Unpleasant as it is to think about, death is the ultimate fact of life. This is true for everyone, not just wealthy people who might have millions of dollars, which have to be disposed of once they're gone.

Estate planning encompasses much more than just writing a will or designating a beneficiary for your life insurance. It also includes a wide range of activities that fall into three broad categories: Strategies to help build, protect, and distribute your wealth, so that those you love are taken care of and your assets and possessions go where you want them to go and within a reasonable timeframe. 

Even if your estate is more modest - say a home, some personal possessions, and a bit of cash in a bank account - it will still have to be settled after you die. The degree to which you plan for that certainty beforehand will dictate how smoothly the process goes and how much of your worth goes to the people you love, rather than to lawyers or the government. Both the federal and state governments tax estates. But careful planning can reduce the amount of taxes your estate will pay, leaving more money to pass along to your heirs. 

Making your wishes clear before your death - through wills, trusts, and other estate planning tools - can greatly reduce the possibility that your heirs will get into disputes over your assets and possessions.

Planning your estate involves a number of useful tools and strategies that can maximize your assets, minimize your liabilities, and make the process go as smoothly as possible for your heirs. They include: Wills, Advanced Health Care Directives, Power of Attorney

Trusts, Life insurance, Gifts, Joint tenancy (with right of survivorship), Beneficiary designations

One of the most common mistakes people make is not having a valid will. According to a study by Rutgers University in 2000, 70% of Americans die without one. If you die without a will (called "intestate"), state laws will govern how your estate is distributed.

A will allows you to determine who gets your property, to appoint guardians for your minor children, and to pick someone you trust to oversee your estate as executor. Without a will a judge could decide who raises your children. And a will that makes your wishes clear can keep your loved ones from getting in disputes over your assets or possessions.

Whether you're seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility--many types of trusts exist, each designed for a specific purpose. A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals. Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to:

·        Minimize estate taxes

·        Shield assets from potential creditors

·        Avoid the expense and delay of probating your will

·        Preserve assets for your children until they are grown (in case you should die while they are still minors)

·        Create a pool of investments that can be managed by professional money managers

·        Set up a fund for your own support in the event of incapacity

·        Shift part of your income tax burden to beneficiaries in lower tax brackets

·        Provide benefits for charity 

A living trust is a special type of trust. It's a legal entity that you create while you're alive to own property. Property that passes through a living trust is not subject to probate--it doesn't get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age.

Living trusts are attractive because they are revocable. You maintain control--you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it. Living trusts can also be used to help you protect and manage your assets if you become incapacitated. 

Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Unlike a living trust, an irrevocable trust can't be changed or dissolved once it has been created. You generally can't remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust--assets you don't mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.

Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors.

There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.

Understanding Probate

The word “probate” comes from the Latin and means “to prove the will”. Probate is a legal process for distributing your estate that takes place after your death. The validity of your will is determined (if you have one), your assets are identified, your heirs are located, and your estate is distributed - after your debts, taxes, and fees are paid.
Small estates usually go through probate in about one year, with six months generally being a minimum time if everything proceeds according to schedule and depending on your state's court system. 

Living wills