ESTATE PLANNING

It is important to prepare for incapacity before it happens in order to have the necessary legal documents in place.

There are several important legal documents to consider, such as wills, trusts, powers of attorney, and advance healthcare directives. Without these in place, your family may need to go to court and request the appointment of a guardian if the unexpected were to happen.

Most estate plans begin with a review of your will and an assessment of how the probate process could affect your legacy planning goals.

Many people are aware that a will dictates the distribution of their assets after death, but there is often less understanding of the probate process, which actually carries out that distribution.

Wills

A will is a crucial legal document that dictates how a person's assets will be distributed after their death. It is the most fundamental part of estate planning and is used to determine who will inherit the deceased person's assets. However, it only applies to certain assets and is not considered for others like joint accounts or trust assets. If someone dies without a valid will, their assets will be distributed according to the state's laws of intestate succession, which outlines a specific order and priority for inheritance.

Beneficiary Designation

A beneficiary designation is an important tool for determining who will receive a designated asset and in what order. The relationship between the beneficiary and the account owner can impact distribution options and taxation. It's also important to consider unexpected contingencies, such as what happens if the owner outlives the primary beneficiary or if one of the beneficiaries is deceased. It's important to carefully consider the terms and considerations for constructing an effective beneficiary designation.

Trusts 

Trusts are a popular estate planning tool for a variety of reasons. They can help avoid probate, provide for heirs, control the distribution of assets, protect assets, and reduce taxes. Additionally, trusts can be used to fulfill charitable intentions.

Dynamics of Income Taxes and Estate Taxes

There are two areas of taxation that affect estate planning: income taxes and estate taxes. It's important to understand that this provides a general overview of trust taxation, and for personalized guidance, it's recommended to seek advice from a qualified tax advisor.

Income Taxes

Whenever assets are transferred from one person to another, whether through inheritance or as a gift, the recipient takes on not just the asset itself, but also any potential tax obligations related to that asset. This is why it's crucial to thoroughly consider the income tax consequences of asset transfers as part of the estate planning process.

Estate Taxes

Transfers of property after death are subject to an estate tax, which is paid by the estate of the deceased. This tax is assessed on all property interests, both tangible and intangible, owned by the deceased at the time of their death. It's important to note that there is a difference between estate taxes and inheritance taxes. An inheritance tax is assessed on the beneficiary’s right to receive property, while an estate tax is imposed on the transferor’s estate for the privilege to transfer property. Individual states may also have their own inheritance or estate taxes in addition to the federal estate tax. For the purpose of this discussion, we will focus solely on the federal estate tax.

Gift Tax

Certain transfers made during life can be subject to a gift tax, which is intended to prevent people from avoiding the estate tax through excessive gifts. It's important to consult with an attorney and fully understand the rules before executing a gifting strategy, as the gift tax system is complex and can have a significant impact on the reduction of a taxable estate over time.