An Intro to Estate Planning

Estate planning is the process of designating who will receive your assets and handle your responsibilities upon your death or incapacitation. While estate planning doesn’t directly deal with investment returns, it is an integral piece of the financial planning puzzle as it helps you effectively and efficiently transfer assets to future generations.

An effective transfer of assets occurs when your assets are properly transferred to the intended person or institution. Though this seems easy enough on the surface, ensuring your assets are transferred appropriately does take some thought. 

For example, rather than splitting all of your assets 50/50 between two heirs, it may make sense to transfer your higher yielding income assets to the heir in the lower tax bracket (and in turn transferring your lower yielding assets to the heir in the higher tax bracket), helping mitigate future taxes paid by your heirs.

An efficient transfer of assets is completed when the transfer costs of your assets are minimized. Transfer costs can include gift and estate taxes, probate costs, and attorney fees. By minimizing these costs, you are able to efficiently transfer a higher percentage of your net worth to your designated beneficiaries.

So what are some of the tools available to ensure an effective and efficient estate transfer?

Wills

A will is a legal document that expresses your last wishes. Specifically, it details how your assets will be distributed and who will take care of any minor children you are responsible for. Wills are important as they allow you to clearly communicate your wishes when you are otherwise unable to do so. 

An effective will includes (but is not limited to):

• An executor, who is responsible for carrying out the provisions of the will
• A list of beneficiaries, who inherit the assets
• Details on how / when to pass your assets to the beneficiaries
• Designated guardians for any minor children

Where there is no will, there is no (easy) way. If you pass away without a will in place, it is referred to as dying intestate. When this happens, the laws of the state where you reside will determine how your assets are distributed. Without a will, the probate process becomes much more difficult and can oftentimes lead to added stress and frustration for your family and heirs.

Trusts

A trust is a legal arrangement that allows a third party (the trustee) to hold assets on behalf of your beneficiaries. Trusts can be created for a variety of reasons, such as protecting assets against creditors or reducing inheritance and estate taxes. Assets inside of a trust may also avoid the probate process, which can save time and legal fees.

While there are many types of trusts, a major distinction lies in whether the trust is revocable or irrevocable.

Revocable trusts allow you to retain control of the assets during your lifetime. A revocable trust is flexible and can be dissolved at any time should your circumstances or intentions change. Because you still have total control, the assets inside of a revocable trust are treated like any other asset you own and are usually subject to estate taxes when you pass away (with the benefit of the assets avoiding probate).

Irrevocable trusts transfer your assets completely out of your estate as you no longer maintain control once the trust is executed. An irrevocable trust cannot be dissolved or changed by the grantor, so there is minimal flexibility. This is generally preferred over a revocable trust if the goal is to reduce estate taxes as the assets are effectively transferred out of your ownership and into the trust.

Similar to insurance planning, estate planning can be an uncomfortable topic as it centers around the prospect of death. However, having these conversations is key when creating a holistic financial plan. 

It is important to be transparent and make sure your family and heirs are all on the same page when it comes to your estate, especially as you accumulate more assets throughout your life. 

Working on estate planning today can save a lot of time, money, and stress for your loved ones in the future.

Derek Prusa, CFA, CFP® and Ben Webster, CFP®

Co-Founders and Owners of Aspire Wealth