An estate is the sum total of everything you own, all your investments, assets, collectibles, money, property, as well as your debts and liabilities.
If you own anything at all, you should know how to make a plan for what to do with it when you’re gone. This is called estate planning, and it’s how smart financial planners manage their money. No matter how complicated or straightforward your situation, you must have an estate plan. You need to account for and allocate everything that you own, all your assets and liabilities so that your loved ones know what will happen after you pass away.
If you manage it correctly, an estate plan is a smooth transition of ownership. And there are many ways to do that. In this article, let’s talk about your estate, how to create a financial plan to manage it, and understand the legal process of distributing your estate.
What is an Estate – An Overview
An estate in its most basic sense refers to your net worth at any point in time. It’s the sum of your assets minus your liabilities. Think about your debts, your loans, your investments, your cars, your accounts, and everything else in your name. Legally, this is called your estate.
But an estate can be anything. It can include real tangible assets like property and money. It can also be non-physical assets like intellectual property rights or business interests.
The estate of an artist, for example, may include the actual works created by the artist while living as well as any related copyrights and royalties they earn. As you can imagine, this could have a dramatic effect on the total valuation of your estate. And it ultimately determines how to create an estate planning tool that works for you.
Estates From a Legal Perspective
An estate is legally defined as the sum of all of a person's property (the assets) and debts at the time of death. Probate assets and non-probate assets make up the estate, which is generally divided into two categories. The probate estate consists of all property subject to probate, and the non-probate estates relate to those items that directly pass to your beneficiaries.
Estate law changes from state to state. Normally, the state wants to make sure it follows the wishes of the deceased individual. This could be made clear through a will or a trust.
It’s then the job of the executor (for wills) or the trustee (for trusts) to oversee the entire estate until all debts and distributions are made according to your final wishes.
Common Estate Myths
Is an estate plan only for rich people?
Hardly! This is a common myth. The truth is, everyone has an estate — no matter how large or modest. Anyone with even a modest collection of goods needs to begin estate planning.
But aren’t estates pretty easy to clear up after someone dies?
No. In fact, dealing with someone’s estate can take years if there is no estate plan. Assets need to pass through probate, with costly delays until people get what they’re owed. There could also be legal battles and disputes about who gets what.
The answer to both of these myths is to create an estate plan, often by using a trust to safely and securely manage your assets, even after you’re gone. It’s not for the wealthy. And it’s not a suggestion. Trusts are the most effective way to manage your estate after you’re gone.
What is Estate Planning?
Estate planning is when you make arrangements for everything you own once you can no longer manage your own assets, as in when you pass away or become incapacitated. This broad term could mean drafting a will, creating a trust, naming heirs, planning guardians for minors, and distributing your assets.
Understanding what an estate is and how it works is critical. Because you need a legal plan for what to do with your assets once you’re gone. If you know what an estate is, you can make plans to prepare for your own financial future. You can protect yourself and your hard-won assets for generations.
Estate Planning: Savvy Money Management
One of the most important parts of estate planning is how to manage your finances. This is what will determine what assets will go where upon your death. In this way it also gives you peace of mind that your wishes will be carried out to the “T”. You get to use your assets for what matters most to you and your legacy.
Estate planning means that you’ll have to do some paperwork. This includes wills, trusts and powers of attorney. These documents protect your assets for the safe distribution to your loved ones.
You can create clauses and conditions about when (and if) your assets get distributed. For example, you might want your loved ones to graduate college before accessing your estate. Or get married. Or reach a certain age. It’s the most complete way to handle everything you own.
Estate Planning vs Wills
Most of the time, people assume that estate planning means drafting a will. This is a common solution for many, but not always the most practical solution. Wills pass through the probate system, a long process that can delay your assets being passed to your beneficiaries for many months.
Rather than assuming that estate planning means a will, you can always choose other solutions. One of the better choices, especially for larger estates with more valuable assets is a trust. When debating wills vs estate planning, a trust is the option you should consider. It avoids the probate process and it simplifies your desires and protects your assets at the same time.
How An Estate Works to Transfer Wealth
Estates can also have a huge impact on the transfer of wealth, controlling how assets are dispersed down through the generations. Estate planning lets you secure the future of your wealth so that your legacy lives on. You can even make sure that your work continues for years after.
If done well, estate planning can reduce wealth transfer taxes. All this means is that a larger share of your assets is passed on to your beneficiaries. If you understand how taxes work with estates, you can lessen the impact on your loved ones.
You may want to think about how to legally minimize your taxes even while you’re alive. Normally, estates only count after you’re gone, but if you use a trust, you can lower your tax rates and still have an estate plan that meets your every desire.
Different Types of Estates
Estates can take different forms. It’s all about what you own, how you own it, and what are your legal rights to something. Inheritance planning and asset allocation requires a comprehensive understanding of various forms of estates.
Fee Simple Estate: Full Ownership
This is the highest form of estate ownership. In a fee-simple estate, the owner retains full control of his property during their life and may pass it along after death according to their estate plan.
A fee simple estate holder has an absolute right to use, lease, or even sell the property. It’s the most powerful type of ownership. However, having such an estate implies other things like property taxes and also maintenance.
Many people like this ownership type because it gives the owner a sense of security knowing that you can make decisions on your property without someone telling you that you can’t do something. Also, a fee simple estate can increase in value over time, meaning it makes for a profitable investment for your heirs.
Life Estate: Limited Ownership
A life estate means that you give someone the right to use and live in a property for their lifetime. But when that person dies, the estate reverts to a different owner. For example, you might want your spouse to have a life estate for your home. But once they pass away, the home passes on to your children. The benefit of a life estate is that you smoothly transfer the title of your estate to someone without the hassle of going through probate court.
Life estates can also protect assets against creditors. So, if you have a property in a life estate, the property is safe from being taken by your creditors. You could even allow your heir to lease the estate or have tenants. They’re simply restricted from selling or disposing of the estate.
The Estate Administration Process
Estate administration is the legal process of dealing with a deceased person's estate. There are a number of steps in this process, including validating a will and carrying out asset distribution amongst beneficiaries. This is the settlement of all debts and taxes, and then the distribution of your assets.
If your family knows how estate administration works, they’ll go through the process with both clarity and decisiveness. It will neutralize some of the emotional struggles of their loss.
Executors and Administrators
If done right, a will nominates an executor, who is charged with managing the estate's settlement. They have to make sure your debts and covered and your bills paid. Then they distribute your remaining assets in accordance with your wishes. This usually involves having a firm grasp of financial issues. Executors will have to deal with bank accounts, investment accounts, property titles and more. They may need to work with professionals like tax planners and attorneys to meet their responsibilities.
But what happens if you die without a will in place? In this case, the court steps in to appoint an administrator to take care of the estate. And all your assets have to pass through probate, which can months, even years to settle correctly.
Executors and administrators must also be ready to communicate with beneficiaries, providing them with status updates and dealing with any issues that come up.
What is Probate And Why It Matters
Probate is the court-supervised process of transferring an individual's assets and discharging their liabilities after they pass away. Probate confirms the will of a deceased individual and distributes their assets under court supervision.
Although it is generally considered a slow and burdensome process, probate offers significant legal protections. One example is that probate prevents fraud. It verifies that your estate’s assets are properly distributed, exactly as you would’ve wished.
Do you need probate? No, you do not.
In fact, if you’d like to smoothly transfer your estate to your loved ones, it’s better to use a trust to bypass the probate process. A trust is like a safe and secure way to manage your assets and distribute them directly to your family after you’re gone. You get speed, security, privacy, and the peace of mind that your estate is fairly and legally managed.
Handling Estate Tax
Estate taxes have a huge impact on how your wealth is ultimately passed down to your heirs.
Estates are generally subject to federal and state taxes. Each state has its own laws that can vary dramatically between jurisdictions.
Introduction to Federal Estate Taxes
Federal estate taxes only apply above a certain figure. So, if you have an estate over $10 million, you should consult with a tax professional to see what, if any federal estate taxes will apply. But if you have an estate that large, you should be planning an irrevocable trust to safeguard your wealth once you’re gone.
You can use different estate planning to avoid taxes that might otherwise apply to your estate. This matters especially if that tax bill will fall to your family. Plan how your distributions will go so that you can minimize your tax bill, both while you’re alive, and after you’re gone.
State Inheritance and Estate Taxes
Besides federal taxes, you should also kind in mind that your state will have some estate taxes. State taxes are different from the federal estate tax, which is based on the total value of your gross estate.
Some states have significant taxes that can be bundled with the value of your estate. You should discuss with your estate planning professional what your state does and how it will impact your strategy.
One option is to create an irrevocable trust in a state with minimal tax laws, like Nevada or Florida. You can legally avoid excess taxes and the burden that will fall on your family when you try to transfer your assets to them. A trust like that is simple to create and effectively a barrier against any and all threats to your wealth.
What to Do With Your Estate: A Final Thought
No matter what we do, we’re going to pass away one day. And when you do, you want to have an estate plan in place for everything you own. Do you want to simply transfer everything to someone else? Or do you want to build a legacy that will last for generations? This is your money. It’s your right to make an estate plan that works for you.
If you’d like to talk more about estate plans, future-proofing your money, and how to secure your assets, let us know. Fill in the form below so we can discuss your situation. We create tailor-made trusts for people to safely secure their estates and pass it along to their loved ones without probate, with privacy, and for their peace of mind.
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