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Estate Planning Fundamentals

Estate Planning Fundamentals

(March 8, 2011)

People are often unsure about whether estate planning is necessary for them because they wonder if the value of their assets is great enough to form "an estate." One common misconception involves what assets would be included in your estate, and at what value for tax purposes. In addition to bank accounts, stocks, and other tangible assets, inclusion of the fair market value of real estate (based on appraisal not tax value), retirement accounts, and proceeds from any insurance policy received due to death (in most cases) must be accounted for as well.

Many people procrastinate when it comes to estate planning because it can be a sensitive and difficult undertaking, and they would prefer not to think about it. But no matter your net worth, and no matter your age, it is important to have a basic estate plan in place. It’s also essential to find a trusted advisor that not only knows the law, but can guide you through delicate situations to make decisions about your future and that of your family.

Why is it important?

  • So the people you intend to benefit from your estate receive your assets rather than letting state law dictate who will receive those assets.
  • So assets for your children are protected and managed on their behalf until they are of an appropriate age and maturity.
  • So assets are left to your beneficiaries in a tax efficient manner to protect them from paying taxes unnecessarily

What is an estate plan?

An Estate Plan has several components, the most basic of which are a will, durable power of attorney, health care power of attorney, a living will, and for many, there are a variety of trusts that offer an array of tax planning benefits. Planning can also involve review of the advantages of designating beneficiaries of retirement accounts, annuities, and insurance policies (charities or individuals), and the giving of financial gifts to charities or individuals during lifetime.

Typically in the estate planning process, people are focused on what happens after death rather than what happens during lifetime. Powers of Attorney (“POAs”) are needed to allow someone to act for you during your lifetime if you are unable to act for yourself. There are separate POAs for financial matters and health decisions. People often assume that a family member will inherently have the right to act for them if they become incapacitated, but oftentimes this isn’t the case, unless the family member is appointed as a guardian through the judicial system. The guardianship process can be lengthy and costly, but usually can be avoided if POAs are in place in advance.

When should I start planning, and how often should I update my plan?

It is never too early to start planning. There is no rule of thumb as to how often your Will, Trusts, and Powers of Attorney should be updated, but the following situations should prompt a review:

  • Your documents were prepared in another state.
  • Your assets or family situation has changed significantly (births, deaths, marriages, or divorces).
  • Your wishes have changed with regard to how your property should be distributed at death.
  • Your assets (including those of your spouse) exceed $1 million and you have not had your estate plan reviewed in the last several years (laws continue to change).

Additional articles under the tax category provide a detailed look at the recently enacted changes to estate tax laws. Staying abreast of changes to the law is essential to keeping your affairs in order, and a good attorney will inform you of the need to update your plan as laws change.

Who will be impacted by my decisions?

Discussing inheritance can be a very emotionally charged event, but having a plan in place clarifies your intentions and prevents conflict or confusion later. With no Will in place, state law dictates where your probate assets will be distributed. (Please note that probate assets may exclude certain jointly titled assets or assets passing by contract or beneficiary designation). The two most common situations include:

  • If an individual was a resident of North Carolina or South Carolina and was married with living children, at death a portion of the property passes to the spouse and a portion passes to the children (even if they are minors).
  • If an individual was a North Carolina resident and was married without living children, at death a portion of the property passes to the spouse and a portion passes to the deceased’s parents (if living). However, if the deceased was a South Carolina resident, all of the property would pass to the spouse. 

It can be difficult or impossible to “fix” the distributions without tax disadvantages after someone has passed away even if the beneficiaries are willing to do so.

Guardianship for a minor child is another important area commonly addressed in a Last Will and Testament. A guardian is needed for both the physical custody of the child (guardian of the person) and for control of the minor’s assets, not otherwise in trust (guardian of the estate). In North Carolina, a parent may nominate a guardian under his or her Will, and the Clerk of Superior Court will have the authority to appoint such guardian in the best interest of the minor child but will take into account any nomination made by a parent. In South Carolina, a parent may also nominate a guardian under his or her Will, and the family courts will control such appointment and may make any appointment in the best interests of the child.

Click here to view the full digital version of the The Boomers & Beyond edition of SML Perspectives.

Jill L. Peters  Kaess
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