Traditionally, we often assume estate planning is only for the so-called rich. While it is true that taxes are certainly higher for large estates, taxes alone are not the only reason for estate planning. Here are seven additional issues to consider that may be important to you:
If you do not have a plan prior to your death, state laws will determine who inherits your assets and when they receive them. The court system will also appoint a guardian for your children and the administrator for your estate. Additionally, your estate could wind up paying substantial—and unnecessary—taxes and administrative costs as a result of not having an estate plan.
Although most people feel strongly about who should inherit their assets and when, they are often less sure about what to consider as they select an executor and trustees. As background, your executor is your personal representative after your death and is responsible for such functions as:
• Administering your estate and distributing assets to your beneficiaries
• Paying estate expenses, if applicable, and any outstanding debts
• Ensuring that all life insurance, employee benefits and retirement plan proceeds are received
• Filing the necessary tax returns and paying the appropriate federal and state taxes
In short, your executor administers your will. When these duties are met, the job ends. However, if your will creates trusts to accomplish more long-term goals, you need a trustee. Your trustee is responsible for managing the trust’s assets and ensuring the beneficiaries are provided for in accordance with provisions of the trust. Individuals are often torn between choosing an individual as the executor or trustee versus naming a corporate entity, such as an investment firm or bank. As a way of finding some middle ground many people name both a person and corporate entity as executors and co-trustees. Here are the advantages and disadvantages of each alternative:
A few advantages of a corporate executor and/or trustee:
• Specialist in handling estates and trusts
• No emotional bias; therefore, impartial and usually free of conflicts of interest
• Never moves away or goes on vacation
• Never dies or gets sick
Disadvantages of naming a corporate executor or trustee:
• Usually has little familiarity with the family
• Administrative fees may be higher
• Rarely will continue any family-owned business
• Rarely maintains real estate requiring management
Advantages of an individual executor and/or trustee:
• More familiar with the family
• Administrative fees may be lower
• May be familiar with family business interests
Disadvantages of an individual executor or trustee:
• Probably not experienced in handling estates and trusts
• Could have an emotional bias
• May not be impartial toward all heirs
• Could have schedule conflicts with respect to meeting their obligations as executor/trustee
• Could be incapacitated or die
Once you determine who to use as your executor and trustee you may want to consider establishing a living trust. A living trust (also known as a self-declaration or revocable trust) is a legal document that resembles a will. It contains instructions for managing your assets should you become disabled and directions for the distribution of your assets upon death.
Living trusts have two major benefits. Assets in a living trust do not go through probate, which is the process of proving and administering a will under the jurisdiction of a court. It can be a time-consuming and potentially expensive process. It also subjects your private financial affairs to public scrutiny. Beware: All probate records are public documents!
A living trust provides a perfect vehicle for managing your assets in the event of a disability. While you are alive and well, you can act as your own trustee. In the event of disability or death, the successor trustee that you selected takes over.
Estate planning using a living trust may also include establishing a lifetime gifting program, making the most of the unified credit or considering charitable endeavors and the associated trusts.
Before you sit down with an estate planning attorney, take the time to get educated. One book that you may find very helpful is J.K. Lasser’s New Rules for Estate and Tax Planning.
Please keep in mind that estate planning can be a complicated process. Therefore, if you are not confident your affairs are in good order, seek professional advice to alleviate potential problems down the road. And best wishes toward establishing a sound estate plan.
Doug Adler is first vice president, investments
and a registered principal with Raymond James
& Associates in East Lansing where he heads
Adler Wealth Management.