Estate Planning Basics #
What is Estate Planning? #
Estate Planning the process of deciding who will receive your assets and manage your estate when you die. There are many important legal documents you should consider having as part of your estate plan. We’ll go over each one, why it’s important, and how to get it.
Estate Planning is one of the big components of Financial Planning
Purpose of Estate Planning #
If you want loved ones to remember you fondly, tackle your estate planning tasks. Your heirs will thank you for not leaving a legal mess to sort out. Many of us want to get going on this planning but don’t know where to start. We provide a guide for you to start.
Important Concepts to Understand #
Probate
- Probate refers to the process of reviewing the assets of a deceased person and determining who should inherit them. Typically, probate proceedings focus on the validity, authenticity, and existence of a will. It is possible to initiate probate with or without a will.
- Regardless of whether there is a will, a proceeding is usually required if a deceased person’s estate is of high value. With an easily authenticated will or by using investment vehicles that do not require probate, individuals can avoid exorbitant costs and complications associated with probate.
- Generally, any asset that is owned solely by the deceased and has not been assigned a beneficiary designation is considered a probate asset.
Grantor
In Estate Planning, the legal term Grantor is used to identify the creator of a Trust. As the name suggests, a Grantor “grants” assets or property to a Grantee (beneficiary – the person or entity receiving the assets).
The name “Grantor” can be used interchangeably with other terms such as a Settlor, Trustor, Trust Creator or simply, Creator.
Beneficiary
A beneficiary is anyone you name in your Estate Plan who will ultimately benefit from your estate.
- Primary Beneficiary: A primary beneficiary is the person or organization named as the first one to receive the death benefits from an asset.
- Contingent Beneficiary: A contingent beneficiary is named as the “second in line” to receive benefits. If the primary beneficiary should predecease the owner, all proceeds would automatically go to any named contingent beneficiary.
Executor
- The court typically appoints a legal representative or executor in a will.
- The executor is responsible for locating and overseeing all assets of the deceased.
- The executor is responsible for paying off any taxes and debts owed by the deceased’s estate.
Trustee
- A Trustee is a person who acts as a custodian for the assets held within a Trust. A trustee’s responsibilities may include recording expenses and income, distributing funds to beneficiaries, filing taxes on its income, and keeping records of other transactions.
- A trustee has a fiduciary duty to manage trust assets in the beneficiary’s best interest and must follow the instructions provided in the trust.
- In many cases, the person who creates the Trust will serve as Trustee until they become incapacitated or die. When that happens, a Successor Trustee takes over.
Last Will & Testament #
Your will specifies who will inherit certain assets and property when you die. It includes both intangible and tangible assets. You can choose family members, friends, or nonprofits that are meaningful to you.
As part of your will, you can also select guardians for minor children and pets, as well as executors to carry out your wishes. Making a will ensures that your loved ones and causes are cared for after your passing.
Revocable Living Trusts #
Revocable living trusts are legal instruments that allow you to distribute your assets after you die. During your lifetime, a revocable living trust holds onto your property while still allowing you to control and use it.
A revocable living trust requires more maintenance than a will, but it avoids the time and expense of probate. Assets in a revocable living trust can be distributed quickly and privately to your heirs after your death.
In order to implement a revocable living trust, you must first create, sign, and notarize your trust document. In it, you’ll name a successor trustee, who’s the person responsible for managing the trust after you pass away. Once you sign the document, you should transfer your property to your trust.
Advanced Healthcare Directive #
An advance healthcare directive (AHCD) lets you outline how decisions should be made about your medical care if you’re ever unable to make those decisions yourself. In general, an AHCD consists of a living will and a medical power of attorney.
Living Will
In case of incapacity, a living will outlines your preferences for medical care. The preferences may involve medication, treatment options, surgical procedures, end-of-life care, and more.
Medical Power of Attorney
A medical power of attorney allows you to name a trusted individual to make medical decisions on your behalf when you are unable to do so.
Irrevocable Life Insurance Trust (ILIT) #
- An irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive.
- ILITs are also used to manage and distribute the proceeds that are paid out upon the insured’s death.
- The parties in an ILIT are the grantor, trustees, and beneficiaries.
Benefits of an ILIT
- Asset protection
- Reduce taxable estate
- Avoid gift tax consequences
- Greater control through distribution of assets
- Protect government benefits
Power of Attorney (POA) #
With a power of attorney, you can give someone the legal authority to manage your finances and property for you. These tasks could include paying bills, making bank deposits, and managing your real estate property.
If you were to need medical assistance, your financial agent can also use your assets to pay your medical bills and support your family while you’re incapacitated. Your healthcare agent and financial agent can work together to make sure you can afford the medical care chosen for you.
Types of Power of Attorney
- General Power of Attorney is a broad way to give an agent very general powers to act on your behalf. General POAs typically can do the following
- Financial Power of Attorney designates an agent the authority to make financial decisions and act on your behalf should you not be able to.
- Special Power of Attorney allows you to specify what powers you’re authorizing an agent to exercise. For example, Special Power of Attorneys might be asked to handle debt collection, handle business transactions, manage real estate and real property, etc.
- Healthcare Power of Attorney allows you to appoint an agent to make medical or other health-related decisions for you if you’re unable to do so for yourself.
- Durable Power of Attorney simply means that it becomes effective immediately upon you creating the document and survives and stays effective even if you were to become incapacitated
- Springing Power of Attorney works similarly to a Durable Power of Attorney, except that it takes effect upon becoming incapacitated.
