Do You Have an Effective Estate Plan?

By Dale West, Senior Advisor, American Society for Asset Protection

If you were to die this week, do you know what would happen to your assets? Creating an effective estate plan ensures you can answer yes to this question. Without an effective estate plan, up to fifty percent of your estate could be lost to probate costs, federal estate taxes, and state inheritance taxes. This article will teach you how to avoid probate, and eliminate or dramatically reduce your estate taxes. You will learn what you should be doing now to prepare for successful estate succession.

 

What is Probate?

Probate is the legal process by which a court distributes the assets of a deceased person according to their last 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, an executor is appointed by the court.

Why Do You Want Your Estate to Avoid Probate?

  1. It is expensive. Up to 10% 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.
  2. It is a lengthy process. While it is possible for an estate to be “probated” in six to twelve months, it is also common for the process to take years.
  3. It is an invasion of 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 are instances of dishonest people searching probate records to find assets they can take.

Can I Use Joint Ownership to Avoid Probate?

You can avoid probate by holding assets in joint ownership, but there are several problems with this approach. For example, a couple built 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 did avoid probate with the three surviving children owning the farm as joint owners. However, the spouse and children of the child that died were totally disinherited and they received nothing. In addition, the child who outlives the other two children will end up with 100% ownership in the farm; and the descendants of the other three children will be excluded.

 

Here is another example of the danger 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) on her death; completely excluding Ed’s other three children. Ed’s 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 which designates who is to receive the property.

How Do I Set Up an Effective Estate Plan?

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

Why Do Some Attorneys Recommend a Will?

Many attorneys recommend their clients create a will without a living trust. This ensures the estate will go through probate. Why? Because attorneys do not always have their clients’ best interest in mind. The attorney wants to collect the legal fees associated with probate, and, in some states, the attorney receives a percentage of all the assets that go through probate. The only person that benefits from your estate going through probate is the attorney.

 How Do I Set Up a Living Trust?

A living trust is a legal document created during your lifetime, and is revocable, which means you can amend, alter, or cancel the trust at any time prior to death. Setting up a trust is a simple process. First, you name the trust. Typically, it is named after the individual or couple setting up the trust – “The John and Jane Doe Living Trust” for example. Next, you specify where you want your assets to go upon your death(s). Once you sign and notarize the living trust, it is a legal and binding document. You are not required to file with the state, you do not need a Tax ID number, and there are no filing fees or tax returns.

Once the trust is notarized, you need to fund the trust. “Funding” the trust is the process of transferring ownership of your assets to the trust. For titled assets (bank accounts, cars, stocks, etc.), you 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 title (jewelry, artwork, antiques, etc.), you simply list the items on the Schedule “A” of the Trust. You would also write a description of the items such as – American Heritage billiard table, brown leather couch, and diamond wedding ring. It is important to remember that any asset not funded in the trust will pass through probate!

Does a Revocable Living Trust Have Tax Benefits?

A Living Trust provides no income tax savings, and for income tax purposes, it is as if 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.

 

Conclusion

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

For more information, please visit www.AmericanSocietyForAssetProtection.com or call 1-800-848-9238.

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