Estate Planning Fundamentals


The purpose of estate planning is to transfer assets to beneficiaries and heirs in a timely, orderly, and tax-efficient manner based on the specific wishes of the individual or family. Estate planning is not limited to the wealthy nor is it limited to the final disposition of assets at death. The following are come points to consider when reviewing your estate plan.

Transfers During Your Lifetime: The annual gift tax exclusion allows you to gift up to $11,000 per year an unlimited number of beneficiaries without any filing requirements or gift taxes. You are also allowed to make taxable gifts of up to $1,000,000 during your lifetime without payment of any gift taxes, although these gifts reduce the amount excluded from estate taxes at your death. You may use other gifting strategies to significantly reduce the size of your taxable estate without triggering gift taxes during your lifetime. These strategies may include the use of charitable trusts, irrevocable trusts, family limited partnerships, and limited liability companies.

Transfers at Death: How you have your assets titled plays a major role in the final distribution of your assets.

The assets your own in your own name as the sole owner will fall under the terms of your will. If you don’t have a will, state law provides for the disposition of these assets. These assets will be required to go through probate. State laws provide for simpler probate procedures for small estates, usually those of less than $15,000.

You may simplify or avoid probate in a number of ways. The first is by holding title to your assets in joint ownership with right of survivorship; using transfer of death designations; or using payable on death designations. Another way is with a revocable living trust. This is an agreement that allows you to transfer assets into the trust during your lifetime, provides for asset management should you become physically or mentally incapacitated, and provides for the distribution of assets by your trustee after your death. The revocable living trust has no impact on your income taxes during your lifetime, and does not reduce your taxable estate at your death. Only those assets actually titled in the name of the trust will avoid probate.

Retirement accounts, such as IRAs and employer-sponsored retirement plans, and life insurance policies pass according to your beneficiary designations and cannot be over-ridden by your will or revocable trust. Care should be taken in selecting the primary and secondary beneficiaries. The use of disclaimers by the beneficiary should be considered in making your designations. These designations should be reviewed periodically, especially when there are any changes in your family situation.

Jointly owned assets; accounts designated payable of death or transfer on death; or assets with a designated beneficiary will pass to the co-owner or beneficiary regardless of the terms of your will or revocable living trust.

If estate taxes are a concern, you may want to consider having your relatives own the life insurance policies on your life or transfer existing or new life insurance policies into an irrevocable life insurance trust in order to preserve the entire death benefit for your family.

If you are a business owner, a business succession plan can help ensure the orderly transition of your business interests to family members or business partners. Documents such as a shareholder agreements or buy/sell agreements may provide a framework for the purchase of your business upon your death or disability.

If you have a revocable living trust created before 2001, and some that were created after that date, your trust may call for the creation of sub-trusts based on the lower estate tax exemption of $675,000. Under the current law, these trust provisions may no longer be necessary and may create unanticipated problems. You should have your will and trust documents reviewed by your estate attorney.

Also see “Don't Flunk Estate Planning 101