Estate Planning-What happens to your assets after You Die

Just what is estate planning? By definition, estate planning is the process of arranging assets in a way that will achieve certain goals. Most people’s goal is to ensure that after they pass away, their estate will go to the people or causes of their choosing. This is more complicated than it may seem at first thought.

As you set up your plan, you will probably have to make trade offs between the following aspects: implementation costs, relinquishing of financial benefits, and loss of control. Proper estate planning includes organizing any and all assets and not just putting them in a simple will. It also includes measures to reduce taxes and fees that may be charged to these assets. In addition, you should also include contingency plans to ensure, for example, that your wishes regarding health care and financial matters will be honored.

It is important to prepare an estate plan as well as implement it while you are still alive. Before you enter a plan, though, you really need a strong understanding of the process. This will make things much easier for those who will one day be left behind. To that end, we have prepared a detailed PowerPoint video on Advanced Estate Planning that will give you valuable information and hopefully answer many of your questions.

You will find that estate planning is a dynamic process that can and should involve a number of professionals, including lawyers, accountants, insurance agents and financial planners. Each has a specific role to play. However, you should also seek out an individual or a company that specializes in comprehensive estate planning. In other words, you will need one leader to manage the entire process.

When most people think of estate planning, they think of wills — and often don’t think much further. Or they think that because they employ the services of an attorney and a tax person (CPA, EA, Accountant) that their estate affairs are well in order.

Nothing could be farther from the truth. If you didn’t know that, you’re not alone! Very few people know what you really need for a good estate plan, including most advisors. Want to see how you compare to others in your estate planning savvy? Check out how many people, out of 10, don’t have the following estate planning tools in place, based on statistics we’ve gathered here at Retirement Wealth Advisors, Inc:

Trusts, Wills & Durable Powers of Attorney                                                     

Everyone’s situation is different, of course, so what would be appropriate for one person might not be appropriate for another. In addition, just because you may feel you don’t have enough assets or that their value is low, you should not believe that you don’t need to worry about estate planning. Failing to set up a proper plan could be a costly mistake.

To begin with, everyone should at the very least have a will that specifies clearly who will receive how much of your assets upon your death. Even with this document, however, you will more than likely still have your assets probated through the court system, which is both costly and time consuming. Fortunately, you can avoid this by arranging for the proper “payable on death” document for each asset. As you can see, titling of assets and contingency documents are very important.

Many people confuse a will with a living trust. A living trust is a separate legal document, typically drawn up by an attorney for the purpose of avoiding probate (no court interaction) and efficiently passing assets to the next generation. While you are alive, you can have what is called a revocable trust that you can change at any time. It will then become irrevocable at the time of death.

The living trust is the most typical and the simplest type of trust. But proper estate planning also includes several “special purpose” trusts. If you are married, you might have what is called an A-B trust. This is typically established to maximize the available marital deduction. Or you might have a QTIP (Qualified Terminable Interest Property). The main purpose of the QTIP is not tax savings, but rather to allow for asset control. You also might find it necessary to have a Dynasty trust, GRIT (Grantor Retained Income Trust), ILIT (Irrevocable Life Insurance trust) or QPRT (Qualified Personal Residence Trust).

Another set of important estate documents that everyone should be aware of are Durable Powers of Attorney for health and financial purposes. To set up a power of attorney, you (or the principal) must have sufficient mental capacity when the document is drawn up to make it legally binding. You also need to be aware of your state’s specific requirements, since those do vary from state to state.

In case you become physically incapacitated, the health care POA (Power of Attorney) will direct doctors and loved ones to provide the exact level of care you wish to receive. Many of you have heard of Terry Schivo, who became terminally ill and languished in a nursing home for years. A healthcare POA would have solved this. Let’s say you develop a mental disability such as Alzheimer’s, you would want someone you trust to be able to make financial decisions on your behalf. This is especially important if there are many people who would benefit from your demise.

Please note that we can give just a brief overview of these critical documents in this article, which should only be used in conjunction with sound legal and financial advice.

Estate Taxes, Gift Taxes & Generation Skipping Taxes

Taxes are yet another factor to consider when developing your estate plan. Believe it or not, like it or not, the IRS has its hands in your pocket not only all your life but even after you die. We have a Federal tax system that ties together gift and death (estate) taxes, which is called “The Unified System.”

In brief, gifts made during life are added to the transfers made at death or on the estate tax return. Generally, gifts are valued as of the date they were given; transfers made at death are valued as of the date of death, and any estate tax owed is reduced by any gift tax paid. You should give careful consideration to this area of planning as your gift taxes paid can effectively reduce your estate tax liability.

The exemption amount for 2008 is currently 2 million and will be increased to 3.5 million in 2009. However in 2010, congress will have the chance to repeal it or set it to whatever amount it deems fit. And remember that after this amount has been figured, your estate tax liability could be approximately 50% of what will be left over. To figure your potential estate tax liability, go to our free calculator.

Your estate taxes can also be reduced by the marital deduction, by charitable deductions, and by many of the special purpose trusts we mentioned above. What you may not know is that spouses with unequal estates risk wasting their exemptions. To avoid that scenario, the spouse with the larger taxable estate can (and should) transfer assets to the spouse with the smaller taxable estate. Such a transfer would not be subject to a transfer tax because of the marital deduction.

When the first spouse dies, he or she should leave an amount equal to the estate tax deduction (currently 2 million) to the surviving spouse. This is accomplished by the establishment of a Credit Shelter or By-Pass Trust. And by the time the surviving spouse dies, hopefully enough planning will have taken place so that the potential estate tax liability will be reduced to an absolute minimum. Even if your estate is below the current marital deduction, you still should make arrangements to carefully manage your assets in your twilight years.

Charitable Giving

Many Americans decide to make a difference by donating to local religious, educational, social or cultural organizations. This type of charitable giving can also provide benefits to you as the donor or to your heirs. Planned giving options include simple bequests, outright gifts, charitable trusts, charitable annuities, community and private foundations, and donor advised funds.

There are several interesting options when it comes to charitable giving. The first one is the Charitable Remainder Trust (CRT), an irrevocable trust that will provide income for you and your spouse for life. The benefiting charity will receive your property at your death(s), and you can change the beneficiary at any time. You may also be able to serve as the trustee and control the assets.

Another option is a Charitable Lead Trust (CLT), a related but slightly different option. With a CLT, the charity will receive income during your lifetime, or during the lifetime of you and your spouse, for a term of years. You and your beneficiaries will receive the trust principal when the trust period ends. The value of the transfer is reduced by the value or the income stream that is given to the charity.

The Donor Advised Fund (DAF) is yet another option, and it is somewhat similar to a private foundation, but easier to create and to manage. It also requires less money. A DAF invests donations and makes grants to charities, and you may offer advice, but your advice does not have to be followed. Grants can be made in your name or anonymously, and you will receive an immediate tax deduction.

There are other specific trust available but those are less common. You should, however, be aware that there are indeed additional alternatives that could also be of benefit. They would include a Family Limited Partnership (FLP) or a Private