Estate Planning
Estate planning offers two advantages. First, during your lifetime, estate planning protects your wishes and rights when you are no longer able to make decisions on your own at injury or incapacity. Second, estate planning enables you to control who will receive your assets upon your death.
The difference between no planning, bad planning, and good planning can be immense.
No Planning
If you don’t plan, you burden yourself and likely your children with liabilities. Courts and other third parties will decide for you. You will have no say in the distribution of your assets.
Bad Planning
When Elvis Presley died, his gross estate exceeded $ 10 million. However, more than 50%, $ 5.4 million, went to executor fees and estate taxes. Only $ 900,000 actually went to his heirs. Like Elvis, most people consider a will, gifts, or beneficiary transfers good ways to organize their estate.
This is rarely true. A will is subject to probate. Probate is the legal process through which a court makes sure that, after you die, your will is valid, your debts are paid, and your assets are distributed in accordance with your will. Because probate is the only way to change the title to an asset, probate is a mandatory court proceeding under each will.
But: Probate proceedings have numerous disadvantages. They are expensive. In addition to lawyer fees and court fees, about 5% of your estate’s value per each state in which you own property will go to probate. Probate is also a public process. Any “interested party” can see what you owned, which provides an invitation to disgruntled heirs to contest your will. Finally, wills do not regulate your wishes while incapacitated because wills only go into effect after you die. Not you through your will but a court will control your children’s’ inheritance and their role within the estate until they reach legal age.
Gifts on the other hand are subject to gift taxes and thus instantly and inherently reduce the value of your beneficiaries’ assets. The problem with beneficiary transfers is that quite often the grantor employs unclear language (such as “my estate shall be the beneficiary”), is incapacitated at the time you die, or dies before you (e.g. your spouse). In all of these instances, probate is necessary.
Good Planning
A living trust is like a will, but it avoids probate and all associate costs. A living trust is a written agreement, established during your lifetime, between you (called the grantor or settlor) and a trustee. The grantor will transfer specified assets to the trustee and the trustee will hold these assets for the benefit of named beneficiaries.
The Trust can be revoked and cancelled any time by the grantor. Just like a will, a trust names someone (the trustee) to handle your affairs after you die. Just like a will, a trust names whom you want to receive your assets after you die (beneficiary). But, unlike a will, a trust avoids probate and excludes any court intervention.
People Involved
The grantor (you) creates the trust. The grantor also controls the trust because only you can make changes. The trustee (you) manages the assets by deciding distribution. The beneficiaries will receive your assets after you die. We further recommend naming a successor-trustee. If something happens to the trustee, the handpicked successor-trustee will take care of things.
Procedure
Husband and wife create a revocable trust with husband and wife as initial trustees and as them being the beneficiary. Upon the death of either spouse, the trust becomes irrevocable and the surviving spouse becomes the sole trustee. When the surviving spouse dies, the trust property passes along according to the wishes expressed in the trust document.
Funding & Ownership
Prior to the grantor’s death, you transfer your assets from your name to the name of your trust (e.g. from Dr. John Doe to “Dr. John Doe, trustee of the John Doe Trust”). The trust document, like a will, provides for the disposition of trust assets upon the death of the grantor. For real estate, the charge in title is accomplished by executing and recording a deed to the property. Bank and brokerage accounts are changed by simply changing the account name.After the transfer, you no longer own anything. Nonetheless, because you are the trustee, you still have full control over all assets. As a trustee you can do anything you please with your assets. For example, you can buy and sell your assets; you can even cancel and revoke the trust at any time.
Taxes
Revocable Living Trusts do not provide income tax savings. For tax purposes, trusts are treated as if they don’t exist. For tax purposes, a previous trust is called Grantor Trust.
Healthcare
To complete your estate planning, we recommend setting up what is called an Advance Directive for Healthcare. This order gives legal authority to a person of your choice (spouse, brother, oldest child) in advance to make any health care decision for you. This includes the use of life support. An Advance Directive for Healthcare is legally enforceable.
We hope this initial overview provided you with helpful information. We are looking forward to discussing your questions.