Most people have heard of "estate planning" and have some general notion that it relates to writing a Will or a Trust. But do you know what is involved and whether or not it might apply to you?
This guide will take you through several steps in a discussion on this subject.
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Estate Planning: Basic Objectives
Did you know that if you don't have a Will, your State has made one for you? It is called the statutory system of intestate distribution, and you may or may not agree with the State's disposition of your property. To make your own decisions regarding your property, you need to consider estate planning.
There are three basic objectives in estate planning: (1) Implementing personal decisions; (2) Ease of administration; and (3) Reduction of Taxes.
Each of these three steps is discussed below.
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Implementing your Personal Decisions
In the personal area, the principal objective is to make sure that property passes at the time of death to the intended person, and in the proper manner. In some cases, if is sufficient to leave assets outright to intended beneficiaries. In other cases, it is desirable to control how the property goes to those persons, through the use of trusts. A trust is simply a device where a trustee will carry out your instructions regarding disposition and administration of gifted property. The trust enables you to control disposition after time of your death.
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Ease of Administration
Ease of administration is accomplished by utilizing title and beneficiary designations so as to simplify the procedure by which property passes to those intended to receive it. To the extent that court proceedings can be avoided, such a a formal probate, administration is greatly simplified and made less expensive.
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Reduction of Taxes
We are concerned with minimizing death taxes that would be imposed at the time of death, and in deferring taxes as well. We are concerned with minimizing income taxes that would have to be borne by the beneficiaries of the decedent's estate. This involves planning to maximize use of estate tax exemptions that are available as well as reducing the size of the taxable estate at time of death. Income tax planning involves planning for maximum basis adjustment for appreciated assets plus the use of income-shifting techniques to reduce the tax rate on income earned. Timing of distributions and comparison of trust and estate rates to individual beneficiaries' rates is part of this.
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Coordination of Titles in the Finished Plan
An essential part of estate planning is funding trusts, to assure the benefits are enabled. You want to coordinate the title and beneficiary designations to assure the complete implementation of the plan. Title to assets must be examined to make sure of consistency and reviewed with the instrument's tax allocation clause in mind; otherwise, your intended heirs may find out they are paying the estate taxes on someone else's gift. Likewise, insurance and retirement plan beneficiary designations must be examined for the same purpose.
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