The Ultimate Guide to Estate Planning

An estate plan maps out how you want your personal and financial affairs to be handled in case of incapacity or death, and how those strategies will be implemented to fulfill your wishes. There is no “one size fits all” estate plan, which is why it’s wise to thoroughly review your options. This informative guide will help you see why having an estate plan is important and provide you with strategies to protect and manage your assets. Whether you’re nearing retirement or just testing the waters of estate planning, you’ll leave with a better understanding of these arrangements and the documents they include.

1. Who needs an estate plan?

Estate plans aren’t a need exclusive to the wealthy. In fact, an estate plan may actually be more important if you have a smaller estate. Final expenses are covered by your estate, but if there are insufficient funds to cover the total cost, your loved ones will have to cover the remaining amount.

Aside from avoiding a financial burden for your loved one, an estate plan is also important if you relate to any of the following:

• Your spouse isn’t comfortable with financial matters.
• You have young children who would need a guardian.
• Your estate will be impacted by transfer taxes (taxes are covered in more depth in section 5).
• You own property in more than one state.
• You have privacy concerns.
• You have other distinct needs, such as planning for the succession of a business.

2. Why you should plan for incapacity

Sometimes, an estate plan can come in handy while you are still living. The term incapacity means you are unable to make decisions about your well-being or finances because you do not have the full function or ability to do so. An example of this would be if you got into an accident and spent several months in a coma. It’s not a very pleasant thought, but it’s important to understand the legal elements involved with incapacity. During this time, how would a doctor know what medical treatments you either want or don’t want? How would your personal business be transacted if no one is authorized to sign documents for you?

Should you not have a plan in place, someone would have to go to court and get legal permission to make decisions, and they would have to go back each time permission is needed. This causes stress and becomes quite burdensome to the guardian. In addition, this person may make decisions in contrast to wishes they are not aware of.

Health care directives

Health care directives allow you to proactively leave instructions about the medical care you want in the event you’re incapacitated. There are three ways of doing this: a living will, a durable power of attorney for health care (AKA health care proxy), and a Do Not Resuscitate order (DNR).

• Living will: A living will is a document listing the types of medical treatment you would want, or not want, under particular circumstances.
• Durable Power of Attorney: This lets one or more family members, or other trusted individuals (AKA agents), make medical care decisions for you.
• Do Not Resuscitate Order: This is used for a different purpose – say you are in the hospital with a terminal illness, and you don’t want the hospital staff to take life-saving measures if you suddenly go into cardiac or respiratory arrest. Doctors issue a DNA, signed by both you and your doctor, which is posted by your bed to give staff members the permission they need to carry out your wishes.

Property management tools

There are three ways you can plan to have your financial affairs taken care of in the event you become incapacitated. The first is to grant joint ownership of your property to another person. This allows them the same access to the property as you have. If you become incapacitated, your joint owner simply acts instead.

The second option is to appoint a durable power of attorney. A durable power of attorney lets you name family members of other trusted individuals to make financial decisions or transact business on your behalf. And lastly, you can use a living trust. This option is explained in more detail in section 6, but just know it effectively allows someone to step into your shoes to manage a property in the trust if something should happen to you.

3. What happens if you pass away without an estate plan?

Many people carry more than the minimum required amount of auto insurance because they recognize the possibility of financial loss due to an accident. You should have this same proactive mindset for your estate.

If you pass away without an estate plan, any property you own jointly may pass automatically to the joint owner. Funds from an IRA or retirement plan, or your own life insurance, may pass automatically to designated beneficiaries. Similarly, property held in a trust may pass to a designated beneficiary.

In general, each state has their own laws in place to address the distribution of assets when a person passes away without a valid will, or when the will won’t account for a portion of his or her estate.

4. Wills & probate

A will is one of the most vital pieces of anyone’s estate plan. This legal document directs how your property will be dispersed when you pass away. It also allows you to name an executor who’ll carry out your wishes, which are stated in the will. If you have minor children, you can name a guardian for them. In addition, you can also create a trust as part of the will.

To be valid, a will must be in writing and signed by you. Your signature must also be witnessed, although the number of witnesses required varies from state to state. These requirements are important because if you aren’t careful, your will may be invalid. One big consideration people have regarding wills is probate. Wills generally have to go through this process, so it’s important to know what it entails.

The probate process

Generally, the probate process starts by someone filing the will with the probate court – this is usually done by the executor. Then, the file is validated with the court. From there, the executor can go about the business of settling the estate. This may include collecting monies owed to the person who passed away, paying any outstanding bills, filing final tax and estate returns, and distributing the remaining property to the rightful heirs, if necessary.

The process typically takes anywhere from a few months to a year, depending on the size of the estate. In some states, smaller estates are exempt from probate or qualify for an expedited process.

You’ve likely seen a handful of headlines touting ways to avoid probate and assumed the process was something to try and steer clear of. It’s important to note while probate does come with cons, there are also benefits to consider. Probate court can set a hearing for serious questions or disagreements about administration and provide court supervision. This can be invaluable to some families.

On the other hand, probate can be time-consuming for complex estates, may come with fees and title transfer delays, and is public record. The latter may become an issue if you don’t want some family and financial information to be available to the public.

If any of these issues are a concern to you, an estate plan can be designed to limit the assets passing through probate, or to avoid probate altogether. The major ways property is passed outside of probate are by owning property jointly with rights of survivorship; by ensuring beneficiary designation forms are completed for eligible types of assets, such as IRAs, retirement plans, and life insurance; by putting property in a trust; and by making lifetime gifts.

5. Estate taxes

Three types of federal taxes may be imposed when property is transferred from one person to another either during life or at death. Referred to collectively as “transfer taxes,” these taxes include: the federal gift tax, federal estate tax, and federal generation-skipping transfer tax.

Federal gift tax

If you transfer property to another person during your lifetime, the transfer may be subject to a gift tax. Some people may try to avoid estate tax by giving away all their property before they die. The gift tax is meant to address this. Though, the gift tax doesn’t apply to every lifetime gift.

Federal estate tax

When property is transferred at death, it is generally subject to estate tax. This is true whether the property goes through probate or not. For example, even though funds in an IRA pass by virtue of a beneficiary designation, the funds are still potentially subject to estate tax. As with the gift tax, there are exceptions to the estate tax.

Everyone has a lifetime exclusion amount for gifts and estate tax combined. As of 2021, this amount is $11.7 million per individual. The exclusion is portable, meaning any portion of the exclusion not used by a deceased spouse can be transferred to the surviving spouse.

Federal generation-skipping transfer

Prior to 1976, the wealthy could gift money or property to grandchildren without paying federal estate taxes. The generation-skipping transfer tax (GST) addressed this loophole. Now, gifts made during life or in death to individuals at least 37 ½ years younger than the transferor are subject to GST tax.

6. Estate planning strategies

Lifetime gifting

Making gifts during one’s lifetime is a common estate planning strategy. For one thing, when you make lifetime gifts you have the satisfaction of seeing the recipients enjoy them. Many people also use gifting to minimize transfer taxes. One way to do this is by taking advantage of the annual gift tax exclusion, which lets you give up to $15,000 to as many individuals as you want – gift tax-free – in 2021.

There is a tradeoff to lifetime gifting. Generally, if you gift property during your lifetime, your investment in the asset is carried over to the recipient. In other words, the amount used to determine profit or loss upon selling. In contrast, if you leave property to your heirs at death, they get a “stepped-up” (or “stepped-down”) basis in the property which is equal to the fair market value at the time of your death.

Trusts

If you aren’t inclined to make outright gifts, you might consider using a trust. This is a common and versatile estate planning tool sometimes used to plan for incapacity or to avoid probate. In addition, you may want to use a trust as part of an overall strategy to minimize transfer taxes; to have certain property managed by a professional; and to provide for minor children, elderly parents, and other beneficiaries.

Certain trusts can be established to protect your assets from future creditors. Most importantly though, trusts can provide the means to administer property on an ongoing basis according to your wishes.

Life insurance

Life insurance plays a part in most estate plans one way or another. A couple ways life insurance can assist in estate planning include:

• To create an estate if you have a small or modest estate.
• Provide liquidity for your estate.
• Create a bequest to a charity.
• Provide funds for your child’s college education.

Although life insurance proceeds are generally included in your estate for estate tax purposes, an estate plan can be structured to exclude life insurance proceeds.

A common strategy to accomplish this is using a trust to own and hold the life insurance policy. This is known as an irrevocable life insurance trust (ILIT). If the ILIT owns the life insurance policy, the proceeds of the policy will not be included in your estate for estate tax purposes. However, this is only true if the strategy is correctly implemented.

When you pass away, the ILIT receives the proceeds of the life insurance policy. If properly implemented, no estate tax is due on the life insurance proceeds, and the funds are distributed according to the term of the trust. The beneficiaries of the ILIT then receive funds free from estate tax.

As you’ve learned, there are many factors contributing to your estate plan. For a further in-depth analysis from Wood + Lamping, Attorney at Law, Ed Bender, please visit our Credit Union Events page to view our on-demand webinar, Estate Planning: Planning for the Unexpected. 

Ready to begin planning, but not sure where to start? Contact Legal Services, provided by Wood + Lamping, LLP today at 513.243.8300 or 513.243.7887.* You are entitled to an initial consultation with a W+L attorney at no cost.**