Estate planning is the process of preparing for the transfer of a person's wealth and assets after his or her death. Estate planning includes:
- The will
- Beneficiary designations
- Powers of appointment
- Property ownership considerations (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety)
- Lifetime exemptions and gifting considerations
- Powers of attorney
More sophisticated estate plans may include strategies and provisions for deferring or decreasing estate taxes or winding down a business.
Estate planning can be used to eliminate uncertainties over the administration of a probate and to maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for beneficiaries who are minor children and those who may be incapacitated. The ultimate goal of estate planning is determined by the specific goals and needs of the client, and may be simple or complex depending on these requirements.
Probate is a process typically used for distributing property at death in the United States:
- The decedent’s purported will is entered in court
- After hearing evidence from s representative of the estate, the court decides if the will is valid
- A personal representative is appointed by the court as a fiduciary to close out the estate.
- 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; if there is no will, the probate judge closes out the estate
Probate-Avoidance Strategies are frequently used to avoid the time and expenses associated with the traditional probate process. Some common probate-avoidance strategies include:
- Revocable living trusts
- Joint ownership of assets and the naming of death beneficiaries
- Making lifetime gifts
- Purchasing life insurance
Income, gift, and estate 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 or any qualified charity are not subject to U.S. Federal estate tax.
Assets left to others, including the decedent's children, are taxed if that part of the estate has a value of more than $5,450,000 (for a person passing in 2016).
One means to avoid U.S. Federal estate and gift taxes is to distribute the property in incremental gifts during a person's lifetime.
- Individuals may give away as much as $14,000 per year (as of 2016) without incurring gift taxes
- Payments of college tuition or medical insurance premiums for grandchildren are free of gift taxation, 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 (TOD) financial accounts
- Life insurance proceeds
Trust Provisions for Beneficiaries
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 and disposition of assets.