Estate Planning is the transfer of property, either during life or at death, the ways to affect those transfers, and the risks associated with those transfers.
Everyone who owns anything has an estate. This includes a home, cars, bank accounts, stocks, bonds, mutual funds, life insurance policies, retirement plans, business interests, furniture, and collections. A will and other estate plans can include provisions to minimize the expenses of settling an estate and perhaps save on taxes. As a result, more property goes to those who the owner wishes to receive it. For example, unless stated in a will or other legal document, a person would be unable to leave a gift to a charitable organization because state laws only distribute estates to next of kin.
Legal experts advise reviewing, when changes in relationships or economic circumstances occur, estate planning documents regularly. They may need to be changed when tax laws change. Beneficiary designations on retirement savings plans and life insurance policies also need to be reviewed periodically to make sure they are current and not in conflict with provisions in a will or other legal document. Errors in beneficiary designations can lead to the disinheritance of heirs, delays in providing for the financial needs of loved ones, and unnecessary expenses and tax payments.
Trust planning is becoming more and more popular in the U.S., mainly because it is a creative way to meaningfully pass along large assets to your descendants while hopefully avoiding a probate proceeding. Without getting into too detailed a discussion about the different kinds of trusts available (they vary by state) it's important to note that having trust will not automatically avoid a probate proceeding when you pass. The first step after you execute your trust is to re-title your assets that you wish the trust, vis-à-vis the trustee to manage. If you pass away without re-titling all of your trust assets, then those assets which remain outside the trust will be subject to disposition according to your Will, and a probate proceeding will be likely.
This is nothing more than a ploy for business. Playing on the example from Myth #1, Robert Jones does not need trust-planning at all. While it is true Robert could have some type of trust to ensure the proceeds from his IRA account are managed/distributed according to his wishes, the truth is most of Robert's assets will pass to his descendants by operation of his beneficiary designations. Trust planning is advantageous in several situations, including second marriages, families who wish to provide for adult/minor children, including a child with a disability, high net worth individuals and those who hold certain types of assets, i.e. large investment funds, several pieces of real estate, etc. However, for most Americans trust planning will do little beyond cost you a chunk of money annually (trustees are entitled to annual commissions for managing your property in most states) and create more of a paperwork shuffle in managing and distributing your assets.
Many online sites and attorneys advise elderly clients to actively give away their money in order to lower the available resources and qualify for Medicaid (to defer the cost of nursing care or placement in an assisted-living facility). The truth is, most baby-boomers are very independent when it comes to managing their finances, so while this type of strategy may have worked in the 1980s and 90s with the Depression-era babies, it will serve little utility as the baby boomers reach retirement age. There are several different ways to qualify for Medicaid without giving up total control to your money, and if anyone tells you otherwise they are flat-out lying. However, based on new federal regulations placed into effect almost two years ago, Medicaid will now require you to provide financial history account statements for five years prior to your Medicaid application. The lesson for those who feel they may need nursing-care and placement within the next decade, purchase long-term care insurance, and start keeping accurate details and records of your finances.
Don't do this. I cannot think of any benefit here, especially because estates generally pay higher taxes than individuals, this type of planning will have serious tax consequences for your estate. The reality is a lot of people name their estate (i.e. Estate of Robert Jones) as the primary beneficiary of their IRA/life insurance/annuities, etc. This is bad for tax-planning purposes, and also because now those assets are forced to pass through your estate (rather then directly to your intended beneficiaries) and will be subject to probate. This is a bad idea all around.
I hope you enjoyed my first post, and will look forward to many more posts which intersect the areas of personal finance, taxes and estate planning.
