Developing an estate plan gives you control over your assets during your life and after your death. With a smart estate plan, many people are able to provide a financial foundation not just for their children, but for generations to come.
Wills and Trusts
Both wills and trusts give you control over how your money will be dispersed after you die. If you don't have either of these, you are said to have died in intestacy, and your money and assets go into probate court. Probate is a long and costly process that ultimately has a judge determine, often arbitrarily, who gets what. When you have a will, you are at least able to convey your wishes. Most smart estate plans include a will with a trust. A trust is actually a separate legal entity that holds your assets and survives you to disperse them according to the trust document. It requires a trustee and must be funded with the assets of your estate.
Funding a Trust
Many people take the time and spend a lot of money to develop a trust that gives very specific directions for the money and assets. Trusts can simply liquidate the money upon death or require beneficiaries to use the money for a home or college education. There may be a clause in the trust that only allows heirs to use so much of the money annually. A trust may provide information about who will care for minor children and name the guardians for them and provide assets to be used for their care. While all of these directions are wonderful, many people unfortunately never fund the trust, then when they die, their assets are left in their name with no real plan. To fund a trust, you must move all assets in title under the name of the trust. This means stock portfolios, real estate and bank accounts. IRAs do not need to be moved into your trust.
Life Insurance and Taxes
When you die, your estate will pay out a lot of money. Probate costs as well as estate transfer taxes at both the state and federal level are some expenses. A smart estate plan looks at the costs that will result from passing the money on to heirs and considers meeting any needs your beneficiaries may have to continue a lifestyle, maintain the family home and keep the income reasonably the same. Life insurance is used to meet these needs. Life insurance pays a benefit upon the death of the insured. Life insurance may be purchased in the amount it would take to pay off the mortgage or pay for college, taxes or other financial needs determined in your estate plan. Life insurance is paid to beneficiaries tax free as long as it is not paid into the trust, where it is added to the entire estate value and taxed as high as 55 percent. A good estate plan provides enough insurance to make sure assets are not eroded by costs and that your beneficiaries can live with financial security.