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Estate planning primer

Management | September 1, 2013 | By:

Planning and solid decision-making will help protect assets for the future.

Everyone can benefit from good estate planning. Single, married, a parent with children, a business owner—the scenarios are as varied as the lives we lead, but the principles are the same. Effective estate planning ensures that you can control and preserve your assets. Without an effective estate plan, up to 50 percent of your estate could be lost to probate costs, federal estate taxes and state inheritance taxes.

Probate and its problems

Probate is the legal process by which a court distributes your assets after your death, according to your will and/or state law. The court first determines the validity of the will and then resolves all claims from creditors and competing claims from heirs. If you have not named an executor to oversee the distribution of your assets, the court will appoint an executor.

There are many reasons to avoid probate, and the devil is in the details. Probate is expensive. Up to 10 percent of your estate can be lost to probate costs alone. Costs may include court fees, legal fees (to the executor of the estate, or to resolve disputes), appraisals and accounting services. Probate can also be a lengthy process. While it is possible for an estate to move through the probate process in six to 12 months, it is also common for the process to take years. Probate can also be an invasion of your privacy: your entire estate will become a matter of public record during the probate process. Anyone can go to the courthouse and learn what assets are in the estate, their value, and to whom the assets are to be distributed. There have been instances of dishonest people searching probate records to find assets they can take.

Pitfalls of joint ownership

You can avoid probate by holding assets in joint ownership, but problems can arise with this approach. One example includes a couple that worked hard to build a farm worth several million dollars. An estate planner advised them to own the farm in joint ownership with their four children to avoid probate. A few years later, the parents and one of the children were killed in a car accident. As a result of joint ownership, the farm avoided probate, with the three surviving children owning the farm as joint owners. However, the spouse and children of the child that died were completely disinherited and received nothing. In addition, the child who outlives the other two children will end up with 100 percent ownership in the farm, and the descendants of the other three children will be excluded from any benefits.

In another example of using joint ownership to avoid probate, a couple, Ed and Mary, had three children when Mary died. Ed remarried and had a fourth child, Tom, with his second wife. Ed’s will specified his desire for the estate to go equally to his four children. However, all of Ed’s assets were owned in joint ownership with his second wife, and upon Ed’s death, she, as the joint owner, became the sole owner of the estate. She instituted a plan to have all the assets go to her only child, Tom, at the time of her death, completely excluding Ed’s other three children. His wish for his assets to go equally to all four of his children went tragically unfulfilled. In almost every instance, property held in joint ownership goes to the surviving joint owner(s), even if there is a will that designates who is to receive that property.

Estate planning 101

There are several ways to arrange the transfer of your assets to your heirs and do so outside of probate. One key document to an effective estate plan is a revocable living trust. Let’s look at the terms and what they mean in this legal entity. It’s “living” because you create it while you’re alive, as opposed to a trust created at your death as part of a will. It’s revocable, meaning you can change or cancel it during your lifetime (as long as you have the mental capabilities to do so).

A revocable living trust enables you to avoid probate, keep your estate private and reduce or eliminate estate taxes. It also ensures that your assets will quickly transfer according to your wishes upon your death. With a revocable living trust, no court action is involved, and property is distributed privately. Other documents frequently used in conjunction with a revocable living trust include a living will, a medical power of attorney, a durable power of attorney, and an irrevocable life insurance trust.

Some attorneys may recommend that their clients create a will without a living trust, which ensures that the estate will go through probate—possibly so they can collect the legal fees associated with probate. In some states, the attorney receives a percentage of all the assets that go through probate. Probate is time-consuming, costly and public, and the attorney may ultimately be the only person who benefits from the process.

Setting up a trust

The process of setting up a trust is fairly simple. First, you name the trust. Typically, it is named after the individual or couple setting it up: The John and Jane Doe Living Trust, for example. Next, you specify where you want your assets to go at the time of death. Once a living trust is signed and notarized, it is a legal and binding document. You are not required to file with the state, you don’t need a tax identification number, and there are no filing fees or tax returns.

Once the trust is notarized, it needs to be funded. Funding the trust is the process of transferring ownership of your assets to the trust. For titled assets (bank accounts, cars, stocks and similar items), you must change the ownership of the asset to the name of the trust. For real estate, new deeds are filed with the county recorder where the property is located. For assets without titles (jewelry, artwork, antiques), you simply list and describe the items on Schedule A of the trust.

You may also fund the trust indirectly by transferring your interest in other entities. For example, if you hold assets in family limited partnerships, or LLCs, the trust can hold your interest in these entities. It’s important to remember that any asset not funded in the trust will pass through probate.

A living trust provides no income tax savings—for income tax purposes, it is as though it does not exist. However, if the size of your estate is above the amount exempted from estate taxes, the trust can be structured to reduce or eliminate estate taxes.

The vast majority of Americans do not have an effective estate plan in place when they die, and by default, they subject their heirs to the frustrations and costs of probate. Setting up a revocable living trust enables you to pass assets to your heirs quickly, safely, efficiently, and is one of the most important things you can do for your family and partners.

Larry Oxenham is a senior advisor for the American Society for Asset Protection. He will present “Advanced Asset Protection, Business Succession and Exit Planning Strategies” on October 24 at IFAI’s Specialty Fabrics Expo in Orlando.

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