There’s more to estate planning than merely planning for the future. Financial options are available to you depending on your situation and can provide considerable savings and protection.
What Is An Estate?
An estate is comprised of all of one’s possessions, both tangible and intangible. This includes their house, car, various accounts, financial assets and instruments (stocks, life insurance), personal possessions, and more. In essence, everyone has an estate, regardless of how large or small it might be. Click here for more details on legacy-planning.
What is the importance of estate planning, and what might happen should someone neglect to make one?
As stated previously, estates vary in size, depending on the person. What doesn’t vary, however, is the fact that at some point everyone dies (or becomes incapacitated). And it is here that estate planning comes in handy, allowing the person to determine how their assets will be preserved, managed, and distributed. This can include the people in that person’s life, organizations they hold dearly, etc. Moreover, estate planning allows for the determination of what each beneficiary will receive and when they are to receive it. Of course, estate planning will also include the best efforts to minimize the amount of money that will go to taxes, along with legal fees, court costs, and the like, ensuring that beneficiaries can keep as much as possible.
The importance of estate planning should not be understated. Failure to plan appropriately could leave your assets in the hands of the state, which will use its own laws to determine who gets what, and what the value of each asset is for tax purposes. This process could take years, leaving your loved ones in a potentially detrimental position. There will also be no way to shelter your assets from various taxes and fees. In short, a failure to plan will put your beneficiaries in a disadvantageous position.
What differentiates a will and a trust, and which is preferable?
Before we delineate the differences, it makes sense to first go over the similarities between a will and a trust. Both, broadly speaking, are legal documents that allow you to decide what happens to your property and various assets after you die.
A will is a legal document that directs who receives your assets and property after your death (and can also establish the legal guardian for your minor children), while a trust involves the appointment of one or more trustees who manage and distribute your assets to your beneficiaries. Furthermore, a trust goes into effect as soon as it’s signed, allowing for the distribution to occur while you are alive if you so wish. A trust will also avoid scrutiny during probate, which means that the distribution of your assets remains private to you and your family. The avoidance of probate also means that the distribution will happen much faster than with just a will, which will have to go through probate. These are the main differences, and it is important to keep in mind that in most cases having both a will and a trust will be beneficial.
For asset and property distribution, whereas a will might be sufficient for those with a more modest estate (as it is easier to create and will involve lower costs while not requiring the appointment of a trustee), to maximize control over your assets and put your beneficiaries in the best possible position you should also create a trust. More on will information here.
What are the Different Types of Trust?
A revocable living trust cannot protect you from creditors or provide any tax advantages, but it guarantees a simple transfer of property after your death and can be altered at any moment. An irrevocable living trust is another option that provides tax benefits and protection from creditors. It can also help provide for family members for many generations, provide an income, and contribute to charities, depending on whether it’s an asset protection trust, a dynasty trust, a charitable remainder trust, or an irrevocable life insurance trust. Creating a foundation can also provide you with some of the same advantages while adding more control for a longer-lasting legacy.
Revocable Living Trusts
A trust is a fiduciary arrangement wherein you entrust the management of your assets to a third party for the benefit of one or more beneficiaries. The simplest and most commonly used trust is a revocable living trust.
When you die, your assets (the trust assets) are divided according to the terms of your revocable living trust.
Irrevocable Living Trusts
Creating a trust is one of the simplest and most effective ways to ensure that you retain control over the distribution of your assets after you pass away.
Put simply, a trust is a system to keep track of who owns and maintains your property, as well as how it is managed and distributed. A trust is similar to a vault that you generate your own combination for and place property inside of, giving you the most control and peace of mind.
Asset Protection Trusts
One of the most powerful and effective trusts is the asset protection trust. The asset protection trust, unique to all others, is created to benefit the trust’s creator (known as a self-settled trust). Basically, an asset protection trust allows someone to cede legal ownership of assets while continuing to gain benefits from them, thereby protecting them from creditors who are only able to reach their assets.
Charitable Remainder Trusts
A charitable remainder trust is a type of irrevocable trust. It’s an instrument you may finance, such as other irrevocable trusts, and once you put assets in, you can no longer pull them out or change the trust’s conditions. A charitable remainder trust, unlike most other irrevocable trusts, is set up to benefit both you and the charity of your choice.
A dynasty trust is an unbreakable trust that permits wealth to be preserved inside a single family for numerous generations without having to pay taxes. The tenure of a dynasty trust and its tax benefits are the two main advantages of a dynasty trust.
Irrevocable Life Insurance Trusts
When it comes to explaining an irrevocable life insurance trust, the simplest way to explain it is a trust that is created to keep the grantor’s life insurance policy(ies). Irrevocable trusts containing life insurance policies are known as Irrevocable Life Insurance Trusts, or ILITs, because life insurance is one of the most prevalent assets in irrevocable trusts.
Create a Foundation
Businesses with income that is generated from outside the United States can benefit from these vehicles as well. Using your wealth to leave a philanthropic legacy could be as simple as establishing a foundation, allowing you to make a difference in the world, be recognized for it, and save money on taxes along the way. The Internal Revenue Service recognizes a foundation as a type of tax-exempt charitable organization (while others are known as a public charity).