Estate planning arranges for the transfer of an individual's estate at the time of death. An estate consists of all property owned at death before it is distributed by will, trust, or intestacy laws. An estate may contain both real property (real estate, including houses and investment properties) and personal property (all other property, including bank accounts, securities, jewelry and automobiles). Typically, the process of estate planning involves extensive consultation with a number of professional advisors, including lawyers, financial counselors, accountants and life insurance representatives.
Purpose of Estate Planning
Estate planning benefits those with large estates, as well as those with modest assets. Creating an estate plan ensures that all property will be distributed according to the personal wishes of the deceased, and that those who are benefiting from the estate receive the largest distribution possible with a minimum amount of delay. Specifically, estate planning allows an individual to decide exactly who will benefit from their estate, and to what extent. Estate planning also ensures that the estate will not be destroyed by taxes imposed on the transfer of assets at death. In addition to providing financial security, estate planning encourages individuals to make important decisions, such as appointing a guardian for minor children, choosing healthcare preferences, and securing funeral arrangements.
Estate Planning Tools
An estate plan is created to reach the specific goals of the estate owner. A number of tools may be utilized to ensure the best possible distribution of assets. The basic instruments used in estate planning are listed below. However, individual estate plans depend on the size of the estate, the number of beneficiaries, and the purpose of distributions.
- The Will. The most common estate planning instrument is the will. A will sets forth who will inherit what property. Additionally, wills often appoint a guardian for minor children or specify what funeral arrangements should be made at the time of death. All wills must pass through probate, which may be a lengthy and expensive process. As a result, the will's beneficiaries may not receive the entire share specified in the will, and there may be a considerable delay in the distribution of assets. In the absence of a will or other testamentary instrument, the state will distribute an individual's estate according to the laws of intestacy. Generally, under the intestacy system, assets are divided in a particular order, to provide for a surviving spouse, issue, parents or siblings.
- The Trust. A trust is an arrangement by which a trustee distributes payments or property to a beneficiary according to the terms of the trust. A beneficiary may be a family member, a friend, a charity or a pet. A trust may be created during the individual's life, or it may be created by will. A trust created by will transfers property to the trustee at the time of the individual's death. By creating a trust, the beneficiaries to the estate bypass the probate process.
- Health Care Directives. Health care directives ensure that an individual's medical wishes will be carried out when they become unable to make their own health care decisions. Health care directives include a health care declaration and a power of attorney for health care. Health care directives, also known as "living wills," set forth an individual's personal decisions regarding healthcare at the end of their lives. A power of attorney for health care gives a family member or friend control of all health care decisions leading up to the person's death.
- Financial Power of Attorney. Finally, a financial power of attorney appoints a third party to handle an individual's finances when they can no longer take care of their own financial affairs. A financial power of attorney may designate a friend, family member, or a trusted professional to fulfill this position.