The absence of an estate plan might lead to problems in family relations, including misunderstandings among beneficiaries, disputes over the estate distribution, tax issues, among others. Another implication of failing to engage in comprehensive estate planning strategies is increased administration costs, which arise from lengthy court procedures, legal issues, and disputed claims among family members. For many years, estate planning strategies have focused mainly on writing wills and trust and advanced tax planning strategies to preserve and transfer family wealth to subsequent generations. However, without a foundation in the effective communication of the estate plan and related goals, the estate planning strategies may not achieve the desired outcomes. Further, family members who are unprepared to inherit wealth may experience difficulties handling sudden prosperity.
Whether you are in the beginning years of your career or retirement is on the horizon, it is never too early to start planning for your future. Not only do solid estate and wealth management strategies help you secure your financial, property, and other assets, but they also play a significant role in preserving family legacies. Studies show that nearly 59% of U.S. adults have not yet done their wills, while 68% do not have an estate plan ready. For individuals who have already done their will and planned an estate, most of them do not follow through in sharing the details with family members. According to research, it is critical to use estate planning strategies to manage family relations in planning estates. Failing to put an estate plan in place might cause unnecessary conflict, confusion, or additional burden to family members.
Importance of Estate Planning
Business is often a way of life for an individual and his family. It is part of an individual’s identity, and he may devote his complete existence to achieve this objective. For a certain individual, making a company vibrant and successful that retains the family’s joint unit, as well as business fund, is an achievement in itself. Successor planning, which normally involves the whole exercise of governance leading to effective business, is a challenging condition. It is a particular purpose to recognize an heir, ensure that future generations possess the right combination of skills, intellect, and curiosity so that the prevailing and potential companies could remain expanded for decades to come. The owner has to recognize the successor, inspire him, and provide him with an opportunity to direct the continued operations of the company. Accomplishing this requires endurance and expense. So economic stability is a compromise, and no one wishes that all their difficult endeavors should fade.
Estate planning ordinarily refers to formulating and establishing a comprehensive program designed to conserve a person’s assets upon death, through various asset-building tools available, and actually intended for distribution to the succession of heirs and their legacies. In the case of individuals who carry on business, they involve protecting the future of such business in the generations to come. Without a comprehensive plan, the wealth of the owner may diminish, and the legacy may eventually disappear. As such, estate planning deals with two main aspects: straining financial resources to maximize the estate that might be inherited by the heir, and then conserving the inheritance that comes into the hands of the heir to be distributed to the grandchild. Likewise, businessmen who carry on a thriving business family tend to have a strong aversion to destroying and eradicating the full value of their work. With estate planning strategies, they help the majority of family-owned businesses maintain that worth for the profit of their successor.
Benefits of a Well-Executed Estate Plan
An often overlooked part of estate planning is ensuring that the client’s choices reflect their ongoing strategy. Estate planning should be an ongoing process and not just a one-time effort. Primarily for financial freedom purposes, personal situation changes, legal rules – which may have been the estate plan of an existing client which were not in existence when the plan was first put in motion. Therefore, estate plans should be reviewed every 3-5 weeks, depending on the situation. During a client’s life and especially during estate plan execution, numerous choices need to be made and the ramifications of all these decisions should be communicated. Regular communication with clients is an important part of the estate oversight plan. The financial advisor should consistently communicate with professional advisors. People will be more aligned to receive returns when their professional advisors communicate with the financial advisors. Professional advisors can have specialized knowledge on targeted financial and trust solutions. They can also help people avoid common mistakes as the recipients of the inheritance. Regularly review plans with estate planning and tax professionals to ensure efficiency and expertise. Ultimately, people will want to avoid becoming the main recipients of the estate as well as executing a sound, tax-efficient plan.
Estate planning can be as simple or complex as one’s particular situation warrants. Several benefits of a well-executed estate plan include: a concise plan for how to carry out one’s legacy; choosing guardians for their children or other dependents; nominating healthcare agents, assuring the directive to physicians are revealed; providing for medical needs and long-term care planning; caring for pets and setting up pet trusts; and selecting the beneficiaries designated to receive property and assets.
For individuals who have acquired substantial assets and property throughout their lives, creating an estate plan has the potential to greatly benefit not only them, but also their remaining family members and heirs. For people who have not yet established a will or trust, it is important for their families to try to settle who gets what and memorialize property disposition in accordance with existing estate laws. Having accessible assets to pay for final expenses or legacies for their families, the failure to perceive the importance of practical estate planning often causes additional stress for families who are in the process of coping with a recently deceased loved one.
Key Components of Estate Planning
Prior to and during the creation of an estate plan, advisors should be aware of the clients’ entire financial picture, tax situation and goals, both personal and financial. The holistic approach isn’t just about providing complete and comprehensive advice—it’s also about forming a deeper, more meaningful understanding of the client. Given the fluid nature of the framework, advisors need to have a firm grasp of changes in law, as well as present, evolving and future issues, all of which can affect an estate plan. While some think of estate planning as primarily tax planning, there are three overarching concerns with creating an estate plan. The first is to facilitate the disposition of assets and preservation of personal values and beliefs at death or the preservation of wealth for future generations.
Preserving Legacies: The Essentials of Estate Planning Strategies. This article addresses the key components of estate planning. Estate planning may involve variables such as the convenience and cost of transferring assets within and outside the estate, achieving the decedent’s disposition desires, tax efficiency and minimizing probate expenses, avoiding protracted court involvement and the financial and emotional stress that is often associated with it. Further, the decedent may have concerns about what should happen if he/she were to become incapacitated during life, and these will need to be thought through and addressed as well. Many of the worst-case scenarios can be foreseen and planned for with a well-considered estate plan.
Will and Testament
A will, also known as a last will and testament, is a legal document providing the organizer the opportunity to specify who will receive their assets and how they will be managed by the executor upon death. The executor is an individual responsible for handling the estate and properties of the decedent, and this person can be the individual specified in the will or the individual determined by a court involved in the probate process. All money, real estate, shares, and personal property should be included in the will. Despite the change in location, there is a strong possibility that the probate process will be required, especially if the organization owns numerous remote assets. It is advantageous to have a legal professional assess a will created.
When you are planning for death, the last thing you want to think about is the division of the wealth and possessions you’ve left behind. Even during the hardest times, estate planning is essential because it prevents legal battles over asset management and provides easier solutions and less hassle for descendants. As we know it, estate planning is divided into two phases: during life and post-mortem. One of the most essential post-mortem components is the preparation of a will and testament. It is essential to periodically review and adjust to ensure that distribution accurately follows the current wishes, particularly in increasingly complex and transitional family structures that generally evolve from wealth building.
Trusts
Since the agency does not dissolve upon the demise of the grantor, the trust has the flexibility to deliver financial benefits or to ensure that the assets within the trust accrue to any beneficiaries specified as other institutions or corporate entities. Trusts are classified as per one of two distinct entities. The revocable design affords the grantor flexibility and control over the trust’s assets. Given its flexibility, upon the death of the grantor, the trust is considered destitute. In contrast to the revocable trusts, an irrevocable trust requires that all assets are placed within an irrevocable trust, thus removing the assets from the grantor. It is due to this irrevocable mechanism that grantors are able to access the benefits credited to irrevocable trusts. It is, therefore, ironic that trust assets are not recognized as personal assets of either the grantor or heirs to the assets and are, thus, immune to creditors’ claims.
A trust entails an arrangement for the protection and safe administration of assets. A grantor may establish this type of arrangement. It comprises three parties, namely the grantor, a trustee, and beneficiaries. The grantor will transfer the assets into the trust and decide how they will be managed and distributed by the trustees. The assets are placed in named entities that serve as the owners of the entailed assets. In due course, the grantor will then decide who the beneficiaries of the trust will be. This decision focuses on when the beneficiaries will be allowed to access the trust’s assets. The grantor is at liberty to dictate the manner in which the assets will be distributed or otherwise used. The grantor may also make provision for the amendments to the trust. This design has a lifespan that is notionally unlimited. His far-reaching foresight will enhance the potential tax benefits that the trust will offer. His exceptional expertise will be instrumental in minimizing risks associated with the transfer of wealth to the intended heirs.
Power of Attorney
A “statutory short form” power of attorney confers the same authority with words that are substantially similar to those in the statutory short form. Connecticut has a separate statutory short form for health care powers of attorney and those that are used to authorize financial transactions. A health care power of attorney should be considered for health care decision-making purposes. During your lifetime, should you lose the ability to make decisions for yourself, an individual of your choosing can make health care decisions on your behalf. Regrettably, there are no easy ways or direct avenues to achieve the above-listed goals. While the end goal makes practical sense, the path to success must be carefully chosen. Regulatory or statutory federal guidelines must be met. That can be done through a clear understanding of the regulations and the appropriate selection of a law venue. When it comes to achieving the success listed above, there really is no substitute for proper planning.
A power of attorney is a statutory requirement for some Medicaid applications. A durable power of attorney gives broad powers to another person and should be carefully considered as it can be used to give the attorney-in-fact the power to sell your property, mortgage property, and pledge property to secure a loan. If you have appointed more than one attorney-in-fact, each attorney-in-fact can act independently of the others. However, unless the document limits the authority, in particular, the attorney-in-fact has the authority to do anything with and to your property that you could do. Depending upon the powers conferred through the durable power of attorney by the principal (also known as the donor), an attorney-in-fact (a person named to act for the principal, who legally is referred to as the donor) can create gift transactions on behalf of the donor. A durable power of attorney is a crucial tool in the event of an individual’s incapacity. Often it is used in the management of assets and health care decisions when you can no longer make sound decisions on your behalf.
Provide for the management of your affairs in the event of your incapacity. A durable power of attorney can be effective immediately after you sign it or when the principal is incapacitated; therefore, it is designed to be in effect both immediately and upon incompetence. If executed in conjunction with a will, the will must be probated. Effective January 1, 2012, the form acknowledged by a notary public for a power of attorney will have a validity period of five (5) years from the date it is signed by the principal unless the document specifies a shorter period. The principal may revoke the power of attorney at any time and for any reason. Once the power of attorney has been revoked, the principal must send written or verbal notice to the attorney-in-fact, to the banks and financial alert institutions where the power of attorney was used, and to any third party who may still be using the now revoked power of attorney. Also, a fiduciary or conservator may be authorized to act for you through the court system if necessary. A power of attorney is a legal document where one person (referred to as the principal) gives another person (referred to as the attorney-in-fact) the power to act on their behalf pursuant to the power of attorney.
Healthcare Directives
The healthcare representative acts as the stand-in for the person who cannot make decisions about their immediate healthcare. When a loved one is unable to express their own wishes regarding life support or surgery, for example, the healthcare representative’s job is to make these decisions thoughtfully. They must consider the feelings and beliefs of the disabled person. In many cases, that representative can make decisions based on previously expressed wishes. When a person is not capable of expressing these feelings, they allow people to take care of their loved ones more effectively. They are not allowed to change their minds and give consent regarding the donation or collection of fertility treatment or research. Withholding or withdrawal of medical services such as food or water can only be done if the person being cared for is in a persistent vegetative state. And this directive only works if your personal doctor and another doctor (who is asked by the doctor to agree or disagree that you will go into a PVS and confirm your personal doctor’s opinion) physician evaluates and the best medical judgment of the two is provided in monitoring the responses.
Healthcare directives deal with what health measures are taken when you are unable to take care of yourself health-wise. If you are in an accident, the question is who your spouse or children would turn to make the right decisions about your health. In Florida, the state legislature requires that every advance directive is recognized as long as it is valid in the state in which it was issued. This means that you do not need to worry about one state not recognizing the document that was issued in another state.
Estate Planning Strategies
Although wills and sustaining trusts are basic parts of an estate plan, gifts and trusts and estates planning are also practical methods that can help reduce inheritance and inheritance tax obligations. In essence, individuals can gift up to $14,000 a year without tax penalties. Estate plans are used as a strategy to create trusts that allow individuals to fund education without any tax implications. Applicable exclusion amounts will allow individuals to transfer assets to trusts or children, according to the 2017 Tax Cuts and Job Act. Mutual interests income and loan interest could be tax-deductible. A Charitable Residual Trust, CRAT, is also useful for charitable giving. It will pay a method to heirs for a specific amount of money and the remaining income to a charitable foundation. Using this type of trust, individuals can fund charities while enjoying tax benefits. By creating letters of intent, heirs could continue to monitor money contributed to charities, regardless of whether charitable trusts are established. For small business proprietors, it can be advantageous to transfer shares to preserved trusts. Charitable cooperation must be used optimally to protect businesses. Ultimately, it is important to provide heirs with access to financial experts who can guide them through tough decisions.
Estate planning is about preserving family and business values, rather than just transferring dollars to the next generation. It is necessary to integrate estate planning with financial strategies. There are many things to consider when planning an estate. The most common are wills, trusts, gifts, and estate taxes. It is important to make wills if the individual has heirs. The will specifies the manner in which the heirs will receive the proceeds of life insurance policies, residence, investments, and other assets. This can help avoid family disputes in the future. It is important to appoint a guardian for minor children if both parents become deceased. It is important to finalize the details of a will to avoid probate since this can reduce the assets that are distributed to the heirs. Creating a will plays a significant role in preserving families’ standards. Trusts are an important part of the estate plan, especially since it is possible to reduce the inheritance tax and, in some cases, create income to pay off bills. Trusts also avoid the costs associated with administering assets. Estates with significant assets should consult lawyers and financial planners to determine whether wills, trusts, or estates must be created or updated.
Minimizing Estate Taxes
A powerful gift tax avoidance strategy is available through lifetime annual exclusion gifts. The annual exclusion for gift tax purposes is subject to an annual adjustment for inflation. Each spouse can take advantage of the annual gift tax exclusion, thereby potentially protecting an amount equal to the combined exclusion for lifetime giving. If the gifts are made using property generating income, any income that the property generates escapes the donor’s income taxes. A donor may take great advantage of the income tax-free gift strategy by funding a trust that has been designed to qualify as a grantor trust for income tax purposes. In establishing a grantor trust, the grantor contributes property to the trust, yet the federal income tax on the income from the trust is reported by the grantor, rather than being imposed in the trust.
Estate tax planning generally represents an important estate planning objective of an individual. The ultimate goal of estate tax planning is typically to reduce the future estate tax liability, including potential federal estate tax liability, potential state estate tax liability, or other succession tax liabilities imposed by foreign jurisdictions. Despite its importance, many charges in practice do not recognize the significance of estate tax planning until it is too late to implement those techniques that afford significant tax benefits. Since there are many estate tax avoidance strategies available, most people will likely be able to find a few that are suitable for their particular circumstances. When working toward reducing estate taxes, two important planning concepts are inter vivos gifts and generation skipping transferring strategies.
Asset Protection
A risk management framework needs to be considered for its impact on investment returns. The amount and type of life and disability insurance are important considerations when planning for wealth accumulation and transfer strategies. Asset protection planning minimizes financial loss if the unexpected occurs and helps ensure that the property remains within the family. The cornerstone of most asset protection plans should be the purchase of appropriate levels and types of insurance. The advantages of an ABLE account are that contributions to the 529 ABLE account can grow tax-free to the extent the withdrawals are used for qualified disability expenses, and the accounts may give family members the ability to have some control over the funds, as long as the assets in the account do not exceed the $100,000 threshold.
Protecting wealth is a concern for many individuals. It is not just high-net worth clients who worry about losing assets. More affluent clients seek asset protection as part of a comprehensive estate plan. The primary tools and planning strategies for asset protection discussed with clients are distribution planning, titling of assets, insurance, business entity selection, estate and financial planning strategies for clients and their families, utilizing a combination of asset protection tools. Insurance is an important consideration for individuals and their families. Through the use of the appropriate types and amounts of insurance, wealth protection and transfer goals can be achieved. Health insurance, general insurance, disability insurance can ensure that funds are available to meet personal, business, or health emergencies.
Charitable Giving
The current income tax charitable deduction rules can be helpful to some clients in those years when they have appreciated assets to contribute. Some clients make charitable contributions in a single year and only every other year in order to exceed the standard deduction in one year. This has a form of a similar impact as the “charitable lead trust.” Charitable remainder trusts can be used to significantly improve the ordinary income tax problem in the year of sale if the installment sale violates the guidelines for an OID sale. Clients can give away a large portion of their money (the “charitable lead” portion) and still transfer the family business or family investment assets to the next generation of family members. Readers may wonder why income should be withheld as a payment out of a charitable lead annuity trust.
There are many commonly used techniques for charitable giving that can form an effective part of an estate plan. These techniques include direct contributions, charitable remainder trusts, charitable lead trusts, charitable annuities, and private foundations. Benefits of making charitable gifts include the psychological lift, the reduction of income taxes by itemizing deductions, and the avoidance of capital gain taxes. Donations of public stock to a public charity to fund a charitable remainder trust provide an excellent way to avoid a capital gain but accomplish a charitable goal.
Succession Planning
It would be surprising if the business you’ve built from the ground up didn’t cause mixed emotions when it comes time to let others take the fair and equitable leadership, perhaps just with your exit strategy. However, for the business to transition and flourish, your business may require succession planning thoughts and efforts. Expand your family’s harmony and shoulder any future multi-generational disagreements; lifestyle decisions, heir considerations, asset control, or managing equity challenges with sound advisory planning. Not planning to transition well could lead to ill-advised actions or legal disputes, degenerating effects on the company’s financial health, relationships, legacy, and goodwill. Local management searching opportunities to improve and rely on the legwork and business recommendations through your exit strategy. Be strategic in how a creation glimpse of your step back, then phase out, exit path. Don’t be hasty to pick out key employees to succeed yourself, then distribute control as you undertake the role of a mentor with the candidate, and then be there for critical issues and meetings.
Backup planning or succession planning prepares your family and business for life after your business ownership. Think of your business as a living thing. The business you’ve grown likely needs guidance and forward-thinking continuity plans to flourish and fulfill its potential. Benefiting from your hard work, your family and the business you have successfully built can continue amongst changing conditions and life’s speed bumps. A cohesive succession plan is a personal legacy that can produce a lasting family impact. As most small business owners household, personal, family, and financial wellbeing are a significant component to everyone’s future.
