What Is Estate Planning?

Estate planning is the preparation of tasks to manage a person's assets in the event of incapacity or demise. Included in the planning are the distribution of assets to heirs and the payment of estate taxes. Most estate plans are drafted with the assistance of an attorney who has much experience in estate law.

• Estate planning is the process of determining how a person's assets will be preserved, managed, and distributed after death or incapacity.

• Planning tasks include drafting a will, establishing trusts and/or making charitable donations to reduce estate taxes, naming an executor and beneficiaries, and arranging for a funeral.

• A will is a legal document that specifies how an individual's property and custody of minor children, if any, should be handled after death.

• Various strategies can be used to limit taxes on an estate, including the creation of trusts and charitable contributions.

Understanding About the Estate Planning

Estate planning is the process of determining how a person's assets will be preserved, administered, and distributed after death. It also includes provisions for the management of a person's assets and financial obligations in the event of incapacity.

Houses, automobiles, stocks, works of art, life insurance, pensions, and debt may be included in an individual's estate. Individuals plan their estates for a variety of reasons, including preserving family wealth, providing for a surviving spouse and children, funding children's or grandchildren's education, and leaving their legacy to a charitable organization.

The most fundamental step in estate planning is the creation of a will. Other significant estate planning tasks include:

•        Limiting estate taxes by establishing beneficiary-named trust accounts

•        Establishing a guardian for the living dependents

•        Naming the executor of the estate to direct the terms of the will

•        Creating or updating the beneficiaries on plans like life insurance, IRAs, and 401(k)s

•        Setting up the funeral arrangements

•        Establishing annual gifting to the  qualified charitable as well as  non-profit organizations to reduce the taxable estate

•        Setting up a proper durable power of attorney (POA) to direct other assets as well as investments

Writing a Will

A will is a legal document that provides instructions for the disposition of an individual's property and, if applicable, custody of minor children after death. The individual expresses their desires in the document and appoints a trustee or executor they trust to carry out their wishes. Additionally, the will specifies whether a trust should be established after death. Depending on the intentions of the estate owner, a trust can take effect during their lifetime (living trust) or after their death (testamentary trust).

The legal procedure known as probate is used to determine the validity of a will. Probate is the initial step in administering a deceased person's estate and distributing the assets to the beneficiaries. Within 30 days of the testator's passing, the custodian of the will must submit the will to the probate court or to the executor named in the will.

The probate process is a court-supervised procedure in which the validity of the deceased's will is established and accepted as the deceased's last testament. The court formally appoints the executor named in the will, thereby granting the executor legal authority to act on behalf of the deceased.

Appointing the Right Executor

The court-approved legal personal representative or executor is responsible for locating and managing all of the deceased's assets. According to the Internal Revenue Code (IRC), the executor who is in charge must estimate the value of the estate with the proper estate valuer using either the date of death value or the alternative valuation date.

Among the assets that must be evaluated during probate are retirement accounts, bank accounts, stocks and bonds, real estate property, jewelry, and any other valuable items. The majority of probate-administrable assets fall under the jurisdiction of the probate court in the decedent's last place of residence.

Real estate is the exception, as it must be probated in the county where it is located.

Additionally, the executor must pay any taxes and debts owed by the deceased from the estate. Creditors typically have a limited amount of time from the date they were notified of the testator's death to submit claims for money owed to them from the estate. Claims that are rejected by the executor may be brought to court, where a probate judge will make the final determination regarding the claim's validity.

Additionally, the executor is responsible for filing the decedent's final personal income tax returns. After taking an inventory of the estate, calculating the value of its assets, and paying all taxes and debts, the executor will request permission from the court to distribute any remaining assets to the beneficiaries.

Any outstanding estate taxes are due within nine months of the decedent's date of death.

Planning for Estate Taxes

Prior to the distribution of an estate's assets to its beneficiaries, federal and state taxes can significantly diminish its value. Death can result in substantial family liabilities, necessitating generational transfer strategies that reduce, eliminate, or defer tax payments.

There are significant steps that individuals and married couples can take during estate planning to reduce the impact of these taxes.

AB Trusts

For instance, married couples can establish an AB trust that splits in two upon the death of the first spouse.

Strategies for Funding Education

A grandfather may encourage his grandchildren to pursue higher education by transferring assets to an entity, such as a 529 plan, for current or future education funding. This may be a significantly more tax-efficient strategy than transferring the assets after death to pay for college when the beneficiaries are of college age. The latter may trigger multiple tax events that severely restrict the available funding for the children.

Reducing the Tax Consequences of Charitable Donations

Donating to charitable organizations during one's lifetime is another strategy estate planners can employ to reduce the estate's tax liability after death. The gifts reduce the estate's value because they are excluded from the taxable estate, thereby reducing the estate tax liability.

As a result, the individual has a lower effective cost of giving, which provides a further incentive to make these donations. Moreover, a person may wish to make charitable contributions to numerous causes. Donors can work with estate planners to reduce their taxable income as a result of their contributions, or estate planners can devise strategies to maximize the impact of these contributions.

Estate Freezing

This is yet another method for minimizing death taxes. It entails an individual locking in the current value and, consequently, the tax liability of their property, while attributing the value of the capital property's future growth to another party. Any future increase in the value of the assets is transferred to another individual, such as a spouse, child, or grandchild.

This method entails freezing the value of an asset at its transfer date value. Consequently, the potential capital gain at death is indeed frozen, allowing the estate planner to estimate there own potential tax liability upon death as well as better plan for the payment of income taxes.

Utilization of Life Insurance for Estate Planning

Life insurance is used to pay for death-related taxes and expenses, buy-sell agreements, and retirement plans. If sufficient insurance proceeds are available as well as the policies are properly structured, any income tax on the presumed dispositions of assets following the death of a person can be paid without selling the assets. The proceeds from life insurance received by beneficiaries upon the insured's demise are generally exempt from federal income tax.

The process of estate planning is ongoing and should begin as soon as a person has a measurable asset base. As life progresses and goals change, the estate plan should evolve accordingly. Inadequate estate planning can place undue financial burdens on loved ones (estate taxes can reach up to 40 percent), so even if the taxable estate is small, a will should be drafted.