What You Need to Know About Estate Planning
What You Need to Know About Estate Planning
What is estate planning? Estate planning might seem a daunting task, filled with lots of legal requirements and legal work. An estate plan is really just several documents that ensure your wishes are carried out for your property as well as for your health care. Everyone should have an estate plan.
Be Willing to Have a Will
One of the most basic estate planning documents is a last will. A will determines who you leave your property to. It can also set up trusts, name a guardian for your minor child, and name an executor, the person in charge of carrying out the instructions in your will. Wills usually must be in writing with two witnesses. Each state has slightly different requirements. After your death, a will must go through probate, a court process that validates and enacts the will.
Estate Tax Truths
Estate tax is a tax imposed by the federal and/or state governments when an estate is passed to the beneficiaries, whether it goes through a will or a trust. The tax comes out of the estate (the beneficiaries pay nothing out of pocket). Estate tax applies to most property (exceptions include life insurance and certain specific types of trusts). The good news is federal estate tax only applies to estates worth more than $5.43 million (of 2015). State estate tax exemptions vary and some states have no estate tax at all.
Gift Tax in the Present
Gift tax is an issue that is related to estate tax. The federal government applies a tax to any gifts you make during your lifetime. This tax is to prevent people from giving away their entire estate during their lifetime and avoiding estate tax. The federal gift tax exemption is $14,000 (as of 2015). Each individual can give up to $14,000 away to as many people as he wishes under annual gift tax exclusion. There is a lifetime cap of $5.43 million on gifts. In a married couple each person can give $14,000 to as many people as they wish (up to the lifetime cap) per year and avoid the gift tax rate. Annual gifts made during your lifetime can be an important part of your estate planning 101.
Should You Trust a Living Trust?
Living trusts are often discussed as estate planning basics, but the truth is they aren’t for everyone. A revocable living trust allows you to place most of your assets into a trust during your life. The assets are owned by the trust but you continue to use and spend them. Upon your death, the assets pass to your beneficiaries without going through probate. A living trust allows you to control when your beneficiaries get their inheritance (for example you can choose milestone birthdays). Living trusts do not avoid estate taxes and the cost of establishing and managing a trust can be similar to probate costs. There are other trusts to consider such a marital trust, which allows you to avoid estate tax when you leave your estate to your spouse.
Empower Yourself with a Power of Attorney
A power of attorney is an important part of estate planning law. This document authorizes someone else (such as your spouse, your child, or a trusted friend) to make legal, business, and financial decisions for you should you become unable to manage your own affairs. This document allows your bills to be paid, banking completed, and transactions handled if you are disabled. A power of attorney can be springing (taking effect only if you become disabled) or durable (allowing the person to manage affairs for you at any time).
Live with a Living Will
Any estate planning attorney will tell you that a living will is an essential part of planning for your future. A living will is sometimes called an advance directive. A living will states your wishes for life prolonging medical treatments. The document is legally binding on your physicians. A health care power of attorney or health care proxy is another important document that names the person you select who will make medical decisions for you should you be unable to.
Get the Most out of Your Estate Plan
A good estate plan not only includes the documents listed here but is thoughtful and inclusive. Make sure that all of your property is protected and managed. Be sure your wishes are clear and are specified in legally appropriate language. Discuss your estate plan with your family so there are no surprises and they know where to locate your documentation. Remember that if you don’t create an estate plan, the state will decide how your assets should be distributed when you die, whether you are unable to manage your own affairs and if so who should manage them for you, and when and if you can discontinue medical treatment.
An estate plan is an important part of planning for the future and taking charge of your affairs. With a little time and thought, you can plan for all eventualities.
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