What is Estate Planning?
Most people know what a will is. It is the document you prepare during your lifetime to tell people what you want done with your assets after you die. And it is a good idea for every adult to have a will so their wishes will be known. However, a will is usually just the beginning of a proper estate plan.
What is an estate?
Well, if you’re lucky it is a huge house with a butler and a swimming pool. But the kind of estate we’re talking about is all the assets and liabilities you have when you die. And an estate plan is what you do to maximize the assets and minimize the liabilities both during your life and after your death.
Estate planning involves consideration of how best to dispose of your property; how to avoid taxes; how to plan for your own incapacity during lifetime; designating guardians for minor children; and strategies for growing your wealth during your lifetime. An attorney is often the best place to start your estate planning process and he or she may involve other professionals for special advice on taxes, insurance or investments.
While it is possible to write your own will, it is highly recommended that you consult with an attorney. An attorney will explain to you the proper way to dispose of your assets, how to divide them among different heirs, and what will happen under various scenarios. A will is also used to designate a guardian for any minor children who may be living after you die, and to designate a personal representative who will oversee the transfer of our estate. A will can be changed or evoked at anytime during your lifetime.
After one has died and left a will, he will must go through a process known as probate. This is simply a court process by which a will is proven to be valid and that arranges for the administration of the estate and the transfer of assets. Some of the benefits of having a will and going through the probate process include the fact that it will be supervised by the courts after you die; there is protection against liability provided to your personal representative; and all interested parties are provided information about the contents of the will. However, probate can be costly and lengthy.
The Living Trust
A living trust is an entity that holds and distributes your assets during your life and upon your death. Once the living trust is created, you transfer your significant assets into the trust and the Trustee holds the assets for you and the other named beneficiaries according to the terms of the Trust. Upon your death the assets are distributed as you have directed in your trust. For example, it is common for people to designate that assets left to their children continue to be held in trust until the children are 25 or 30 years old. Most living trusts can be modified and revoked during the lifetime of the Settlor.
The benefits of a living trust over a will and the probate process include potentially significant tax savings; the fact that the terms of the trust are kept private even after your death; greater control over disposition of your property; less administrative and probate cost; and typically, faster settlement of your estate. The disadvantages are lack of court supervision and administration requirements during your lifetime.
Other Estate Planning Considerations
Finally, two other documents should be in your estate plan. The first is a power of attorney, which authorizes another person to make decisions for you when you are unable. Powers of Attorney can be effective all the time or only if you are incapacitated. They also can give the other person unlimited authority to act on your behalf, or be limited to specific tasks.
The second document is called the health care directive, which consists of two parts: a health care power of attorney that gives another person the power to make health care decisions for you if you cannot; and a second part, a living will, that allows you to state preferences and instructions regarding your health care and treatment which will apply when you are incapacitated.
The biggest step you will take in your estate planning effort is making the first call to an attorney or other professional to get started. While your effort, thought and time will be required to complete your estate plan, it can provide you and your family with tremendous peace of mind.