What Is Estate Planning?

The term estate planning refers to the preparation of tasks that serve to manage an individual's financial situation in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes and debts, along with other considerations like the guardianship of minors and pets. Most estate plans are set up with the help of an attorney experienced in estate law. Some of the steps included in estate planning typically include listing assets and debts, reviewing accounts, and the writing of wills.

Key Takeaways

  • Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death or in the event they become incapacitated.
  • Estate planning tasks include making a will, setting up trusts and/or making charitable donations to limit estate taxes, naming an executor and beneficiaries, and setting up funeral arrangements.
  • A will is a legal document that provides instructions on how an individual’s property and custody of minor children (if any) should be handled after death.
  • Various strategies can be used to limit taxes on an estate, from creating trusts to making charitable donations.
  • Estate planning can and should be used by anyone—not just the ultra-wealthy.

Estate Planning Basics

The Estate Planning Process

Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated. Contrary to what most people believe, this isn't a tool meant just for the ultra-wealthy. In fact, anyone can and should consider estate planning.

Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for a surviving spouse and children, funding children's or grandchildren’s education, or leaving their legacy behind for a charitable cause.

The most basic step in estate planning involves writing a will. Other major estate planning tasks include the following:

  • Limiting estate taxes by setting up trust accounts in the names of beneficiaries
  • Establishing a guardian for living dependents
  • Naming an executor of the estate to oversee the terms of the will
  • Creating or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
  • Setting up funeral arrangements
  • Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate
  • Setting up a durable power of attorney (POA) to direct other assets and investments

The following table serves as a checklist when it comes to planning your estate:

Task Considerations
1. Make a list of all your assets.  Be sure to include any physical assets like real estate and precious metals along with any bank accounts, insurance policies, and annuities.
2. Make a list of all your debts. This list should include everything you owe, including any loans.
3. Make copies of your lists.  If you have multiple beneficiaries, it helps to make multiple copies for each one to have at their disposal.
4. Review your retirement accounts. This is important, especially for accounts that have beneficiaries attached to them. Remember, any accounts with a beneficiary pass directly to them so it doesn't matter what your will states.
5. Review your insurance and annuities.  Make sure your beneficiary information is up-to-date and all of your other information is accurate.
6. Set up joint accounts or transfer of death designations.  Joint accounts, especially checking and savings accounts, do not have to go through the probate process as long as there is a right of survivorship. This means the account moves directly from the deceased to the surviving owner. Similarly, a transfer of death designation allows you to name an individual who can take over the account after you die without probate.
7. Choose your estate administrator. This individual is responsible for taking care of your financial matters after you die. Choose someone you trust. Your spouse may not be the right person as they may not be in the right emotional space to take over your finances.
8. Write your will. Wills don't just unravel any financial uncertainty, they can also lay out plans for your minor children and pets, and you can also instruct your family/estate to make charitable donations with the money you leave behind.
9. Review your documents. Make sure you look over everything every couple of years and make changes whenever and wherever you see fit.
10. Send a copy of your will to your administrator. This ensures there is no second-guessing that a will exists or that it gets lost. Send one to the person who will assume responsibility for your affairs after you die and keep another copy somewhere safe.
11. See a financial professional.  This individual may be an estate planner or a financial planner. This person can help you review your accounts and help you make decisions to optimize your earnings.
12. Consolidate your accounts.  Some people have accounts in different places. But as time goes on, it's always a good idea to move as much as you can into one place. Doing so helps clear up any confusion in the future for you and for your heirs.
13. Complete other financial documents.  You may need other legal and financial documents as you get older. Consider a power of attorney (POA) for health and finances, living wills, and letters of instruction that provide direction for your funeral or what to do with other assets like a digital wallet.
14. Consider other savings vehicles.  There are some tax-saving investment vehicles you can take advantage of to help you and others, such as 529 college savings plans for your grandchildren.

Writing a Will

A will is a legal document that provides instructions on how an individual’s property and custody of minor children (if any) should be handled after death. The individual expresses their wishes and names a trustee or executor that they trust to fulfill their stated intentions.

The will also indicates whether a trust should be created after death. Depending on the estate owner’s intentions, a trust can go into effect during their lifetime through a living trust or with a testamentary trust after their death.

The authenticity of a will is determined through a legal process known as probate. Probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries. When an individual dies, the custodian of the will must take the will to the probate court or to the executor named in the will within 30 days of the death of the testator.

The probate process is a court-supervised procedure in which the authenticity of the will left behind is proved to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which, in turn, gives the executor the legal power to act on behalf of the deceased.

Estate Planning vs. Will

Estate planning is an action plan that individuals use to determine what happens to their assets and obligations while they're alive and after they die. A will, on the other hand, is a legal document that outlines how assets are distributed, who takes care of minor children and pets, and any other wishes after an individual dies.

Appointing the Right Executor

The legal personal representative or executor approved by the court is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternative valuation date, as provided in the Internal Revenue Code (IRC).

A list of assets that need to be assessed during probate includes:

  • Retirement accounts
  • Bank accounts
  • Stocks and bonds
  • Real estate property
  • Jewelry
  • Any other items of value

Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death. The exception is real estate, which must be probated in the county in which it is located.

The executor also has to pay off any taxes and debt owed by the deceased from the estate. Creditors usually have a limited amount of time from the date they were notified of the testator’s death to make claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say as to whether or not the claim is valid.

The executor is also responsible for filing the final personal income tax returns on behalf of the deceased. After the inventory of the estate has been taken, the value of assets calculated, and taxes and debt paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries.

Any estate taxes that are pending will come due within nine months of the date of death.

Planning for Estate Taxes

Federal and state taxes applied to an estate can considerably reduce its value before assets are distributed to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments. There are significant steps in the estate planning process that individuals and married couples can take to reduce the impact of these taxes.

A-B Trusts

Married couples, for example, can set up an A-B trust that divides into two after the death of the first spouse. Trust A is the survivor's trust while trust B becomes the decedent's trust. Each individual places their assets in the trust and names someone other than their spouse as the beneficiary.

Education Funding Strategies

A grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity, such as a 529 plan, for the purpose of current or future education funding.

That may be a much more tax-efficient move than having those assets transferred after death to fund college when the beneficiaries are of college age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids.

Cutting the Tax Effects of Charitable Contributions

Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus lowering the estate tax bill.

As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes. Estate planners can work with the donor in order to reduce taxable income as a result of those contributions or formulate strategies that maximize the effect of those donations.

Estate Freezing

This is another strategy that can be used to limit death taxes. It involves an individual locking in the current value, and thus tax liability, of their property, while attributing the value of future growth of that capital to another person. Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild.

This method involves freezing the value of an asset at its value on the date of transfer. Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes.

Using Life Insurance in Estate Planning

Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free.

Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), so at the very least, a will should be set up—even if the taxable estate is not large.

What Is Estate Planning?

Estate planning is a broad term that is used to describe the process that individuals go through to plan the administration of their assets and liabilities before and after they die. This process also includes writing a will, reviewing accounts and assets, creating joint accounts, preparing other legal documents, and appointing an executor among other things.

How Expensive Is Estate Planning?

Estate planning costs vary based on the steps you take and how you undergo the process. For instance, using an estate planner or lawyer may require you to pay an hourly fee for their services. Keep in mind that you may be able to secure a flat fee for services rendered. Other fees associated with estate include will preparation, which can be as low as $100 if you hire a professional.

What Documents Do I Need as Part of my Estate Planning?

There are certain documents you'll need as part of the estate planning process. Some of the most common ones include wills, powers of attorney (POAs), guardianship designations, and living wills. Other paperwork you'll need and will find useful include bank and account statements, full lists of your holdings (assets and liabilities), and beneficiary designations.

Is Estate Planning Only for the Wealthy?

There is a myth that estate planning is only for high-net-worth individuals. But that's not true. In fact, estate planning is a tool that everyone can use. Estate planning makes it easier for individuals to determine their wishes before and after they die. Contrary to what most people believe, it extends beyond what to do with assets and liabilities. In fact, estate planning can also answer questions about the guardianship of minor children and pets, what to do when it comes time for your funeral, and what charities you want to support after you die.

The Bottom Line

Estate planning is often thought of as a tool for the wealthy. But that isn't the case. It can be a useful way for you to deal with your assets and liabilities before and after you die. Estate planning is also a great way for you to lay out plans for the care of your minor children and pets, and to outline your wishes for your funeral and favorite charities. But don't confuse writing a will with estate planning—the former is just one of the steps you'll need to take in the estate planning process. While you're at it, make sure you appoint a responsible executor and review your accounts on a regular basis to ensure you're getting the most bang for your buck.

Article Sources
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  1. Government Printing Office. "Title 26: Internal Revenue Code: Sec. 2032. Alternate Valuation," Pages 2383-2384.

  2. Internal Revenue Service. "Topic No. 313 Qualified Tuition Programs (QTPs)."

  3. Internal Revenue Service. "Topic No. 506 Charitable Contributions."

  4. Internal Revenue Service. "Publication 525 (2022): Taxable and Nontaxable Income."

  5. Internal Revenue Service. "Instructions for Form 706 (09/2022)."

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