The basics of estate planning

Some assets, such as individual retirement accounts and life insurance proceeds, bypass a will entirely and go directly to the beneficiaries listed and filed with the financial firm that handles those products. Otherwise, the state decides who gets what. Each state has a prescribed order for the distribution of property of those who die with no will.

Having your property items pass according to your state’s succession statutes is a rather rigid default distribution scheme because predetermined, specific percentages of your estate assets will go to your closest blood relatives -- the state's way, not yours.

Whether you have a will, your property that does not pass according to its title or beneficiary designation goes through probate -- that is, the state court's system for monitoring its distribution.

Characteristics of a will

  • A simple will is a relatively inexpensive document, often costing a couple of hundred dollars. This guesstimate varies according to complexity, size of the estate and geographic location.
  • A will only transfers property that you own in your name alone. Therefore, property you own as a joint tenant with right of survivorship or property that passes by beneficiary designation, such as life insurance proceeds or retirement assets, cannot be transferred by will.
  • Even if you have a trust, you should still have a will for any assets the trust does not cover.

Trusts as a complement to wills

You establish trusts during your lifetime. Trusts involve the transfer of your property to an individual or corporate trustee who manages the assets within the trust's control for the benefit of one or more others -- the beneficiaries.

A living, or inter vivos, trust is one that is effective during your lifetime; a testamentary trust is one that is contained within the provisions in your will. A testamentary trust does not become operative until your death.

Because the will can be changed prior to death, assuming the testator, or creator of the will, is mentally competent, the trust terms are amendable. Living trusts can be created to be revocable or irrevocable. With a revocable trust, the creator of the trust, or grantor, has access to the trust corpus -- another word for "principal" -- while alive; the trust assets within an irrevocable trust, however, no longer belong to the grantor. Once transferred to the trust, they are owned by the trust entity.

The reasons for trusts are as varied as their creators. These are some motives behind their creation.

Purposes of trusts

  • Obtain professional management and investment of trust property.
  • Minimize gift and estate taxes.
  • Distribute assets to beneficiaries efficiently and without the delay, expense and, especially, publicity of probate.
  • Place conditions on how and when your assets should be distributed. You may not want your son to squander his inheritance on a Porsche!

The estate tax system: How it works

Estate and gift taxes are part of a transfer tax system that is separate from the income tax system we all know and love so well each April. Gift taxes apply to certain transfers of assets or interests in property that a person, the donor, makes to another, the donee, while still alive. Estate taxes come into play after a person's death.


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