For some, the term “estate planning” conjures up visions of very wealthy people with huge sums of money to deal with—in other words, not us. The truth is, everyone needs some form of estate planning, regardless of the size of his or her estate. Because estate planning can be a complicated matter, you should seek the advice of a qualified tax advisor or attorney. This article is for informational purposes only and is not intended as legal, accounting, or tax advice.

Estate planning has two components: the accumulation and efficient management of wealth during your lifetime, and the effective distribution of your wealth after your death, all coordinated according to your objectives. Your particular estate planning needs depends on your age, wealth, health, goals, lifestyle, and an infinite number of other factors, all of which may change over time. A young, healthy, single person may only need a simple will. An older person in declining health with more wealth, multiple prior marriages, and many children within those marriages will need a more complex set of plans in place. Here’s a brief overview of some of the possible tools involved in estate planning. Let’s begin with a discussion of probate, a term most people have heard of but few really understand.
 
Probate
Defined simply, probate is the legal process for handling someone’s assets when they die. The probate process includes:

• Filing a deceased person’s will with a local court
• Identifying and inventorying the deceased person’s property
• Verifying the value of specific assets
• Paying off debts, including taxes
• Having the will “proved” valid to the court
• Executing the terms of the will
• Distributing assets that do not have a beneficiary or are not jointly held

Probate is neither cheap nor quick. The process can tie up property for months—sometimes even a year or more. The cost of probate may be set by state law or by practice and custom in your community, and can include appraisal costs, executor’s fees, court costs, the costs for a type of insurance policy known as a surety bond, legal fees, and accounting fees. When you add it all up, probate can cost from 3 percent to 7 percent of the total estate value. And if your estate includes property in more than one state, it may be subject to separate probate proceeding in all applicable states.

Not all aspects of your estate may need to go through probate. Any assets held in a living trust are not subject to probate. If you die without a trust or a will, probate is necessary to determine who is legally entitled to your estate. Any property held jointly with survivorship rights avoids probate, as do the proceeds of insurance policies and retirement plans with proper beneficiary designations in place. You can also arrange for the automatic transfer of bank accounts, securities, and vehicles (in some states) immediately upon death, avoiding probate for those assets (see below for details). Reducing the amount of your estate that is subject to probate can ensure that your heirs receive your gifts sooner and with less cost and hassle than would be required if probate was required for your entire estate.

Wills
Wills are the basic cornerstone of any estate plan, and most people should have one. In its simplest form, a will is a legal document that determines how your money, property and personal belongings will be distributed after your death, as well as who will care for your children. If you die without a will, state law (called intestacy statutes) will dictate how those matters are handled. For a more detailed discussion of wills, see the article entitled Wills – The Essential Part of Your Estate Plan.

Powers of Attorney
Giving someone a “power of attorney” (POA) means giving that person (known as the agent) the legal authority to act on your behalf when you can’t. There are nondurable or temporary POAs that terminate when you become legally incompetent, and durable POAs, which continue in effect even if you become incapacitated. A durable healthcare POA, healthcare proxy, or advance medical directive names someone to make medical decisions on your behalf when you are unable to do so yourself. It’s important to have a healthcare POA on record so that your wishes can be carried out by a trusted agent and not left to your relatives, the doctors, hospitals, or courts.

Living Trusts
Once considered an instrument only for the rich, living trusts are now a common estate planning tool. A living trust allows your estate to avoid the cost and hassle of going through probate court by passing it directly to your heirs. It’s not much more difficult to create than a will. Almost any asset, including savings accounts, stocks, bonds, real estate, life insurance, and personal property can be placed in the trust by changing the names or titles on your assets to the name of the trust.

A living trust also minimizes estate taxes by fully utilizing every individual’s Unified Credit. While you’re alive, the trust has no effect. But after your death, trust assets can be transferred quickly and easily according to the directions you left in the trust document. Married couples who have both a large estate and children may be interested in a type of living trust called a living trust with marital life estate or AB trust. It allows a couple to pass the maximum amount of property to their children (or other beneficiaries) after both spouses die, avoiding probate and reducing the potential federal estate tax bill, while providing for the financial security and comfort of the surviving spouse during his or her lifetime.

Automatic Transfers-at-Death
These are simple ways to avoid probate for parts of your estate. Any bank account can be turned into a payable-on-death account by signing a form at your bank naming the person you want to inherit the money in your account at your death. Likewise, you can register stocks, bonds, and brokerage accounts with a transfer-on-death registration, which means that your beneficiary’s name is included in the ownership papers. And if you’re lucky enough to own a car in California, Connecticut, Kansas, Missouri, or Ohio, you can include your beneficiary’s name on the certificate of title to inherit your vehicle automatically upon your death. In all cases, you retain complete control over the asset while you are alive. Your beneficiary has no rights over the asset until you die, at which time your beneficiary simply provides proof of death and proof of identity to claim the asset without involving probate.

Joint Ownership
There are multiple forms of joint ownership that all accomplish the same goal of avoiding probate. Real estate, vehicles, bank accounts, securities, or other valuable property can be owned in joint tenancy with right of survivorship so that the asset passes automatically to the survivor when one owner dies.

Gifts
Another way to avoid probate and estate taxes is to give away property before you die. If you don’t own it at your death, it doesn’t have to go through probate and it can’t be taxed. Current tax law allows you to give away up to $12,000 per person per year without incurring any gift tax, with no restrictions on eligible recipients. And if you’re married, you and your spouse can each give away $12,000 per person per year, for a total of $24,000 per couple annually to each child, grandchild, niece, or dear friend. All gifts you make to your U.S. citizen spouse are tax-free (if your spouse is not a U.S. citizen, there is a gift limit of $128,000 in 2008). Gifts to qualified tax-exempt organizations and direct payment of tuition or medical bills are also exempt from gift tax.

Life Insurance
If you have young children, own a house, or support a spouse or disabled person, including some life insurance in your estate plan can be a good idea. Insurance proceeds are generally not subject to probate and are a ready source of cash for immediate needs, such as funeral expenses, debts and taxes.

Beneficiary Issues
Bank accounts, IRAs, and employer-sponsored retirement programs all ask you to name a beneficiary(ies) to receive any proceeds at your death. Make sure you keep these designations up to date by reviewing them regularly, or at least following major life-changing events (marriage, divorce, children, etc.). The assets in these types of accounts are not subject to probate if an appropriate beneficiary designation is in place at the time of your death.

The goal of any estate plan is to maximize your available assets both before and after your death, minimize any estate taxes that might be owed, and to ensure that your wishes are carried out with regard to your property after your death. Take the online course called Estate Planning for more information. As you can see from this brief overview, there are many approaches and options to consider, and only a qualified financial planner, accountant, or estate planning attorney can explain them in detail to see what tools would be best for your situation. Review your plans regularly to keep pace with your changing life and changing tax laws.