiaries cost basis becomes the value of the asset at the trustors death. Instead of keeping the original cost basis that the trustor had, this can save hundreds of thousands in taxes for beneficiaries of large estates. 


What Is a Power of Attorney (POA)?

The term power of attorney (POA) refers to a legal authorization that gives a designated person the power to act for someone else. As such, a POA gives the agent or attorney-in-fact the authority to act on behalf of the principal. The agent may be given broad or limited authority to make decisions about the principal’s property, finances, investments, or medical care.

There are a few types of power of attorney which can determine how much control or freedom an agent has.

  • A General Power POA allows the agent to act on behalf of the principal in any matters, as allowed by state laws. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal
  • A Limited POA gives the agent the power to act on behalf of the principal in specific matters or events.1 It might explicitly state that the agent is only allowed to manage the principal’s retirement accounts. This type of POA may be in effect for a specific period. For example, if the principal will be out of the country for two years, the authorization might be effective only for that period.
  • A Durable Power of Attorney (DPOA) remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated. While a DPOA can pay medical bills on behalf of the principal, the durable agent cannot make decisions related to the principal’s health, such as taking the principal off life support. When the agent acts on behalf of the principal by making investment decisions through a broker, the broker would ask to see the DPOA.


Using Life Insurance in Estate Planning

Life insurance serves as a funding source to pay taxes and expenses after death, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free

Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), so at the very least a will should be set up—even if the taxable estate is not large.

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