This article has multiple issues. Please help talk page. (Learn how and when to remove these template messages)( or discuss these issues on the Learn how and when to remove this template message)
Estate planning is the process of anticipating and arranging, during a person's life, for the management and disposal of that person's estate during the person's life and at and after death, while minimizing gift, estate, generation skipping transfer, and income tax. Estate planning includes planning for incapacity as well as a process of reducing or eliminating uncertainties over the administration of a probate and maximizing the value of the estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by the specific goals of the client, and may be as simple or complex as the client's needs dictate. Guardians are often designated for minor children and beneficiaries in incapacity.
Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney.
Wills are a common estate planning tool, and are usually the simplest device for planning the distribution of an estate. It is important that a will be created and executed in compliance with the laws of the jurisdiction where it is created. If it is possible that probate proceedings will occur in a different jurisdiction, it is important also to ensure that the will complies with the laws of that jurisdiction or that the jurisdiction will follow the provisions of a valid out-of-state will even if they might be invalid for a will executed in that jurisdiction.
A trust may be used as an estate planning tool, to direct the distribution of assets after the person who creates the trust passes away. 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. Furthermore, certain types of trust provisions can provide for the management of wealth for several generations past the settlor. Typically referred to as dynasty planning, these types of trust provisions allow for the protection of wealth for several generations after a person's death.
An estate plan may include the creation of advance directives, documents that direct what will happen to a person's estate and in relation to their personal care if the person becomes legally incapacitated. For example, an estate plan may include a healthcare proxy, durable power of attorney, and living will.
After widespread litigation and media coverage surrounding the Terri Schiavo case, estate planning attorneys often advise clients to also create a living will. Specific final arrangements, such as whether to be buried or cremated, are also often part of the documents.
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 any other heir, including the decedent's children, may be taxed if that portion of the estate has a value in excess of the estate tax exemption. As of 2018, the federal estate tax exemption was $11,180,000. For a married couple, the combined exemption is $22,360,000.
One way to avoid U.S. Federal estate and gift taxes is to distribute the property in incremental gifts during the person's lifetime. Individuals may give away as much as $15,000 per year (in 2018) without incurring gift tax. Other tax free alternatives include paying a grandchild's college tuition or medical insurance premiums free of gift tax--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 (or TOD) financial accounts, and life insurance proceeds.
Because life insurance proceeds generally are not taxed for U.S. Federal income tax purposes, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change a beneficiary, the proceeds will be treated as part of his estate and will generally be subject to the U.S. Federal estate tax. For this reason, the trust vehicle is used to own the life insurance policy. The trust must be irrevocable to avoid taxation of the life insurance proceeds.
Countries whose legal systems evolved from the British common law system, like the United States, typically use the probate system for distributing property at death. Probate is a process where
Due to the time and expenses associated with the traditional probate process, modern estate planners frequently counsel clients to enact probate avoidance strategies. Some common probate-avoidance strategies include:
If a revocable living trust is used as a part of an estate plan, the key to probate avoidance is ensuring that the living trust is "funded" during the lifetime of the person establishing the trust. After executing a trust agreement, the settlor should ensure that all assets are properly re-registered in the name of the living trust. If assets (especially higher value assets and real estate) remain outside of a trust, then a probate proceeding may be necessary to transfer the asset to the trust upon the death of the testator.
Although legal restrictions may apply, it is broadly possible to convey property outside of probate, through such tools as a living trust, forms of joint property ownership that include a right of survivorship, payable on death account, or beneficiary designation on a financial account or insurance policy. Beneficiary designations are considered distributions under the law of contracts and cannot be changed by statements or provisions outside of the contract, such as a clause in a will.
In the United States, without a beneficiary statement, the default provision in the contract or custodian-agreement (for an IRA) will apply, which may be the estate of the owner resulting in higher taxes and extra fees. Generally, beneficiary designations are made for life insurance policies, employee benefits, (including retirement plans and group life insurance) and Individual Retirement Accounts.
Mediation serves as an alternative to a full-scale litigation to settle disputes. At a mediation, family members and beneficiaries discuss plans on transfer of assets. Because of the potential conflicts associated with blended families, step siblings, and multiple marriages, creating an estate plan through mediation allows people to confront the issues head-on and design a plan that will minimize the chance of future family conflict and meet their financial goals.