Estate Planning 101

estate planning

The Basics of Estate Planning

Most of you remember the children’s story about the troll who lives under the bridge. Although there are a couple of variations, the most common one has the troll waiting underneath for unsuspecting travelers. If they do not stomp on the bridge three times before attempting to cross, the troll comes up and eats them. Now, the troll is a demanding fellow; stomping any number of times less than three gets you skewered and served up like a pig at a luau. But stomping more than three times also puts you on the menu. I relate this little scary story from our distant childhoods because estate planning laws are a lot like the troll. Many times you have to stomp three times, no less and no more, in order to do what you want done.

Of course, this begs the question of what do you want done. What’s the point of estate planning? This is the topic for today’s article. Estate planning is simply a plan which tells other people what you want done after you have died and what you want done for you if you can’t make decisions on your own. All the buzz words you’ve heard are fancy legal terms for the different tools available to tell other people what you want done. So let’s explore some of these.

First, I want you to understand how the troll (the IRS and the court system in our story) works. If you do not have your own estate plan, or if you write one incorrectly, then the IRS and the courts will apply standard instructions they’ve written up to decide how much in taxes your survivors should pay, who should get your possessions, and who should watch your kids until they become adults. That means you’re spend-thrift brother, Bob, could get your beach condo, and your mean sister, Ethel (who doesn’t like children), could get your kids. Not a good idea, so you really should develop your own estate plan. Here’s what you need to consider.

You Need A Will

You should at least have a will, which indicates who you want to manage your affairs and tells this person where everything should go. If you have less than $100,000 in assets, a simple will is sufficient. Your estate will go through the “probate” process, which can take time, but there won’t be any taxes or sizable probate charges. Owning more than $100,000 probably means that a trust is in order. For most people in Southern California, owning even a small condo puts them well over this threshold, and a good “living trust” is in order.

You Might Need A Living Trust

The living trust is simply a device you use to own all your major assets which allows you to keep control while you’re alive, but which allows your heirs to skip probate and minimize taxes when you’ve died. In addition to a will and/or a living trust, you should also have “powers of attorney for healthcare” and “powers of attorney for assets”. These two documents indicate who should manage your assets and make medical decisions for you if you are alive but unable to make these decisions on your own. They are a must!

Charitable Instructions

For most people in the U.S., charitable instructions are a key component of their estate plan. Americans are the most charitable people on earth, and most of our clients want to continue that after they have died. Sometimes, it is as simple as leaving some money to a favorite charity before your heirs get the rest. Other times it means splitting the ownership of a key asset between a charity and your children. This can take a variety of formats (and I won’t try to go into all the different techniques), but in most instances it can be very beneficial for your kids and for your favorite charity. Along these lines, you might also consider sharing some of your assets with a favorite charity while you’re still alive. There is a lot of flexibility here, but the bottom line is that charities can save you a substantial amount in taxes, pay you a better return than you might be able to earn and take away some of the risk of outliving your assets.

Bottom Line – You Need an Estate Plan

I’m running out of space, and this was meant to be a short article on estate planning. I would encourage every reader to put some plan in place. Your life has been spent accumulating assets, raising kids and participating in the community. Nobody should let all of that go to waste because they failed to plan properly. Talk to your spouse and your kids so that you can meet your family’s needs and preserve your charitable legacy. The troll may be a hungry fellow, but there are techniques available to keep you off of his menu and help him stay on a stricter diet.

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