Retirement Planning Advice and Financial Related Education by Barry Unterbrink, Chartered Retirement Planning Counselor

Wednesday, February 21, 2007

Estate Planning 101

Why is Estate Planning important?

Estate planning gives you peace of mind by knowing that you have provided security and privacy for your family and loved ones. There are many other benefits of creating an estate plan including: 1) avoidance of costly probate estate proceedings at death, 2) consolidation of all your assets in one plan, 3) faster distribution of assets, 4) reduction or elimination of estate taxes, 5) ability to specify that assets remain in trust until you want them distributed, 6) and avoidance of guardianship. In addition, trusts are more difficult than a will to contest in court.

What happens if you do not have an Estate Plan in place?
If you do not have an estate plan in place when you die, your estate, including debts, will enter a court probate proceeding, which is a legal process that oversees payments of your debts and distributes your assets according to your will. If you have not provided for a valid will, then the court will distribute your assets according to state law.

How do you avoid Probate?
Not only is probate court costly and time consuming, but it also does not afford your family any privacy or control of the distribution of your assets. To avoid probate proceedings, you should set up a revocable living trust. This legal document allows you to transfer ownership of your assets from your name into a trust, which you control. The trust also prevents the court from controlling your assets in case you become incapacitated; for example, due to incompetence or illness or if you die. For probate purposes there are no assets that would be subject to the probate court process. With a revocable trust, you personally do not own anything since all your assets are in the trust.

What is the Tax benefit of a Living Trust?
Federal estate taxes are expensive (top tax rate at 45% in 2007 and 2008) and they must be paid in cash, usually within nine months after you die. Your estate will have to pay estate taxes if its net value (adding all assets and then subtracting all debts) when you die is more than the exemption amount set by Congress at that time. The current exemption amount is $2 million. Assets include your home, business interests, bank accounts, investments, personal property, IRA’s, retirement plans, and any death benefits from your life insurance. It would be helpful to prepare a listing of all your assets and their estimated values so that your advisor can properly assist you with your estate planning.

Estate Planning can help you reduce or eliminate your estate taxes in three simple ways. 1) Remove assets from your estate before you die via gift; 2) Buy life insurance to replace assets given to charity and/or pay estate taxes at a reduced cost; and 3) if you are married, your revocable trusts can utilize both spouses’ estate tax exemptions and possibly pay no estate taxes.

Who are successor trustees and what do they do? Successor trustees can be your child, CPA, corporate fiduciary, attorney, etc. It is critical that successor trustees be appointed because if you become incapacitated, your successor trustee can look after your care and manage your financial affairs using your assets, and if you die, can dispose of your assets pursuant to the provisions in your trust.

What is a Designation of Health Care Surrogate?
This document allows you to designate someone you trust to act on your behalf to make health care decisions in the event you are not capable to do so. These health care decisions may include the consent, refusal or withdrawal of your health care regarding pain management, the removal of respiratory support, artificial nutrition and/or artificial hydration.

What is a Durable Power of Attorney?
In the event of your incapacity to act, this document allows your designated agent to handle your financial affairs as necessary and transfer assets to your revocable trust.

How much can I save by preparing an Estate Plan instead of paying an attorney, CPA, or personal representative to administer an estate in probate?
Preparing an estate plan can avoid many costs typically associated with probate, including attorney’s fees, personal representative fees, and other court costs. Probate costs can range from six to eight percent of your assets versus an average of one to two percent in non-probate estates.

Who should have an Estate Plan?
Having an estate plan should not depend on your age, marital status, or wealth. If you own any titled assets and want your loved ones to avoid court interference at the time of your death or incapacity, then you should consider preparing an estate plan. Further, you may want to encourage other family members to have one, so that you will not have to deal with the courts if they should become incapacitated or die.
Copyright 2007, Christopher D. Vasallo, J.D./LLM Taxation

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