Establishing Your Estate Planning Goals 

The beginning of the New Year is a good time to evaluate a number of financial matters, including such things as strategies to reach retirement goals or to pay for the increasing costs of a child’s education.  Although it is a vital component of anyone’s financial planning, individuals are sometimes hesitant and often neglect to plan for their potential death.  Regardless of their current financial status or age, all individuals need to consider and evaluate their estate planning goals and needs.  Some common goals for estate planning include: 

Avoiding Intestacy.  Without either a Last Will and Testament or a Revocable Trust, a person’s estate will pass pursuant to the intestacy laws of the state in which the decedent resided.   Executing a will or trust allows the individuals (and not the State) to decide who will be their heirs, how much each heir will receive and what conditions, if any, will be placed on the receipt of those funds. 

Naming Guardians for Children.  Parents with minor children need to decide who they want to raise their children if something were to happen to them.  By executing a will, parents can provide assurance that their children will be raised in an environment that they approve.  Unless parents proactively name the guardians for their children in a duly executed will, the guardians for their children would be decided by a judge, possibly after an extensive court battle, and the children may not end up in the home that the parents would have chosen for them.  

Avoiding Probate.  Probate is a lengthy and sometimes expensive court process that can be required to administer a decedent’s estate.  In a probate proceeding, all of the records relating to the administration of the estate and its assets are a matter of public record.  Through the use of a Revocable Trust and/or certain beneficiary designations, a person avoid the probate process altogether, thereby alleviating his or her heirs from significant time and expense, while at the same time keeping matters relating to the estate confidential and outside of the public record.  

Avoiding Outright Distributions.  There are a number of reasons why proceeds from an estate should not be distributed outright to the heirs immediately.  By establishing trust provisions for their heirs, individuals can exercise some control over when and how their heirs will receive distributions from their estate.  Some of the situations where individuals may want to place restrictions or limitations on an heir’s receipt of estate proceeds include:    

n      Minors and Young Adults.  It is common for individuals to restrict sizeable distributions to minors and young adults.  Instead of providing these funds outright to minor and/or young adults, funds are often held in a trust to be used for heir’s benefit, including such things as payment of education, medical, housing, transportation, food and other general support expenses.  However, the bulk of the funds would remain in trust until the minor or young adult has reached an age of sufficient maturity. 

n      Surviving Spouse.  Often, an individual will set aside funds to assist a surviving spouse but wants to assure that the balance of any remaining funds will pass to his or her children.  If funds are given directly to the surviving spouse, then the surviving spouse would be able to effectively disinherit the decedent’s children in favor of a new spouse or the surviving spouse’s own children.  By holding funds in a trust, the trustee of the trust can be directed to help support the surviving spouse, as necessary, while directing that the balance be distributed to his or her children upon the surviving spouse’s death or remarriage.   

n      Special Needs.  Trusts can be particularly helpful for individuals who have special needs because of certain medical conditions, or otherwise, they are unable to fully support themselves and may currently be receiving support from various government sources.  If a distribution were made outright to such an individual, the individual may be disqualified from receiving the government benefits. A special needs trust can be established so that the special needs individual maintains his or her government benefits but can receive supplemental benefits as determined by the trustee of the special needs trust.

There are other significant benefits to holding funds in trust instead of providing an outright distribution to heirs.  These additional benefits include, among others: (i) providing heirs protection from creditors and (ii) protecting heirs from spousal claims in the event the heir is involved in a divorce. 

Minimize Estate Taxes.  A properly crafted estate plan is instrumental to minimizing the estate taxes that will be due following an individual’s death.  Under current federal law, the estate tax exemption (i.e., the amount that can be passed to heirs free of any estate tax) is $2,000,000 per person.  In 2009, the exemption will increase to $3,500,000.  Unless Congress revises the estate tax laws, the exemption will unlimited in 2010 and then revert back to $1,000,000.    

One of the most conventional and simple ways to minimize estate taxes is to set up a Bypass Trust between a husband and wife.  In a Bypass Trust, when one spouse passes away, his or her half, up to then available estate tax exemption is funded into a Bypass Trust.  For example, if a husband and wife have combined assets of $4,000,000 and the husband passed away, the husband’s half, $2,000,000, would be funded to the Bypass Trust.  The Bypass Trust would be used for the benefit of the surviving spouse, if necessary, and then distributed to the couple’s children upon the death of the surviving spouse.  No estate taxes would be payable with respect to the Bypass Trust.  If all of the funds went directly to the wife instead of the Bypass Trust, then the husband’s $2,000,000 estate tax exemption would essentially be wasted. By establishing a Bypass Trust, the couple assures that both of their estate exemptions will be fully utilized.   

            In addition to the Bypass Trust, there are many additional techniques and strategies for minimizing estate taxes, including such things as the establishment of an Irrevocable Life Insurance Trust, a Family Limited Partnership, a Qualified Personal Residence Trust, a Charitable Remainder Trust and others. The appropriate estate planning tools or devices will vary depending upon a person’s particular financial circumstances, family circumstances and goals.

            Any questions about the foregoing topic, including any specific questions or issues related to your estate planning needs should be directed to Titus, Brueckner & Berry, P.C. at (480) 483-9600.

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