Estate Planning is not Only for the Heirs

Estate Planning is not Only for the Heirs

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Estate planning is a crucial part of every person’s life. However, many people are under the impression that such planning is essential only if they own some property.

In general, there is a misconception about the word “property” as well. This word conjures up images of a mansion or expensive jewelry pieces.

In truth, anything that can be sold to fetch some monies, and anything that can be used to generate regular revenues for short term or long term is classified as property.

Effectively, estate planning is necessary for everybody. Some of the assets are of the class that cannot be physically seen, such as goodwill and royalty. These too fetch returns.

Why should a person do estate planning?

Assets are acquired to maintain and improve living standards. The person acquiring many assets gets so lost in acquiring more and more assets that he or she forgets that death is inevitable, and the moment of death is uncertain.

How the assets should be distributed among the heirs and others needs to be planned during the lifetime of the person acquiring or inheriting assets. Obligations such as taxes, debts, legal expenses, funeral expenses etc., also need to be taken into account.

The ratio of distribution may differ because of some additional help or care received from one of the children. Without addressing these issues, the person may leave behind a family that spends time and resources fighting battles in court.

In addition, there are inheritance or estate taxes to consider. These taxes differ for different assets and value of assets.

However, estate planning is not only for the heirs. The person acquiring the asset also needs to consider the probability of becoming incapacitated in some way and being unable to manage those properties.

When should a person do estate planning?

Obviously, the earlier the better. Obligations differ from time to time. Similarly, the list of properties and debts too may change. Relationships with loved ones may sour. All of these reasons are good enough for periodically revising the estate planning instrument.

How should a person do estate planning?

In general, there are four options available for estate planning. These four options are:

a. Execution of a Will

In this document, the testator or the person executing the will specifies all of the assets he or she owns as of the date of executing the will. In addition, the list of debts and obligations are also mentioned.

Finally, how the property needs to be distributed among the survivors, and others such as charities are specified. While planning who should be inheriting which asset, the testator takes into account the estate taxes associated with each asset.

After the testator’s demise, the court verifies authenticity of the document and then issues probate for carrying out the wishes of the testator. An executor named in the will does the rest.

The process is expensive. Witnesses are needed. Wills need to be periodically revised because of changes in properties, debts, obligations, etc.

b. Beneficiary designation

Almost everybody designates beneficiary without realizing it. Bank accounts for example have forms for nominating the beneficiary.

Similarly, in the US, there are forms for designating the beneficiary of 401K savings. But these need to be periodically revised; otherwise, loved ones will not inherit the monies. Instead, the monies will eventually go to somebody with whom the person did not share a cordial relationship with.

c. Trusts

By far, this is the best option available for any estate planning. The idea is to set aside the property under the trust, and appoint a trustee who will take care of distributing the assets as stipulated.

The process reduces expenses associated with probate. It is also considerably faster.

But if estate taxes are to be reduced, the trusts should be irrevocable. Costs associated with this kind of trust are a bit on higher side, but on the whole, the process saves some monies in the hands of the heirs and others.

The person executing an irrevocable trust should be careful, because once the asset is under this kind of protection, there cannot be any changes, which includes denial of rights to sell or gift the assets mentioned in the trust.

d. Power of attorney

This document is not for heirs or others, but for the person. As mentioned before, the person can be incapacitated in some way or be unable to manage property at a distance.

For example, the person may suffer with Alzheimer’s, dementia, or another debilitating condition that renders him or her comatose. If properties are acquired in another country, then managing the property at a distance may become difficult.

In such cases, it becomes necessary to give power of attorney to somebody whom the person trusts. Effectively, this can be for specific purposes as well as for general purposes.

Power of attorney can become operational only if some conditions such as deterioration of health condition are met. Durable power of attorneys are valid at all times, whereas non-durable types are for a restricted period only.

Conclusion

While executing wills, trusts, etc., the person needs to be careful in differentiating self-acquired properties and those properties that he or she inherited. The restrictions applicable in distribution of these assets vary.

Consulting a legal professional at the time of execution of documents such as irrevocable trusts, durable power of attorney, power of attorney for managing assets, and wills is advisable because this reduces any expensive disputes at a later date. These professionals will guide on how to save taxes in estate planning, and also remove any clauses that can be detrimental to the interests of their clients.

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