Estate Planning Options
Ø Wills
Individuals with smaller estates may choose a will, which is a low cost alternative to an estate plan. One reason to write a will is to name a guardian and/or trustee to care for young children. Although using a will does not avoid probate, there are ways to ensure the probate-free transfer of assets such as bank and brokerage accounts to dependents. Using careful planning, an individual can minimize or avoid the need for extensive probate proceedings.
Ø Trusts
ü Living Trust
A living trust is similar to a will except that an individual’s property is transferred to a trust during his or her lifetime. The owner usually maintains control of the property during his or her lifetime. After death, the property is distributed to beneficiaries by the trustee without the need for probate.
ü Testamentary Trust
A testamentary trust is created by a will and is customarily used to provide for young children by placing assets in trust until the beneficiary turns a stated age. The trustee may be the guardian or an independent third party.
ü AB or Family Trust
An AB or Family Trust is used to eliminate or reduce estate taxes for married couples with a combined estate that exceeds the current tax exemption. The family’s estate is divided into two parts with one portion passing directly to the surviving spouse and one portion placed in trust for use by the surviving spouse during his or her lifetime. The principal is distributed to beneficiaries upon the death of the surviving spouse. By dividing the family’s assets in this manner, estate taxes are minimized or eliminated upon the death of each spouse.
ü Life Insurance Trust
A life insurance trust and pour-over will is used when an individual’s primary asset is a life insurance policy. Life insurance trusts must be irrevocable, identify beneficiaries that cannot be changed after the trust is established, and requires a third-party trustee. Estate tax savings are maximized if the insurance policy is purchased by the trust. Existing policies can be transferred to the trust, but are subject to certain restrictions and may require the insured to pay gift taxes.
ü Qualified Terminable Interest Property (QTIP) Trust
A QTIP trust postpones the payment of estate taxes by taking advantage of the unlimited marital deduction during the lifetime of the surviving spouse. Typically, income producing property is transferred to a trust and used for the benefit of the surviving spouse during his or her lifetime. Upon the death of the surviving spouse, the property is distributed to beneficiaries and the entire amount is subject to estate taxes. A QTIP trust is commonly used by wealthy individuals who want to provide for the lifetime care of a spouse who is not the parent of that individual’s children.
Ø Health Care Directives and Durable Powers of Attorney
Health care directives (living wills) contain instructions to doctors and hospitals on the use of lifesaving measures and organ donation. A spouse, family member or close friend is typically designated to ensure an individual’s wishes are followed if he or she is unable to make health care decisions. A durable power of attorney gives another person, usually a spouse or family member, the ability to make decisions regarding an individual’s care and finances if he or she is mentally or physically incapacitated.
bravenet.com