Fundamentals of Estate Planning


As we work through our adult lives, many of us set aside money for retirement. Retirement planning is a complex process with many hurdles to overcome. Part of that process is the concept of estate planning, or what will happen to our assets during our lives and after we die. Perhaps the goal is to provide a stable financial future for our children or to leave our precious possessions to loved ones and dear friends. No matter the goal, it is never too early to begin the estate planning process.

What is Estate Planning?

Estate planning is the process of arranging for management and disposal of our “estate”, or the assets we have acquired through the course of our lives. These assets could be money, fine art, real estate properties, collectibles, stocks and bonds, or anything else of value. Estate planning can include eliminating questions about the future, such as administering distributions of assets during probate. Probate is the legal process by which assets are distributed to those named in a will and any financial claims are resolved after a person’s death. The ultimate goal of estate planning is to minimize taxes and expenses associated with those assets in possession, whether the person is alive or has passed on, thereby maximizing the value of the assets.

Components of the Estate Planning Process – Probate

There are several major components to consider when developing an estate plan. These components work together to ensure that a person’s final wishes are carried out and that assets are divided in the way they are intended to by the owner.

The first component is a probate. In the United States, the deceased person’s will is entered into court. The evidence is heard from representatives of the estate. The probate court’s role is to decide if the will is valid. Then, the court appoints a custodian (called a fiduciary) to take charge of the deceased person’s assets. This can be a family member, an attorney, a financial advisor, or someone else determined by the court to be competent to handle this responsibility.

Once the will is determined to be valid, all known and unknown creditors will be notified, either directly or through an announcement published in news media. This gives creditors an opportunity to file any financial claims against the estate. All valid claims are paid from the estate’s assets in an order determined by the court or by state laws. The remaining funds are then paid to any beneficiaries named in the will and testament, or to heirs if there is no will present. Finally, the probate judge renders the estate closed.

Tax Implications of Estate Planning

Remember that the goal of a solid estate plan is to maximize the value of assets. Taxes can eat into the value of those assets. Income tax, estate taxes, and gift taxes all play a part in the process of developing an estate plan. Court costs associated with probate can also impact the final value of assets.

In the U.S., any assets left to a spouse or to a qualified charity organization are exempt from federal estate taxes. For assets left to the deceased person’s children or to anyone else named in the will, taxes may be imposed under certain circumstances.

One way of avoiding estate and gift taxes is by distributing assets in the form of gifts during the asset owner’s lifetime. One may distribute up to $14,000 in assets each year without incurring federal taxes. Paying for college tuitions with assets or paying for medical insurance premiums are other ways to avoid taxes, but only if those payments are made directly to an educational institution or to the medical provider.

Outside of a traditional will, there are other alternatives to avoiding the payment of estate and income taxes. These tax-advantaged alternatives include:

  • Retirement plans such as IRAs or 401(k) plans
  • Certain types of trustee bank accounts
  • Transfer on Death financial accounts
  • Proceeds from life insurance policies

Avoiding the Expense of Probate

The probate process costs money and takes up a considerable amount of time as the will works its way through the court system. For people interested in protecting their assets after they’ve passed away, trusts and other vehicles make suitable choices.

For people with less than $5,250,000 in assets, a living trust is a great solution. These trusts allow an asset owner to transfer those assets to a legal entity as defined in the trust. In other words, the trust itself becomes the asset owner. Establishing a trust prevents the need for a probate hearing, saving time and considerable expenses for family members of the deceased person. A living trust can be created at any time during a person’s life, and trust attorneys are readily available to handle the process. There are two major types of living trusts, irrevocable and revocable. Speak to a trust attorney to help decide which is right for your needs.

Along with living trusts, there are special trusts that provide incredible control over the management, distribution, and disposal of assets. Some of these special trusts include spendthrift trusts, which are designed to prevent wasteful spending by a financially reckless child, or a special needs trust which can provide finances for the care of developmentally disabled beneficiaries.

Other probate avoidance methods include making lifetime gifts to beneficiaries, purchasing life insurance policies, and naming death beneficiaries along with establishing joint ownership of assets.

Final Words on Estate Planning

It is never too early to start thinking about the future of your assets. You’ve worked hard throughout your life to acquire assets of value, whether that is money, real estate, or collectibles. You want your spouse and children to be able to live comfortable lives after you have passed away, so preparing now for the inevitable makes strong financial sense. A financial advisor can help guide you toward the right solution for your plans and your needs.


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