Estate planning is the process of anticipating and arranging for the management & disposal of a person's estate during the person's life in preparation for a person's future incapacity or death. The planning includes the bequest of assets to heirs, loved ones, and/or charity & may include minimizing gift, estate & generation-skipping transfer taxes. Estate planning includes planning for incapacity, reducing or eliminating uncertainties over the administration of a probate & maximizing the value of the estate by reducing taxes & other expenses. The ultimate goal of estate planning can only be determined by the specific goals of the estate owner & may be as simple or complex as the owner's wishes and needs directs. Guardians are often designated for minor children & beneficiaries with incapacity.
Estate planning may involve a will, trusts, beneficiary designations, powers of appointment, property ownership (for example, joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gifts & powers of attorney (specifically a durable financial power of attorney and a durable medical power of attorney). More sophisticated estate plans may cover deferring or decreasing estate taxes or business succession.
An attorney meets with client for estate planning. Wills are a common estate planning tool & are usually the simplest device for planning the distribution of an estate. It is important that a will be created & executed in compliance with the laws of the jurisdiction where it is created. If it is possible that probate proceedings will occur in a different jurisdiction, it is important also to ensure that the will complies with the laws of that jurisdiction or that the jurisdiction will follow the provisions of a valid out-of-state will even if those provisions might be invalid for a will executed in that jurisdiction.
A trust may be used as an estate planning tool to direct the distribution of assets after the person who creates the trust passes away or becomes incapacitated. Trusts may be used to provide for the distribution of funds for the benefit of minor children or developmentally disabled children. For example, a spendthrift trust may be used to prevent wasteful spending by a spendthrift child, or a special needs trust may be used for developmentally disabled children or adults. Trusts offer a high degree of control over management & disposition of assets. Furthermore, certain types of trust provisions can provide for the management of wealth for several generations past the settlor. Typically referred to as dynasty planning, these types of trust provisions allow for the protection of wealth for several generations after a person's death.
An estate plan may include the creation of advance directives, which are documents that direct what will happen to a person's personal care if the person becomes legally incapacitated. For example, an estate plan may include a healthcare proxy, durable power of attorney, and living will. After widespread litigation and media coverage surrounding the Terri Schiavo case, estate planning attorneys often advise clients to also create a living will, which is a form of an advance directive. Specific final arrangements, such as whether to be buried or cremated, are also often part of estate plan documents.
Income, gift, estate & generation-skipping transfer tax planning plays a significant role in choosing the structure and vehicles used to create an estate plan. In the United States, assets left to a spouse who is a U.S. citizen, or any qualified charity are not subject to U.S. Federal estate tax. Assets left to any other heir, including the decedent's children, may be taxed if that portion of the estate has a value in excess of the lifetime gift, estate & generation-skipping transfer tax exemption amount. As of 2023, the federal exemption amount was $12,920,000. For a married couple, the combined exemption is $25,840,000.
One way to minimize or avoid U.S. Federal gift, estate & generation-skipping transfer taxes is to distribute the property in incremental gifts during the person's lifetime. Individuals may give away as much as $17,000 per year (in 2023) to another person without incurring gift tax or using up any of their lifetime exemption amount. Other tax-free alternatives include paying tuition expenses or medical expenses free of gift tax, but only if the payments are made directly to the educational institution or medical provider. Other tax-advantaged alternatives to leaving property, outside of a will, include qualified or non-qualified retirement plans (e.g. 401(k) plans and IRAs) certain “trustee” bank accounts, transfer on death (or TOD) financial accounts & life insurance proceeds.
Because life insurance proceeds generally are not taxed for U.S. Federal income tax purposes, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change a beneficiary, the proceeds will be treated as part of decedent's estate and generally will be subject to the U.S. Federal estate tax. For this reason, a trust vehicle often is used to own the life insurance policy. The trust must be irrevocable to avoid taxation of the life insurance proceeds, and it typically called an irrevocable life insurance trust (or ILIT).
Probate Countries whose legal systems evolved from the British common law system, like the United States, typically use the probate system for distributing property at death. Probate is a process where:
Due to the time and expenses associated with the traditional probate process, modern estate planners frequently counsel clients to enact probate avoidance strategies. Some common probate-avoidance strategies include:
In the United States, without a beneficiary statement, the default provision in the contract or custodian-agreement (for an IRA) will apply, which may be the estate of the owner resulting in higher taxes and extra fees. Generally, beneficiary designations are made for life insurance policies, employee benefits, (including retirement plans and group life insurance) and Individual Retirement Accounts.
Estate planning may involve a will, trusts, beneficiary designations, powers of appointment, property ownership (for example, joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gifts & powers of attorney (specifically a durable financial power of attorney and a durable medical power of attorney). More sophisticated estate plans may cover deferring or decreasing estate taxes or business succession.
An attorney meets with client for estate planning. Wills are a common estate planning tool & are usually the simplest device for planning the distribution of an estate. It is important that a will be created & executed in compliance with the laws of the jurisdiction where it is created. If it is possible that probate proceedings will occur in a different jurisdiction, it is important also to ensure that the will complies with the laws of that jurisdiction or that the jurisdiction will follow the provisions of a valid out-of-state will even if those provisions might be invalid for a will executed in that jurisdiction.
A trust may be used as an estate planning tool to direct the distribution of assets after the person who creates the trust passes away or becomes incapacitated. Trusts may be used to provide for the distribution of funds for the benefit of minor children or developmentally disabled children. For example, a spendthrift trust may be used to prevent wasteful spending by a spendthrift child, or a special needs trust may be used for developmentally disabled children or adults. Trusts offer a high degree of control over management & disposition of assets. Furthermore, certain types of trust provisions can provide for the management of wealth for several generations past the settlor. Typically referred to as dynasty planning, these types of trust provisions allow for the protection of wealth for several generations after a person's death.
An estate plan may include the creation of advance directives, which are documents that direct what will happen to a person's personal care if the person becomes legally incapacitated. For example, an estate plan may include a healthcare proxy, durable power of attorney, and living will. After widespread litigation and media coverage surrounding the Terri Schiavo case, estate planning attorneys often advise clients to also create a living will, which is a form of an advance directive. Specific final arrangements, such as whether to be buried or cremated, are also often part of estate plan documents.
Income, gift, estate & generation-skipping transfer tax planning plays a significant role in choosing the structure and vehicles used to create an estate plan. In the United States, assets left to a spouse who is a U.S. citizen, or any qualified charity are not subject to U.S. Federal estate tax. Assets left to any other heir, including the decedent's children, may be taxed if that portion of the estate has a value in excess of the lifetime gift, estate & generation-skipping transfer tax exemption amount. As of 2023, the federal exemption amount was $12,920,000. For a married couple, the combined exemption is $25,840,000.
One way to minimize or avoid U.S. Federal gift, estate & generation-skipping transfer taxes is to distribute the property in incremental gifts during the person's lifetime. Individuals may give away as much as $17,000 per year (in 2023) to another person without incurring gift tax or using up any of their lifetime exemption amount. Other tax-free alternatives include paying tuition expenses or medical expenses free of gift tax, but only if the payments are made directly to the educational institution or medical provider. Other tax-advantaged alternatives to leaving property, outside of a will, include qualified or non-qualified retirement plans (e.g. 401(k) plans and IRAs) certain “trustee” bank accounts, transfer on death (or TOD) financial accounts & life insurance proceeds.
Because life insurance proceeds generally are not taxed for U.S. Federal income tax purposes, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change a beneficiary, the proceeds will be treated as part of decedent's estate and generally will be subject to the U.S. Federal estate tax. For this reason, a trust vehicle often is used to own the life insurance policy. The trust must be irrevocable to avoid taxation of the life insurance proceeds, and it typically called an irrevocable life insurance trust (or ILIT).
Probate Countries whose legal systems evolved from the British common law system, like the United States, typically use the probate system for distributing property at death. Probate is a process where:
- the decedent's purported will, if any, is entered in court,
- after hearing evidence from the representative of the estate, the court decides if the will is valid,
- a personal representative is appointed by the court as a fiduciary to gather and take control of the estate's assets,
- known and unknown creditors are notified (through direct notice or publication in the media) to file any claims against the estate,
- claims are paid out (if funds remain) in the order or priority governed by state statute,
- remaining funds are distributed to beneficiaries named in the will, or heirs (next-of-kin) if there is no will, and
- the probate judge closes out the estate.
Due to the time and expenses associated with the traditional probate process, modern estate planners frequently counsel clients to enact probate avoidance strategies. Some common probate-avoidance strategies include:
- revocable living trusts
- joint ownership of assets & naming death beneficiaries,
- making lifetime gifts, and
- purchasing life insurance.
In the United States, without a beneficiary statement, the default provision in the contract or custodian-agreement (for an IRA) will apply, which may be the estate of the owner resulting in higher taxes and extra fees. Generally, beneficiary designations are made for life insurance policies, employee benefits, (including retirement plans and group life insurance) and Individual Retirement Accounts.
- Identity: A specific, identifiable individual or business must be designated as beneficiary for life insurance policies. Businesses may not be the beneficiary of a group life insurance policy or a retirement plan.
- Contingent beneficiary: If the primary beneficiary predeceases the contract owner, the contingent beneficiary becomes the designated beneficiary. If a contingent beneficiary is not named, the default provision in the contract or custodian-agreement applies.
- Death: For retirement plan assets, at the account owner's death, the primary beneficiary may select his or her own beneficiaries if the remaining balance will be paid out over time. There is no obligation to retain the contingent beneficiary designated by the IRA owner.
- Multiple accounts: A policy owner or retirement account owner can designate multiple beneficiaries. However, retirement plans governed by ERISA provide protections for spouses of account holders that prevent the disinheritance of a living spouse.
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