In order to establish and implement an Estate Plan, several legal documents as well as financial instruments/strategies are used. These documents and instruments have the objective to provide structure, preserve wealth, distribute assets and fulfill your personal wishes.
Will: This legal document allows you, the testator, to name one or more persons to manage your estate and provides for the transfer of your property at death. Wills are legally binding, but can be changed or canceled any time before death (unless there is a loss of mental capacity). It is the simplest of the estate planning tools.
Living Will and Health Care Proxy: Living wills, also known as an advance health care directives, are instructions given by individuals specifying what actions should be taken for their health in the event that they are no longer able to make decisions due to illness or incapacity, and appoints a person to make such decisions on their behalf. A living will is one form of advance directive, leaving instructions for treatment. Another form authorizes a specific type of health care proxy, where someone is appointed by the individual to make decisions on their behalf when they are incapacitated.
Durable Power of Attorney: Also called an enduring power of attorney (EPA), is the legal authorization to act on someone else's behalf in a legal or business matter. Unlike a power of attorney, an enduring power of attorney will not come to an end if the donor becomes mentally incapable of managing his or her own affairs.
Naming Beneficiaries: One of the major issues in estate planning is who to name as beneficiaries of your estate. Naming beneficiaries can be complicated and can present estate and income tax consequences to the beneficiary. When naming beneficiaries, remember to consider:
- Age of beneficiary: Assets will not directly transfer to minors until a trustee or guardian is approved by a court.
- Ability of beneficiary to manage assets: Perhaps a trust set up in the person's name would be better than a direct transfer.
- Naming contingent beneficiaries: Should something happen to your primary beneficiary, the contingent beneficiary would receive your assets.
Buyout Agreements: Legal document used for sole proprietorships, partnerships, and close corporations in which the business interests of a deceased or disabled proprietor, partner, or shareholder are sold according to a predetermined formula to the remaining member(s) of the business.
Name guardians and successor guardians: Naming a guardian in your will ensures that you choose who will assume that important role and not the courts. A guardian becomes responsible for the child’s physical care, health, education, and welfare until he or she reaches 18 years of age. A successor guardian is often named as an alternate guardian incase the first appointed guardian is unable or unwilling to serve as guardian. A successor guardian usually has the same duties and powers of the previous guardian.
Charitable Trust: Also called charitable remainder trust, works as follow:
You set up a trust and transfer to it the property you want to donate to a charity. The charity must be approved by the IRS, which usually means it has tax-exempt status. The charity serves as trustee of the trust, and manages or invests the property so it will produce income for you. The charity pays you (or someone you name) a portion of the income generated by the trust property for a certain number of years, or for your whole life -- you specify the payment period in the trust document. Then, at your death or the end of the period you set, the property goes to the charity.
Lifetime Gifts: This strategy is one that allows you to give property or assets as gifts during your life, to avoid that property being taxed at death. But if you give more than the annual exclusion amount under the US federal law ($13,000 as of 2011) to one person other than your spouse in a single year, there could be income tax implications — and a reporting obligation.
Trusts: In common law legal systems, a trust is a relationship whereby property (including real, tangible and intangible) is managed by one person (or persons, or organizations) for the benefit of another. A Trust is a legal vehicle that allows you to protect your assets from taxation and to dispose of them to your exact specifications.
Life Insurance: Life insurance is instrumental in estate planning – it can be used to pay off estate taxes, provide funding for trusts, charitable contributions and give income to beneficiaries. You can also set up a life insurance trust, which is an irrevocable trust with the purpose of excluding life insurance benefits for estate tax purposes.
Objectives-Estate Planning