Estate Planning Basics

While most people know they should consider estate planning, it’s a topic that often finds itself on the backburner. It is always a great time to start thinking about the future of your assets. To get you started, here is an overview of what an estate and trust plan can do for you.

Generally, an estate includes all the property owned by a deceased person (the “decedent”). This includes assets and any outstanding liabilities (mortgages, loans, etc.) the decedent may have. The net assets (what’s left after fulfilling liabilities) will be distributed from the estate to your beneficiary(ies).

Estate planning is the process of determining how your estate will be handled upon death. This might include setting up trusts, determining power of attorney, designating beneficiaries, assigning guardianship, and more. For our purposes, estate planning largely concerns any assets and outstanding liabilities. At Sensiba, our priority is to ensure that your goals and wishes are fully reflected and achieved in your estate plan with as little stress on you as possible.

Unless other methods are in place, upon death, the decedent’s estate goes into probate — the legal process that transfers the legal title of property from the decedent’s estate to the beneficiaries.

Probate can be expensive and time-consuming. Therefore, avoiding the probate process can be an important component in achieving your estate goals, and various estate planning devices are available to assist in achieving this effort.

Typically, joint tenancy with rights of survivorship or, in California and certain other community property states, community property with rights of survivorship.

This device is commonly available on retirement accounts such as a pension, profit-sharing, 401(k) or IRA accounts, life insurance policies, bank accounts, securities (stock brokerage) accounts, and vehicle registrations. Beneficiaries for these accounts are typically determined upon set-up but can be changed as needed.

Gifting property and assets out of the estate before death removes the property from the assets potentially going through probate. If gifts are numerous or large, the donor may need to complete a federal gift tax return in the year of the gift.

Of these commonly used vehicles, trusts are perhaps the most talked about, as they represent the core of most individuals’ estate plans. The revocable living trust is arguably the most widely-used.

A revocable living trust is a non-taxpaying legal entity that can hold title to property and assets during an individual’s lifetime. A trustee manages the trust assets according to the trust’s terms. During the grantor’s lifetime, the grantor can serve as trustee, even though the assets belong to the trust.

Upon the grantor’s death, a named trustee can quickly settle any trust liabilities and transfer the remaining trust property to the named beneficiaries without going through probate. In effect, the trust functions much like a will but avoids the time-consuming and potentially costly probate process.

Unlike revocable living trusts, irrevocable living trusts may not be altered or terminated by the grantor once the trust agreement has been signed. Additionally, the grantor must typically forego ownership and control of the trust assets and income in favor of the trust.

The benefit of this arrangement is that the assets in these trusts are outside the grantor’s estate. These trusts are often used in reducing the size of a taxable estate. Trusts can be set up where the income and the tax thereon are transferred to the trust or set up as an intentionally defective grantor trust where the income tax burden remains with the grantor, thereby achieving further reduction of the estate.

The irrevocable living trust is often used to set aside funds for minor children, life insurance policies, and the like, when trust assets are not currently needed by the grantor and can be set aside permanently. Tax results can be mixed, so check with a qualified tax planning professional to determine appropriateness and impact.

Charitable trusts are used to set aside assets that will ultimately benefit charity. Some types of charitable trusts distribute trust assets during the grantor’s lifetime. Others are set up to provide the grantor or the grantor’s beneficiary(ies) with the income stream from trust assets, with the trust asset then reverting to the charity upon the death of the grantor or beneficiary(ies). Significant tax advantages can be attained if the trusts are properly structured. Again, consulting with a qualified tax planning professional is advised.

You may have created estate planning documents a while ago, including your will, power of attorney, living will, and living trust. Estate tax rules have changed significantly over the last ten years. Suppose you have not visited your documents since you set them up more than ten years ago.

In that case, it may be not only beneficial but necessary to review the documents and possibly make changes to take advantage of the new rules. It would also be important to review life insurance policies designated beneficiaries on the retirement accounts to ensure they are set up to go to the desired parties.

Estate planning can be a sensitive and daunting process, but the importance of having a plan is too great to ignore. If you’re not sure where to start or would like guidance on getting a plan that is in line with your goals and wishes, our estate and trust experts are here to help. Contact us today to start your estate planning process.