The Nature of Estate Planning
I've seen some fairly intelligent people completely fail to understand the value of estate planning, how easy it can be, and what it can accomplish.
To start with, there are some issues that happen when you die. The first is probate. This is a process whereby the state approves the distribution of your assets. Whether the state has any business putting their big nose into the process is not the discussion we're having here. The current fact is that they do, and this doesn't look likely to change. In the case of things like a home, where the family is living in it already, it's usually not too obnoxious as the state will typically allow the family to continue living in it, pending resolution of probate.
But liquid assets - the money you left - are tied up in the probate and cannot be accessed without court approval unless you titled the account correctly. This can be a major issue to a family that's just lost their major breadwinner - or either breadwinner in the case of a two income family. Unless you don't want your family to get it right away, titling accounts jointly in both your name and your spouse's as joint tenants with rights of survivorship is one way to deal with this. In the case of most accounts, there is the TOD, or Transfer on Death option of naming a beneficiary (or beneficiaries) for the account. The money then transfers upon your death to that person outside of probate. Estate and inheritance taxes are still potentially applicable, however.
The minimum charges for probate are about seven percent of the amount of estate under probate. If this includes your house and other major assets, it gets expensive quickly. A surcharge per year the probate is in effect is also usual. Probate sometimes doesn't get settled for several years - and some unusual ones have gone over twenty years, and with increasingly complicated family relationships, increasingly complicated probate becomes more likely. While probate is going on, your heirs will not have access to the money without court approval, and the court's priorities are not likely to be the same as your family's.
The number one tool for effective estate planning is not a will. That's an important component, especially if you have children and need to determine who their guardians will be, but for distribution of your assets, it falls woefully short. Everything disbursed by the will goes through probate, and estate and inheritance taxes as applicable. Wills can be and are challenged successfully every day, and the cost of the fight drains the estate even if the challenge is unsuccessful.
The most important tool for effective estate planning is the trust. There are varying kinds of trusts, so consult an attorney in your area. A trust is not a corporation, but if that helps you in your understanding, use it. A better way to think of it is as a robot that takes control upon your death and acts according to your instructions. When you create (or alter) the trust, you wind the robot, but (if written correctly) it acts like a string marionette during your life. You don't technically "own" the assets you transfer to the trust, the trust does - but you control the trust, and it dances upon your strings. Once the strings are cut by your death or incapacitation, the robot takes over and does what you told it to do in those circumstances. You might have told it to attach itself to someone else's strings, or you might have told it to disassemble itself, or both, as well as many other things. The important thing to remember about trusts is that they do not go through probate and they are (if written correctly) outside of estate tax as well. Remember, the "robot" owns this stuff, and the robot didn't die!. There may be a successful challenge to a trust on record somewhere, but I've never heard of one and (although not a lawyer) I can't see an angle for doing so. I do know of people who wanted to challenge them, and who appeared to have much better claims on the surface than the person who the trust had been instructed to deliver its assets to, who got their legal noses bloodied in a hurry. Ethical lawyers will generally tell potential clients seeking to challenge a trust "I'll look at it if you want, but if it's written correctly there's not a thing I can do except spend your money."
Next, life insurance. There are so many uses for Life Insurance in estate planning that it is hard to conceive of a good plan that doesn't use life insurance, and by that I don't mean term life insurance either, but one of the cash-value variety. Term life gets so expensive after age 60 that 97 percent of it gets cancelled before it pays benefits. For estate planning purposes, life insurance is useless if it doesn't stay in effect the entire rest of your life. Many people will tell you to buy term, but that's a particularly short-sighted, short-term solution that presumes your need for life insurance will vanish as soon as you've got some decent assets or your kids graduate college. Neither is likely to be the case for anybody middle class today.
This is most deeply rooted in straw-man arguments that claim term insurance is better by comparing it to whole life, ignoring the superior cash value life insurance types, and claim to have refuted the value of all cash value life insurance when they have only refuted whole life, and only within the set of parameters they have set. For older people (age seventy and up at time of plan) universal life is likely the way to go, while with younger people (definitely anyone under 50) it is difficult to come up with a scenario where Variable Universal Life does not outperform its term competitor in every way.
It appears that the difficulty of estate tax is likely to come soon, but there are issues. Even if a permanent repeal takes place, there is nothing to say it could not be re-imposed later. Second, it does nothing about state levied estate taxes. Third, some states have started re-exploring inheritance taxes as a consequence, which would be a disaster. Since estate tax is levied strictly on assets you own when you die (albeit with some recapture of stuff up to three years previously), it is avoidable to such an extent as to render it basically a volutarily paid tax on denial. All I can say is that the people paying it must have wanted to pay it, because there are legal ways not to owe the tax and all you have to do is plan ahead.
I want estate tax gone, mind you, but if I have to choose between complete and permanent estate tax repeal, or say, indexing the Alternative Minimum Tax (AMT) to inflation and putting estate tax back to where it was pre-2000, I'll support the latter option unreservedly. So just because the sentiment is there for repeal doesn't mean it'll happen, or that it'll be permanent if it does. So I suggest planning for estate tax as if it's going to effect you, and some of the methods of estate planning can actually increase the size of your gross estate beyond what it would have been without planning.
Will. Trust(s). Life Insurance. A good plan will have all of these, as well as others (Durable Power of Attorney for Health Care, to name one). I'd say Caveat Emptor, except it's more a case of "Be careful what you wish for. You may get it."
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