Most people think that estate planning is only concerned with the distribution of assets after a person passes away. This is certainly part of it, but a proper estate plan provides a number of benefits while you are still alive and well. Let’s look at what estate planning can help you accomplish and why everyone needs a plan of his or her own.
Controlling your assets even after you pass away
Without your own estate plan, the IRS and the state of California will control how your assets are distributed after you pass away. The government is not interested in minimizing taxes, reducing costs, streamlining the distribution of your assets, and ensuring your wishes are carried out. To control “who gets what” you need your own plan.
A properly designed and implemented plan can help you accomplish all of the following and more:
- Assure the continuance of your lifestyle and the protection of your assets
- Pass your values, work ethic and a sense of responsibility to heirs
- Substantially reduce income, excise, gift, estate, and generation skipping taxes
- Keep your affairs private, and avoiding the costs and delay of probate
- Make sure your heirs are mature enough to handle an inheritance on their own, and if they are not, taking steps to protect the inheritance until they are ready
- Protect your heirs’ inheritance if they become divorced, remarry or fall under the influence of unscrupulous predators
- Manage the value of your business interests, if any
- Ensure your lasting legacy and impact on society
Providing for incapacity
If you become incapacitated, you won’t be able to manage your own financial affairs. Many people are under the mistaken impression that their spouse or adult children can “automatically” take over for them if they become incapacitated. The truth is that in order for others to be able to manage your affairs, they must petition the court to declare you legally incompetent. This process can be lengthy, costly and stressful. Even if the court appoints the person you would have chosen, the individual may have to come back to court every year and show how he or she is spending and investing each and every penny.
In addition to planning for the financial aspect of your affairs during incapacity, it’s critical that you establish a plan for your medical care. The law allows you to appoint someone you trust—for example, a family member or close friend—to make medical decisions on your behalf. It also allows you to specify what medical treatments you would or would not want in an end-of-life situation.
Providing for minor children
An estate plan allows you to control how your minor children are raised if something terrible happens to you. If your children are young, you may want to consider implementing a plan that will allow your surviving spouse to devote more attention to your children without the burden of work obligations. You may also want to provide for special counseling and resources for your spouse if you believe he or she lacks the experience or ability to handle financial and legal matters.
Your plan should specify how your children will be raised if both you and your spouse pass away. It should include a list of persons you would like to manage your assets and name a guardian to raise your children in your absence. The person, or trustee, in charge of financial matters need not be the same person as your children’s guardian. In fact, in many situations, you may want to purposely designate different persons to maintain a system of checks and balances.
You should give careful thought to your choice of guardian and to ensuring that he or she shares the values you want instilled in your children. You will also want to give consideration to the age and financial condition of a potential guardian. Some guardians may lack child-rearing skills you feel are necessary. If you fail to plan, the decision as to who will manage your finances and raise your children will be left to a court of law.
Another issue to consider during the planning process is whether you’d like your beneficiaries to receive your assets directly, or to have the assets placed in trust and distributed subject to conditions and circumstances such as age, need and even incentives based on behavior and education. All too often, children receive substantial assets before they are mature enough to handle them in a prudent manner.
Charitable bequests—planned giving
Do you want to give assets to a charitable organization or cause? Your estate plan can provide support for such organizations in a variety of ways, either during your lifetime or at your death. Depending on how your planned giving is set up, it may also allow you to receive a stream of income for life, earn higher investment yields, or reduce your capital gains or estate taxes.