December 12, 2018 • Retirement 101 / Articles and Insights

Understanding the Basics of Estate Planning

As you start thinking about your retirement strategy, you’re also probably thinking about your estate. Major life changes like retirement can create a decision domino effect—your next set of goals, your plans, your bucket list items. Those decisions should also include how to handle your estate—but it doesn’t have to be intimidating, and it doesn’t matter how big or small your estate is. 

At its core, estate planning is about considering what will happen to your possessions when you die. You might want to leave something to a particular person, like money, or a sentimental item, like a piece of jewelry. Perhaps you want to leave a gift that will have a priceless impact, like helping put your grandchildren through college. You may even wish to leave a charitable legacy by gifting money to a cause that’s important to you.

Whatever your goals, estate planning can help ensure that your wishes are met. Advance planning can help make your passing easier for your family, too. Here are some estate planning basics to get you started.

Write a Will

Writing a will is one of the most important aspects of estate planning. This legal document provides clear instructions about how your estate should be handled after your passing. It should include details about any property or other assets that you want to leave behind for friends and loved ones to enjoy. Without a will, the government will make these decisions for you, and some of your assets could become government property.

You can write a will at any age, but by the time you start to prepare for retirement, a will becomes even more crucial.

While it is possible to write your own will—you can find templates online—you may want to consider hiring an experienced estate attorney, especially if your estate is large or complex. There are also affordable trust and will services available from financial professionals that you may want to consider. Your signature will need to be witnessed (many law firms can also supply witnesses from their staff). Rules vary by state, so check your local regulations or with your lawyer to ensure your will meets legal standards and clearly conveys your wishes.

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If your goals change or your estate grows over time, you can change or amend your will. It will be important to include language that cancels all previous versions.

Appoint an Executor

Unlike in the movies, your loved ones probably won’t gather at your safety deposit box for the reading of the will. There are rules governing how a will is executed—and they vary from state to state.

The first stop is typically probate court. Probate is the process of validating the will and changing the title on assets when someone passes away. Assets that are owned in a deceased person’s individual name, and for which there is no named beneficiary, are no longer accessible once the owner of the asset has died. In order for family members to gain access to accounts or other assets in the deceased’s individual name, they must file a petition with the probate court and wait for the court to approve the will. If there is no named executor, the court will appoint a personal representative.

Once probate court approves your will, your executor will have the legal power to act on your behalf. The executor is responsible for various duties, like getting a value on your estate, distributing your assets according to the will’s stipulations, paying any taxes or debt that your estate owes, and filing your final personal income tax return (Sadly, the old adage about death and taxes is true!).

If you want to avoid the cost and time of probate court, you should consider establishing a trust document. There are certain advantages to establishing a trust over a will.

Since the executor role is a serious responsibility, it’s important to appoint a reliable executor. This could be your attorney or financial professional, but it can also be a friend, spouse, or other loved one. Since these duties can take several months to complete, discuss the details with your chosen executor to make sure they’re comfortable with the role before naming them in your will.

Sadly, the old adage about death and taxes is true!

Factor In Estate Taxes

If the gross value of your estate is above the exclusion limit ($11,180,000 in 2018), estate taxes can impact the amount that your beneficiaries receive. Due to the U.S. marital tax deduction, this does not affect assets transferred to your spouse. But since federal estate taxes can reach as high as 40 percent, with some states imposing additional estate taxes, it’s worth considering steps you can take to protect your assets.

One possible step is to set up an “A-B trust” with your spouse. This joint trust divides your assets in half when the first spouse dies, which can help you optimize your estate tax exemptions. This means more money can be passed on to beneficiaries other than your spouse estate tax-free.

Another option is to make charitable gifts during your lifetime. These gifts are excluded from your taxable estate, reducing the estate taxes due at the end of your life. Speak to an estate planner for advice about optimizing your charitable contribution strategy.

Plan for Estate Liquidation

A life insurance policy can help provide for your loved ones after your death. But it can perform another role in estate planning: providing the money needed to pay those estate taxes.

At the end of your life, your will’s executor has nine months to pay the estate taxes levied against your estate. This may involve liquidating some of your assets, which can be time-consuming and expensive. The payment from a life insurance policy may facilitate this process and help avoid the necessity for assets or property to be sold.

Proceeds from life insurance are still subject to estate taxes if they are included as part of the taxable estate. One way to remove these proceeds from your taxable estate is to place them in an irrevocable life insurance trust (ILIT). Once the trust is created, it can’t be changed. A financial and legal professional can advise you whether an ILIT may be a good option for your situation.

Planning your estate can be a complicated process, but understanding estate planning basics can help you prepare. To learn more about estate planning strategies and the role insurance products can play, contact a financial professional.

This information is provided for educational purposes only and should not be construed as legal or tax advice. Always consult with qualified legal and tax advisors concerning your own unique situation.
The purchase of a life insurance policy is an important decision. Be sure to carefully evaluate the features and benefits, costs and limitations of any policy you are considering before making a purchasing decision.

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