Estate planning is an important step for anyone regardless of age. If you have children, estate planning ensures that your property is divided the way you wish among them. You can also direct how your property is to be used for your children through a trust or will.
If you are married, estate planning can assure the smooth transfer of property to your spouse while minimizing or even avoiding estate taxes, gift taxes, and income taxes. This not only reduces the tax impact on the size of your estate, but can ensure that assets can be passed whole rather than selling off assets to pay taxes.
However, like most people you might not know how to plan your estate. Many people think that a letter or “poor man’s will” is sufficient to make sure that your property passes according to your wishes. Unfortunately, not knowing how to plan your estate can lead to family disputes, excessive taxes, and property ending up with the wrong heirs.
Here are ten ideas for how to plan your estate:
Hire an Accountant
Before you work with a lawyer on how to plan your estate, you need to know what is in your estate. For some people, this process is easy because they have a bank account, a house, and a car. For other people, the process of identifying everything in their estate can be more involved and may require an accountant.
Your estate includes everything that you own. This includes:
- Cash: All bank accounts with your name on it, whether they are held solely or jointly with someone else, are part of your estate.
- Real estate: Every piece of land with your name on the deed is included in your estate.
- Vehicles: Every vehicle, boat, utility trailer, or recreational vehicle that names you as an owner on the title is part of your estate.
- Personal property: All personal property in your house, shed, and storage unit are included in your estate.
- Investments: Every investment, including stocks, bonds, mutual funds, money market accounts, and business ownership interests, are in your estate.
- Retirement accounts: Your IRA, 401(k), and union or government pension are part of your estate.
- Life insurance: The benefits paid on any life insurance policy are part of your estate.
- Trust assets: Any property or money held in trust for your benefit is included in your estate.
For some people, the only way to take a complete inventory of their estate is to hire an accountant. The accountant can not only identify what you own, but can also begin to create a list of where the assets are held (including account numbers) so your lawyer can guide you in how to plan your estate.
Hire a Lawyer
Over 50% of Americans die without a will or estate plan. There are a lot of rules about how to plan your estate and ensure that the estate plan is legally binding. A will that is not signed by witnesses according to the law (also called a holographic will) is not legally binding, although a judge may take the wishes expressed in the will into account when dividing up your assets.
Instead of risking a court challenge, you can contact a lawyer who specializes in estate planning to answer your questions about how to plan your estate.
For example, if you want to make sure that your grandson completes his private school curriculum and graduates before he receives his inheritance, you can discuss with a lawyer the best way to do that.
Similarly, if you want a particular piece of family jewelry to go to your daughter, a lawyer can show you how to plan your estate so that your wishes are carried out.
After you have a handle on your major assets like your real estate, bank accounts, brokerage accounts, and retirement accounts, you need to visit your storage facilities to organize your personal property.
Personal property can trigger family disputes and personal animosity in the absence of a will identifying how personal property is to be divided. It is often worthwhile to go through your personal property alone to make some decisions about what should be directed to a specific person in your will and what can be settled among your heirs.
In the interest of fairness (and this is not required under the law) you may want to do some horse-trading of assets when it comes to personal property. For example, if your son receives the baby grand piano, then your daughter receives the boat. This allows both to feel like they were not forgotten.
In fact, after you organize your personal property alone and think about how to plan your estate, you may want to run through your thoughts and feelings about your personal property with your heirs. If you tell your children how you plan to distribute the piano and boat before you die, there will be less shock and, hopefully, fewer hurt feelings, when your property is finally distributed.
Advance Health Directive
An advance health directive, also known as a durable power of attorney, is a legal instruction that identifies who is empowered to make health care decisions for you if you are incapacitated. For example, if you are in a coma or have a brain injury and are unconscious, your advance health directive tells the hospital who decides whether you receive life support or have a “do not resuscitate” (DNR) order.
Without an advanced health director, the hospital will look to your closest relatives for any decision-making about your medical treatment. However, two equally situated relatives, such as a brother and a sister, might disagree and trigger a court battle over which will be empowered to make your health care decisions.
Keep in mind that this durable power of attorney only comes into effect if you are incapacitated. Thus, you do not need to worry about someone using the durable power of attorney while you are healthy.
Moreover, the durable power of attorney only applies to health care decisions. Thus, your designee cannot use the durable power of attorney to empty out your bank accounts or run up a tab under your name at the jewelry store.
Prepay Your Plot and Funeral
One way to avoid burdening your family upon your death is to remove both the decision-making and cost of your cemetery plot and funeral service from their shoulders.
Prepaying for your funeral also allows you to choose how your remains will be handled. For example, if you prefer cremation over burial, you can choose cremation and pay for it. That way, your body will be handled exactly how you wish.
Yet another benefit of prepaying funeral expenses is that you can shelter your money from Medicaid. Medicaid is only available to people with limited income and assets. By prepaying funeral expenses, you can reduce your assets to qualify for Medicaid.
On the other hand, there are some risks of prepaying for funeral expenses. These include:
- Inflation: Some funeral homes reserve the right to ask your survivors to pay the difference if the price is substantially more than your prepayment.
- Refunds: If you die out of state or your family chooses a different funeral home to handle your burial, your survivors may be unable to receive a refund of your prepayment.
- Uncertainty: The funeral home that you prepay for your arrangements could go out of business before you die and you may be unable to obtain a refund.
Other Death Benefits
Under some circumstances, your survivors may be entitled to death benefits, burial allowances, or other funeral reimbursements. These are usually administered through federal programs including:
- Veterans Administration (VA): The VA will partially reimburse families for funeral expenses for disabled military veterans and veterans receiving care at a VA facility at the time of death. The amount varies based on the cause of death and whether the veteran was hospitalized in a VA facility. Moreover, veterans are entitled to be buried in a national or veterans cemetery without paying for a plot.
- Federal Emergency Management Agency (FEMA): FEMA will pay for funeral expenses and a burial service for victims of a presidentially-declared disaster. Your survivors will need to show that other disaster assistance is insufficient to compensate them for your burial expenses.
- Social Security Administration (SSA): SSA does not pay for funeral expenses directly. However, heirs of people receiving social security benefits receive a one-time death benefit. This is not enough to pay for funeral expenses. However, the little bit that SSA pays will help.
Consider Joint Ownership
When you have joint ownership of a property with the right of survivorship, that property will pass to the other joint owner without going through probate. This is important for a few reasons:
- One of the purposes of probate is to clear any debts owed by you and your estate after you die. Since the property does not go through probate, it cannot be used to pay off your debts.
- Probate is also where heirs can contest your will. Since the property passes to the joint owner automatically without probate, no one can contest the transfer.
- Probate is a judicial proceeding. As a result, it takes time and usually requires a lawyer before it can be completed.
Keep in mind, however, that joint owners each have rights in the property. Thus, whether the joint owner is a spouse, child, parent, or other close relative or friend, joint ownership may risk a battle over the property while you are still alive. For example, if you try to exclude a joint owner from the property without a court order, you may be liable for damages because you interfered with your joint owner’s use and enjoyment of the property. On the other hand, joint owners share expenses, taxes, and repairs proportionally. This means that if the roof is damaged, equal joint owners would each pay for half of the roofing company charges.
When determining how to plan your estate, you will want to consider the tax implications of any decisions. While the federal tax code eliminated estate taxes, many states have inheritance taxes and the federal tax code could be amended in the future to bring estate taxes back. These taxes are usually based on the size of the estate and are usually paid by the estate. This means that your estate may be required to sell off assets to pay taxes rather than passing those assets on to your heirs.
Moreover, both the federal tax code and most states impose a gift tax if you give away property while you are still alive. In other words, you cannot avoid taxes by giving away property rather than leaving it in your estate. However, depending on the state you live in, you may be able to figure out which strategy, gifts or inheritance, minimizes your tax liability.
Even after you are dead, your estate may own income taxes if assets earn income before the assets are distributed. For example, if you have a savings account in your estate when you die and your estate takes eight months to pass through probate, your estate would owe income taxes on the eight months of interest earned. However, appreciation of assets is generally not included as income. For example, if your estate pays for a garage door installation after you die and your home’s value appreciates as a result, the appreciated value is usually not considered income.
Liquidate Some Assets
Some personal property might need to be liquidated so your estate can be divided among your heirs. For example, it might be impossible to pass large assets equally among your heirs. Instead of horse-trading assets, you might be better off selling the assets and passing the cash to your heirs. Moreover, if you have unusual assets, you might be able to liquidate them easier and for a greater value than your executor. If, for example, you invested in gems and precious metals, you might be able to find the highest prices paid for gold and diamonds easier than your heirs who may not know anything about gold and diamonds.
Maintain Your Home
When determining how to plan your estate, make sure you keep your assets in good repair. For example, rather than leaving your heirs a home with a damaged garage door, hire garage door services to repair it.
Why? Because when heirs inherit your home, they receive the stepped-up basis of the home based on its value at the time of your death. For example, if your home is worth $200,000 when you die, your heirs have a tax basis of $200,000 when they sell it. If they sell it for $200,000, they have no profit to pay income tax on. In other words, they inherit $200,000 tax-free.
Conversely, if the home was only worth $190,000 when you died because the garage door was damaged, and your heirs had to pay to fix it before they sold it for $200,000, they would have realized a $10,000 profit that they would owe income taxes on, and they would have spent some money out of pocket to repair the garage door.
Deciding how to plan your estate can be a difficult process. No one likes to face their own death. However, a bit of advance planning can prevent disputes, minimize taxes, and ensure a smooth passing of your property exactly according to your wishes.