Estate planning is the preparation of tasks that help to manage an individual’s asset base in the case of their incapacitation or death. Planning involves paying off estate taxes as well as leaving assets to heirs. The majority of estate plans are created with the assistance of an estate law professional. Furthermore, estate planning entails deciding how to preserve, manage, and distribute a person’s assets after death. It also takes into account the management of an individual’s belongings and financial responsibilities in the event that they become incompetent.
Houses, vehicles, stocks, fine art, life insurance, pensions, and debt are examples of assets that could be included in a person’s estate. Estate planning can be done for a number of purposes, including conserving family wealth, supporting a surviving spouse and children, paying for the education of children or grandchildren, or leaving a philanthropic legacy. Making a will is the fundamental estate planning action. The following are some additional significant estate planning tasks:
- lowering estate taxes by establishing beneficiary-named trust funds
- appointing a guardian for dependents who are still alive
- appointing an estate executor to manage the terms of the will
- naming new beneficiaries or changing existing ones for plans including life insurance, IRAs, and 401(k)s
- Organizing funeral services
- establishing yearly gifts to approved charities and nonprofits to lower the taxable estate
- establishing a durable power of attorney (POA) to manage other resources and investments
Estate planning requires creating a will
Having a will clarifies how one’s property and, if applicable, custody of any minor children should be handled after death. The person utilizes the paperwork to specify their preferences and appoints a trustee or executor whom they believe will carry out their stated intentions. The will also specifies how a trust will be established after death. A trust may become effective either during the life of the estate owner (a living trust) or after their passing, depending on their wishes (testamentary trust).
A legal procedure called probate is used to ascertain a will’s veracity. The initial step in managing a decedent’s estate and transferring assets to beneficiaries is called probate. When an individual dies, the custodian of the will must take the will to the probate court or to the executor appointed in the will within 30 days of the death of the testator. The probate process is a legally regulated process where the validity of the will that was left behind is established and acknowledged as the genuine last testament of the deceased. The executor listed in the will is formally appointed by the court, which grants the executor the authority to act on behalf of the decedent.
Choosing the correct executor
Locating and managing all of the decedent’s assets is the duty of the legal personal representative or executor chosen by the court. The executor has to determine the value of the estate by utilizing either the date of death value or the alternative valuation date, as stipulated in the Internal Revenue Code (IRC).
A list of assets that need to be assessed during probate includes retirement funds, bank accounts, stocks and bonds, real estate property, jewelry, and any other items of worth. The probate court in the location where the decedent resided at death has jurisdiction over the majority of assets that must be administered through probate. Real estate is an exception and needs to be probated in the county where it is located.
Any taxes and debts that the decedent owned must also be paid from the estate by the executor. Most of the time, creditors have a finite window of opportunity after receiving notice of the testator’s passing to file claims against the estate for money owed to them. If the executor rejects a claim, it may be appealed to a probate judge, who will make the final determination as to whether the claim is legitimate.
The final personal tax returns for the deceased must be filed by the executor on their behalf. After the inventory of the estate has been taken, the value of assets calculated, and taxes and debt paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries.
Planning for estate taxes
Before assets are dispersed to beneficiaries, federal and state taxes on an estate can significantly lower its worth. Death might result in huge obligations for the family, necessitating generational transfer plans that can decrease, eliminate, or postpone tax payments. There are important steps that single people and married couples can take during the estate planning process to lessen the burden of these taxes.
AB Trusts
For instance, married spouses are able to create an AB trust that splits in half after the passing of the first spouse.
Strategies for funding education
In order to fund their grandchildren’s current or future education, a grandfather may urge his grandkids to enroll in college or pursue advanced degrees by transferring assets to an organization, like a 529 plan. That may be a lot more tax-efficient approach than having those assets transferred after death to support college when the beneficiaries are of college age. The latter might result in a number of tax situations that would substantially cut down on the kids’ financial aid.
Reducing tax effects of charities
Giving to charitable organizations while still alive is another method an estate planner can use to reduce the estate’s tax obligation when the decedent passes away. Due to the gifts’ exclusion from the taxable estate, the amount of the estate is reduced, which lowers the estate tax burden. As a result, the person’s effective cost of giving is lower, which gives them more motivation to make those presents. Of course, one can also choose to donate money to a number of worthwhile causes. Estate planners can collaborate with the donor to optimize the impact of such donations or to develop solutions that minimize taxable income as a result of those contributions.
Property freezing
This is yet another method for reducing death taxes. It entails a person locking in the current worth of their property, and thereby their tax liability, while allocating the value of that capital property’s potential future growth to another person. Any future rise in the value of the assets is transferred to another person’s benefit, such as a spouse, kid, or grandchild. The value of an asset is frozen using this approach at its value on the transfer date. The estate planner may therefore anticipate their possible tax liabilities after death and better plan for the payment of income taxes because the amount of potential capital gain at death is also frozen.
Estate planning and life insurance
Life insurance can be used as a source of funding for retirement plans, business buy-sell agreements, and death taxes and expenses. Any income tax on the deemed disposal of assets upon a person’s death can be paid without selling assets if there are enough insurance proceeds and the policies are set up correctly. After the insured person dies, the beneficiaries of the life insurance policy will often get money tax-free.
Estate planning is an ongoing activity and should be started as soon as an individual has any demonstrable asset basis. The estate planning should change as life goes on and goals change to reflect new ambitions. Even if the taxable estate is not significant, at the absolute least, a will should be created because inadequate estate planning can place an excessive financial burden on loved ones (estate taxes can be as high as 40%).
