Estate Planning
Basic
Basic estate planning is a process by which a person plans for events that are part of living. These events include birth, education, marriage, child rearing, employment, business development, investing, retirement, wealth management, and wealth distribution. There is no one process by which a person and his or her family makes decision on the planning required for the family. Every person has a different family, different dynamics, and different goals.The purpose of basic estate planning is to:
- upon your death, establish a process for the administration of your assets and liabilities, appoint the persons to perform the administration, and if you have minor children and you and your spouse meet your demise, appoint guardians for your minor children, establish trusts for your minor children, and appoint trustees of those trusts and
- during your lifetime, appoint agents to handle your financial and medical affairs, and if a court appointed guardian is required, to select a guardian for you, and finally, to let others know your desires if you face a terminal illness or irreversible illness.
- The Will, which becomes effective upon death.
- The Financial Power of Attorney, which becomes effective either immediately or upon disability.
- The Healthcare Power of Attorney, which becomes effective upon disability.
- The Guardian Directive, which becomes effective upon disability.
- The Physician's Directive or Living Will, which becomes effective upon disability.
The Simple Will
The simple will can either be executed before witnesses with the formalities required by law or written, signed, and dated wholly in the handwriting of the testator. The purpose of the will is to identify a person, the executor or executrix, to administer the estate upon death, to distribute the decedent's assets according to the decedent's wishes, and to establish any trusts for any incapacitated beneficiaries under the Will.The Financial Power of Attorney
The Financial Power of Attorney grants a person the power to manage your financial affairs. Your spouse, if you are married, is typically appointed as your first agent with a first and second alternate person designated as agent.The Healthcare Power of Attorney
The Healthcare Power of Attorney grants a person the power to manage your healthcare decisions. Your spouse, if you are married, is typically appointed as your first agent with a first and second alternate person designated as agent.The Guardian Directive
The Guardian Directive identifies the person who you want as a court-appointed guardian if one becomes required. Your spouse, if you are married, is typically appointed as your first guardian with a first and second alternate person designated as guardian.The Physician's Directive
The Physician's Directive is a statement as to the amount of care you desire if you are unable to give such directions. Such care can include the desire for resuscitation and the use of feeding tubes.Complex
Complex estate planning is required for those individuals that have additional concerns about family needs or family wealth and taxation. It can address those whose concerns are:- Taxable estates;
- Children who are disabled;
- Children who are unable to manage their personal affairs; and
- Other concerns unique to the family.
Taxable Estates
The most significant reason for complex estate planning is tax savings. The tax is imposed on your right to transfer your property to your beneficiaries. In 2007, the Internal Revenue Service reported that the estate tax affected only the wealthiest two (2%) percent of Americans. The effective estate tax rate for 2007, 2008, and 2009 is forty-five (45%) percent of the taxable estate. Each person is entitled to an exclusion of taxation from his or her estate upon death. The exclusion is as follows:| Tax Year(s) | Estate Exclusion |
| 2007 and 2008 | $2,000,000.00 |
| 2009 | $3,500,000.00 |
| 2010 | Unlimited |
| 2011 | $1,000,000.00 |
This means that complex tax planning is not generally required if your estate is less than $2,000,000.00 in 2007 and 2008, $3,500,000.00 in 2009, and so forth. Congress will address future exclusions in the near future.
Tax savings is most commonly accomplished by setting up two separate trusts for the surviving spouse known as a Bypass Trust and a Marital (QTIP) Trust. The first exclusion amount (or $2,000,000.00) Bypass Trust is established with an amount up to the surviving spouse's estate exclusion amount (e.g., up to $2,000,000.00 in 2007 and 2008) and the QTIP is established for any amounts in excess of the decedent's estate exclusion.
Under the Bypass Trust, the surviving spouse can be the trustee and the surviving spouse may use the principal and income of the trust for health, education, maintenance, and support. Under the Marital (QTIP) Trust, the surviving spouse can be the trustee and the trustee must distribute all income annually to the surviving spouse and may use the principal of the trust for the surviving spouse's health, education, maintenance, and support.
The Bypass Trust terminates at the surviving spouse's death or when children reach a certain age. The QTIP terminates at the time of the surviving spouse's death. The children receive the assets of the trusts after payment of federal estate taxes.
Additional Planning and Concerns
Additional tax planning can include the use of family limited partnerships, which have the advantage of lawfully avoiding estate taxes and protecting a person's assets. Advantages of the family limited partnership include, among other things, maintaining structure, cooperation, and peace within the family, protecting assets from creditors, maintaining some control of the assets of the partnership during your lifetime, providing gifts to children of the family, increasing the effective amount of wealth transfer (through discounts) prior to death, and reducing the assets required to be administered at the time of death.A financial planner should be used to manage a person's wealth to ensure that the overall plan is being met. The financial planner can assist in determining the asset allocation based upon the investor's risk tolerance, income needs, insurance needs, and cash needs. These factors are Using more than one financial planner has its benefits and risks. Benefits include diversification of assets and additional thoughts on the markets. The most substantial risk is that an overall and cohesive plan does not exist with more than one person involved.