Smart401k Blog

Some people may be under the impression that estate plans are only for the Rockefellers of the world, but in reality anyone who has something of value or someone they care about can benefit from having one. Estate planning is the process of planning what happens to your property and potentially your dependants when you pass.  By planning ahead you can rest easy knowing that you have made arrangements for the future of your loved ones, and maybe save them some money on taxes while you’re at it.

The simplest form of estate planning is selecting beneficiaries for your investments and any insurance policies you may own. For more information on what to think about when selecting a beneficiary, I’d suggest reading one of our previous blog entries on beneficiary selection. Selecting a beneficiary is a good first step, but to make sure that your property passes as efficiently as possible, a few additional steps may be in order.

In the following paragraphs, I’ll introduce a few tools that could help you protect your estate. Generally, they are listed from most likely to be used by an individual to least likely.  If you’re a small business owner, I’d make sure to check out the last one.

Will- A will spells out your wishes for things such as who will care for your pet and who will receive your assets. For simple wills, you might consider using either an attorney or an online service such as LegalZoom.com. For complex wills, it would probably be a good idea to employ the expertise of an attorney.  If you die without a will, your state would distribute your estate through the courts according to state law.

Trusts- A trust establishes a separate entity to hold assets to be distributed in a specific way privately by a trustee as opposed to publicly by the courts. Trusts have four basic components: the Trustee, Trust Property, Instructions, and Beneficiaries.  Your estate plan may contain one trust or a combination of trusts. Below are a few common types of trusts and the defining characteristics of each.

Living Revocable Trust- For married couples this trust can be established as a bypass trust that will hold the estate of the first spouse separate from the surviving spouse to make the most of the estate tax deduction. For single people, it can limit conservatorship by giving the trustee the capability to manage your assets should you become incapacitated.

Living Irrevocable Trust- Trust assets are permanently transferred to the trust in order to remove them from the estate. By doing this the future appreciation of the assets will not be effected by estate taxes. The initial transfer will be deducted from your lifetime gift tax exemption and gift taxes may be due on any amount exceeding that exemption. The important thing to remember about this arrangement is that it cannot be undone.

Testamentary Trust- Works as an extension of a will and allows for your assets to be transferred to the trust upon your death. Many people use this arrangement to leave assets to children when they reach a certain stage in life. For example the trust may be written in such a way that the heirs would receive their inheritance at age 25 or when they graduate college as opposed to receiving everything at age 18.

ILIT- Irrevocable Life Insurance Trust. A life insurance policy is held outside of the estate and the grantor gifts the premium payments to the trust. This allows the death benefit to pass to the beneficiaries without incurring income or estate taxes. The proceeds from the life insurance can then be used to pay estate taxes, final expenses, or just provide a larger inheritance to your heirs.

Family Limited Partnership- In its most basic form the parents place a business or some other investment interest into the partnership and name themselves both general and limited partners.  They then gift the limited partnership interests to their heirs. Since the interests represent no real current asset to the heirs they can be gifted at a lesser value than that of the underlying assets. The general partners maintain full control over the assets even though their real ownership may be reduced to as little as 1%. Upon the death of the general partners the limited partners take control.

When is the right time to start thinking about an estate plan?  The time to start is at any point in your life where you have a dependent or measurable amount of assets.

Start off simple – sit down and think about what you would want to happen if you where to die unexpectedly. Begin by naming your beneficiaries and drafting a will. After that, if you find that you require a more complex plan it may be a good idea to consult with an attorney. If you are not familiar with an attorney that specializes in estate planning consider using an online directory like Findlaw.com to search attorneys by expertise in your area. By taking some time now to establish a well thought out estate plan you can pass your legacy smoothly and efficiently.

Have more to add to the discussion?  Add a comment to this post or start a new conversation in our member forum.

Charlie Koch, Investment Advisor

This entry was posted on Wednesday, October 28th, 2009 at 10:20 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.