The Ultimate Estate Planning Guide for Wealth Preservation

Rich Fettke


Summary: In this article, you’ll learn the definition of estate planning, the difference between a will and a trust, as well as how living trust benefits can benefit both you and your loved ones. Ultimately you will learn how estate planning can help you to not only preserve your wealth, but to also provide for your loved ones after you’re gone. This article is based on this RealWealth webinar hosted by estate planning expert, Clint Coons.

Living trust vs will … do you understand the key differences? Do you understand how estate planning is essential to preserving your wealth? Do you know how to begin the estate planning process? If you answered “no” to any of the preceding questions, don’t worry. After reading this article, you’ll be able to answer those questions and more as you begin your journey towards effective estate planning that leads to wealth preservation.

What is Estate Planning?

The estate planning definition essentially states that you will make a plan in advance, name the individual(s) who will receive your items after you die, and include specific instructions about how your estate should be handled. Keep in mind that your estate includes everything that you own, your car, homes, checking and savings accounts, furniture, personal possessions, life insurance, and any other items that you own. With this in mind, your estate plan should include the following aspects:

  • Instructions for passing on your values (not just your tangible items).
  • Instructions for your care if you become mentally or physically disabled before you pass away.
  • Instructions / provisions for use of funds that are left to people who might be irresponsible with money.
  • Business transfer instructions at the time of your retirement, disability (should it occur), and / or death.
  • Name someone who will be a guardian for minor children. This person may or may not also be the inheritance manager for minor children.
  • Maintain a life insurance policy.
  • Minimize the impact of estate taxes, court costs, and (if possible) avoid unnecessary legal fees.

Why Don’t More People Have an Estate Plan?

Did you know that more than half of Americans don’t have wills? For many people, they think that they are “too young” to worry about estate planning. For other individuals, they “haven’t gotten around to it,” or they think that they “don’t have enough or valuable enough assets to warrant a will.” Unfortunately, death can happen at any time. This is not meant to be a pessimistic or morbid statement; it is simply stating the reality that death can occur when we least expect it. If you want to protect your assets, as well as provide for your loved ones, then you need to begin estate planning regardless of the number of or type of assets that you own. Keep in mind that it is possible for your assets to go straight to the government, should you not have instructions or a legal will in place upon your death.

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What is a Probate and How Does the Process Work?

In layman terms, probate is the legal process that dictates how your property will be distributed after you pass away. While probate doesn’t have to be complex, it is important that you understand the process. Essentially, the attorney representing your estate (or your estate executor) will be the one to initiate probate. The probate court will then validate your will, authorize your executor to distribute your estate to beneficiaries (per your instructions), and pay any taxes that your estate owes. Without a will, there will be additional administrative proceedings to best determine how to divide your estate. In the latter case, the court will name an administrator to your estate, this individual will then follow the probates judge’s instructions for the distribution of your property.

Pros of Probate

There is one major benefit for the probate process.

1 – Designed for Creditor Protection.

The probate process ensures that a claim can’t be filed against the estate for any possible funds that are owed. This is especially important if the properties being divided have existing mortgages, are in the middle of renovations, or otherwise have money owed on them.

Cons of Probate

There are several potential cons to the probate process.

1 – Wills Become Public Information Upon Probate

The major downside of probate, is that your will (in its entirety) will become public knowledge. This means that not only will it become public record what was listed in your will (include the types and values for the assets), but it will also include your beneficiaries, as well as who received what assets. This invasion of privacy can be particularly troublesome for your beneficiaries.

2 – Expensive

The cost of probate often averages between one percent to eight percent of the total estate value. Additionally, you will have to pay attorney fees, which can be quite costly. For example, the probate costs on a $300,000 estate might range between $3,000 – $24,000. This fee doesn’t include the “reasonable compensation” that is owed the attorney and personal representative per certain state laws.

3 – Time Consuming

While probate doesn’t have to be a complex process, the reality is that it can take anywhere between one to five years to complete. During this time, your estate might be forced to pay other fees, while your beneficiaries wait to receive what you had intended to leave them.

4 – Probate Fees Vary by State

Probate fees vary depending on the state. This is important to remember, because if you own real estate assets in multiple states, then you r estate will conceivably have to pay probate fees in multiple states. Additionally, the process can last even longer if there are any discrepancies between each probate judge.

5 – Notice Must be Given to Heirs, Even if they Don’t Inherit.

The probate process requires that heirs are notified, even if they aren’t set to inherit anything. If heirs aren’t properly notified, then the probate process can be extended. Additionally, this means that heirs (especially those who aren’t inheriting anything) might try to contest the will and your estate, which can lead to costly attorney and court fees. If the estate or will is contested by a heir, then the probate process can be extended for an additional period of time.

3 Common Estate Planning Options

While every estate is different, there are three common estate planning options that people can use to protect their assets and provide for their loved ones.

Option #1: Joint Ownership / Joint Tenancy

As its name suggests, joint ownership / joint tenancy with right of survivorship involves creating an estate plan whereby your assets will pass directly to your spouse upon your death. In fact, this type of estate planning is often the most popular amongst many individuals. However, there are several key advantages, as well as possible disadvantages, that must be carefully explored before you decide to embark on this particular estate planning option.

Benefits of Joint Ownership / Tenancy

There are several benefits to join ownership / tenancy.

1 – Easy to create and works for anything you own.

This benefit is especially important if you want to create a simple, yet effective document to protect your assets upon your death.

2 – Avoids probate.

The key advantage of joint ownership / tenancy with right of survivorship is that it avoids probate by automatically transferring assets to the survivor upon your death.

3 – Community property receives full step-up in tax basis upon passing of spouse.

This advantage can be especially beneficial to your spouse and result in additional cost savings.

Drawbacks of Joint Ownership / Tenancy

There are three main drawbacks to joint ownership / tenancy.

1 – Loss of control.

Each tenant will have unrestricted use of and access to the property, which means that there is a significant loss of control.

2 – Joint tenancy gives away property ownership to the other tenants.

Not only does joint tenancy give away property ownership, but it can also bypass your estate plan.

3 – A jointly owned asset will be subject to judgment against any owner.

It is important to note that a jointly owned asset does have the possibility of being lost in a bankruptcy case.

Option #2: Living Will

A will includes instructions for your estate. However, it is important to note that a will does not avoid probate. In this vein, any assets that are directed by your will must go through your state’s probate process before they can be distributed. Real estate that is owned out of state, will potentially have to go through multiple probates. The good news is that not everything will have to go through probate. For example, your IRAs, 401Ks, and life insurance, i.e. those entities not controlled by your will, can transfer to the established beneficiary without going through the state probate process.

Benefits of a Will

There are several benefits to a will. First and foremost, a will is easy to establish and plan. They offer a lot of flexibility, they also do not require up-front costs. Finally, a will can be used to plan for more personal matters, in addition to the distribution of assets.

Drawbacks of a Will

While wills offer several potential advantages, they do also have a few key drawbacks that you should carefully consider.

1 – Only operates upon death.

A will only comes into effect, upon your death. It does not apply if you are mentally or physically disabled and unable to make financial decisions.

2 – Time consuming and expensive.

Wills can be time consuming to not only create, but to also maintain. Remember you will will need to account for the distribution of all of your assets (especially if you want to avoid letting them fall into the hands of the state).

3 – Loss of control over assets.

When you die, you will no longer have control of your assets. This means that the assets are assigned a set value at the time of your death.

4 – Easy to contest.

A will is easy to contest. In fact, any potential heir can often times contest the will, which can lead to a lengthy and costly court battle.

5 – Requires Probate.

As previously discussed in this post, a will often requires probate in several states. Probate, as you have learned, has several potential consequences.

Option #3: Living Trust

A living trust is often the preferred estate planning option for many individuals. This document avoids probate at the time of your death, it can prevent the state from taking control of your assets, and it can bring all of your assets into one plan to offer the maximum level of privacy and protection. Unlike a will, a living trust doesn’t necessarily have to die with you. Instead, the assets can stay in the trust, be managed by the selected trustee, and then given to your beneficiaries when they reach the right age. In this way, a living trust is very helpful if you have young children who might be minors when you pass away. It can also protect your assets from people who are financially irresponsible, as well as the creditors and spouses of the beneficiaries.

Benefits of a Living Trust

There are several benefits of a living trust.

1 – Transfer your assets into ownership of the trust while you are alive.

Your assets can be transferred into the trust while you are still alive, which means that you can rest easy knowing that everything has been taken care of before you pass away.

2 – You retain control of those assets as the trustee of your revocable living trust.

You do not relinquish control, which means that you are able to ensure that your investment strategy is followed and that your assets are handled how you want them to be.

3 – You can change or revoke the trust at any time.

You are able to change or revoke the trust as needed to maximize its potential benefits and investments.

4 – The assets in the trust pass directly to your beneficiaries without going through probate upon death.

This means that you avoid the drawbacks of probate, including the invasion of privacy that occurs when the distribution your assets becomes public record.

Drawbacks of a Living Trust

While a living trust does offer many potential advantages, it does have one major drawback when it comes to the possible taxes that beneficiaries might be forced to pay.

1 – Living trust taxes after death.

Any income that is earned after the principal assets are transferred in to the living trust can be taxed. This means that when you pass away, your beneficiaries will be responsible for paying any taxes that the living trust accrues. Depending on how the trust is structured, as well as the type and value of your assets, these taxes can often be quite high.

New Laws & Estate Tax Exemption 2018

It was announced that beginning in 2018 the estate and gift tax exemption would be increased. The estate and gift tax exemption is now $5.6 million per individual, which means that you can leave someone the aforementioned sum and they will not have to pay federal or gift tax on the funds. With this in mind, as part of your estate planning, you should carefully consider how the state and federal government will tax your estate. To the best of your abilities, you should structure your estate so that your heirs aren’t stuck paying hefty taxes at the state and federal levels.

Estate Planning Costs

Planning for your estate doesn’t have to a process that breaks the bank. Instead, by keeping the following these three tips, you can greatly reduce your estate planning costs.

  1. Understand exactly what you are getting and what you want. As previously discussed, a living trust offers advantages over a will, however this type of estate plan is often more expensive. With this in mind, you might determine that a living trust is not offer a high enough cost benefit.
  2. Discuss fees with your attorney before you even begin the estate planning process. Remember that after you pass away, your estate will still be responsible for paying the attorney fees, so long as your attorney is needed during the distribution of your estate and assets.
  3. understand the potential advantages (as well as the fine print) associated with a flat fee. For example, the flat fee might be the cheaper option, however it might have a stringent timeline. With this in mind, make sure that you read all fee structure documents carefully, that you choose the right attorney for the job, and that you are ready to make the financial commitment associated with estate planning.

Investor Questions about Estate Planning

As you determine how you want to begin the estate planning process, it is important that you ask a few key investor questions. Remember that you can always speak with your investor consultant, your CPA, and your attorney to create the estate plan that is right for you and your loved ones.

1 – Can a property be deeded if it is already deeded in an LLC?

You can transfer all LLCs into a living trust.

2 – Is a Living Trust a public record?

The actual living trust, i.e. the actual document, does not become public record. To further protect yourself (and your assets from going into public record), you can use a generic trust name to create an additional layer of anonymity.

3 – Is it advisable to have multiple beneficiary trustees under a living trust?

The short answer is “yes.”

What to Do Next?

Following one of the three estate planning options, will not only bring you peace of mind, but it will help to protect your assets and your loved ones. Through estate planning you can provide careful instructions, avoid the negative attributes of probate, and provide for your loved ones after you have passed away. To learn more, contact your attorney, CPA, and your investment consultant to ensure that you are doing everything in your power to properly prepare your estate, while simultaneously making smart investment choices.

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