We Know: How Estate Planning Works
What is estate planning?
Estate planning means preparing a will and planning for taxes in the event of an individual's death. About 75 percent of Americans die without any kind of estate planning.
What kind of taxes are there when a person dies?
When the owner of a large estate passes, you can expect to see inheritance tax and estate tax taken out, potentially on the federal, state, and local levels. On very large estates, taxes can reach to more than half the value of the property and assets, forcing heirs to sell off things you and they may want to keep intact. Even if most of your assets are sunk into a business or large farm, this can still send the total value of your estate to a level where taxes will force its selloff.
How can you protect yourself from some of these taxes?
The five basic ways are:
With Tenancy by the Entirety and JTWRS, you can avoid probate and many of the taxes involved with inheritance. If you think your estate merits any of these, you should seek further legal advice.
How does setting up a trust help with probate issues?
Most people dispose of their property in estate planning by leaving a will or setting up a trust. The advantage of a trust is that you can avoid probate, a lengthy legal process that can cost quite a lot of money. You may also want to make inter vivos gifts, which are gifts made during your lifetime that will help you avoid some of the tax costs associated with inheritance. You should consult an accountant or financial planner before making a gift like this; if you exceed certain set amounts in gift-giving, you or your gift recipient may be liable for gift taxes.
Setting up trusts is not very hard, but trusts do require maintenance fees to be paid to a trustee. Most trusts should only be set up if the size of your estate merits this sort of protection.
How can I benefit from a Power of Attorney?
If you become incapacitated before you die, you may need to have a power of attorney prepared. A power of attorney gives your agent - often a spouse or a child - the right to make decisions according to your wishes if, for any reason, you cannot. Make certain that you get a durable power of attorney so that if you become incapacitated, the power of attorney remains in effect. And always be certain that you make your wishes known to your agent when you give them the power of attorney; their job will be to carry out your affairs in the way you probably would, not in the way they see fit.
Should You Hire Help?
Bottom line - if you have an estate large enough to worry about whether it's going to be taxed into nonexistence, then you should definitely hire a financial planner. They aren't cheap, but they will save you much more money than they will cost you.