The most well-known estate planning tools are wills and living trusts. A will tells what happens to much of your property after death. It is a writing that says who you want to receive your property and how your possessions will be divided. It may also name the person you want to administer your estate and who you want to take care of your young children in case you and your spouse die while they are minors. A living trust is a tool used to avoid delays and complexities of the court’s probate process and also to avoid some taxes. A living trust lets you pass property without being part of the “probate” estate.
There are also other important ways for property to pass from you to someone without being part of a will or living trust. Some of these are life insurance, bank and other retirement accounts and owning property in “joint tenancy with right of survivorship.” Another way for property to pass outside your estate is by making gifts during your life.
Life Insurance
Life Insurance is an insurance policy on someone's life. The policy pays money, called the "policy benefit," to the person named as beneficiary. You may buy a life insurance policy personally, and name a spouse, children or other loved ones to receive or share the policy benefit.
When used properly, life insurance can be a valuable estate planning tool. One reason is that life insurance proceeds go to the "beneficiary" without needing to name that person in a will or living trust. So it avoids probate and gets money to beneficiaries faster (if the estate is named as the beneficiary or no beneficiary is named, probate is not avoided).
Another benefit of life insurance is that the proceeds can be free of estate taxes. Whether or not life insurance proceeds are subject to estate taxes depends on who owns the policy when the insured person dies (to owe estate taxes, an estate must be over a certain size). If the insured owns the policy at the time of his or her death, the proceeds are part of the estate and subject to estate taxes. But if the insured person has placed ownership of the policy in an irrevocable life insurance trust, then the trust owns the policy and any proceeds generally won't be part of the estate and therefore free of estate taxes. Irrevocable life insurance trusts are a popular way to hold life insurance because of the tax savings, but there are specific rules for creating these trusts, including who can serve as trustee and how soon before your death they must be created. So if you want to create an irrevocable life insurance trust to shield life insurance proceeds from estate taxes, seek legal help. Not following the rules could result in taxes being owed.
Bank and Retirement Accounts
Money in bank, brokerage and many other financial accounts goes to the person or persons named as beneficiaries of the account. These are often called "pay on death" accounts, and they are usually easy to set up, with most banks just having you complete a form naming who you want to receive the money in the account upon your death. While you are alive, you have complete control over the money. When you die, the beneficiary usually just needs to show proof of your death to the bank to collect the funds.
Money in retirement account and company pension plans also goes to the designated beneficiary of the account without the involvement of the probate court. It is important to make sure the account beneficiaries are kept up-to-date, as many people have accounts that were set up a long time ago when their personal and family situation was different.
Joint Tenancy
Apart from naming someone as beneficiary of a bank account, other kinds of property can be owned by two or more persons in a form called “joint tenancy with right of survivorship.” This method of holding property means that when any “joint tenant” dies, that person’s interest in the property automatically goes to the other joint tenants. This ownership passing does not depend on the recipient being named in a will or trust.
Gifts
Gifts given to loved ones, friends or charities while you are alive don’t become part of your estate, since that property no longer belongs to you. When making gifts, be aware that large gifts (over $13,000 per recipient in 2009) can trigger a gift tax. However, certain gifts are not taxable, including gifts made to your spouse, gifts to charities, and tuition or medical expenses you pay directly to a medical or educational institution for someone.
Many people also arrange for “planned gifts” to charities as part of their estate planning activities. There are many different kinds of planned gifts, including outright gifts of cash, appreciated stock, real estate or part of a family business, gifts of life insurance or retirement plans, and gifts in partnership with a charity, one example being an immediate gift you make to a charity but you receive the income derived from the donated property while you are alive. Planned gifts to charities often have the additional benefit of providing tax deductions in the tax years when the gifts are made. Because there are many variations of planned gifts and they typically involve complex strategies, legal assistance is vital when including planned gifts as part of your estate planning.
These ways to pass property have important effects. These methods are estate planning tools that are additional to wills and living trusts. Proper use of life insurance, bank accounts, retirement accounts, joint tenancy and gifts can let property pass faster, avoid some taxes, avoid some complexities of the probate process and even provide tax benefits while you are alive. It is important to be careful to avoid conflicts or misunderstandings between the text of your will and living trust, and your arrangements made with these other tools. For example, life insurance proceeds, joint tenancy property and money in bank retirement accounts can pass to the specified person(s) even if a will or trust tries to direct these to someone else.
Estate plans need to be reviewed from time to time. This review should also include thinking about the contents of life insurance policies, bank accounts, retirement accounts, joint tenancy property, and gift giving so that these can be prepared the way you want, updated as needed, and coordinated with each other.
Contact an attorney at DeMarco & Triscaro today. Please call us for all your legal needs. We offer a full range of legal services to individuals, families and businesses, including personal injury, estate planning, real estate, family law and business matters. We are dedicated to providing the highest quality legal services at a reasonable cost. |
