What is Estate Planning?
Estate Planning includes any documents you execute or actions you take to decide who gets your assets upon your death. It also includes what you do to
decide who will manage your affairs if you are incapacitated or make medical decisions on your behalf when you can not speak for yourself.
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Who Needs Estate Planning?
If you do not want the government to decide who will get your assets when you pass away, you need estate planning. If you do not want the government
to decide who will raise and care for your minor children when you pass away, you need estate planning. If you do not want the government to decide
who will manage your affairs if you become incapacitated, you need estate planning. If you to decide who will make medical decisions on your behalf
when you cannot, you need estate planning.
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Who has to pay estate taxes?
Each U.S. citizen has what is called an Applicable Credit or Unified Credit.
Currently, the amount of that credit is $1,500,000. If you make a gift while you are alive that does not qualify for an exemption, you must use part of
that credit. At your death after all deductions and exemptions are used, your remaining credit is applied. If your estate is greater than your
remaining credit, you pay tax on that amount. The rates are steep. They start at 37% and climb sharply to 55%!
Any asset that you have control over at the time of your death is counted in your
estate. This can include assets which pass outside of a will like insurance and retirement accounts.
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How can I reduce or eliminate estate taxes?
The two best ways to reduce and eliminate your estate tax exposure are:
1. Make sure you maximize your Applicable Credit. If you don't use all of
your credit, it is lost! This happens often with married couples. Any assets that you give to your spouse outright while you are alive or through your
estate pass tax free. Often couples have "I love you" Wills or Reciprocal wills. Upon the death of a spouse, everything goes to the surviving spouse,
a tax free transfer. Upon the death of the second spouse, the assets pass to a group of beneficiaries, often the children. This can be a trap! Suppose
Bob and Sue have an estate worth $3,000,000. Bob dies and leaves everything to Sue. Bob's applicable credit is lost! Upon Sue's death her estate has to
pay over $555,800 in estate taxes! Proper estate planning could have allowed Bob and Sue to pass the entire
$3,000,000 tax free!
2. Reduce the assets that are in your estate. Each US citizen can give away
$11,000 per person per year. There are other methods of giving away assets
that can help reduce estate tax exposure.
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What is a Family Limited Partnership?
A Family Limited Partnership or FLP is a type of partnership that consists of assets owned by a family business or investment group. The FLP has two
type of shares, general and limited shares. Owners of limited shares are entitled to income but have no control over the management of the
FLP. Owners of general shares control the management of the FLP, they also decide
who can buy and sell the limited shares. This is an excellent way of transferring ownership without losing control. It can be used for a family
owned business. It is also often used when someone owns rental property as an investment tool.
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What is an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust or ILIT is a trust that is irrevocable and fund it with life insurance. Because the trust owns the policy and it is
irrevocable, the value of the policy is not included for estate tax exposure. However, you cannot be the trustee of ILIT that owns a policy on
yourself. Often adult children or corporate trustees are used.
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What is a Revocable Living Trust?
A Revocable Living Trust is trust that goes into effect while you are alive.
It provides how your assets are to managed, instructs what to do should you become incapacitated and how your assets should be distributed upon your
death. You can be your own trustee or you can pay a corporate trustee to manage your trust. Because legal title of the assets is in the name of the
trust, any asset owned by the trust at your death does not go through probate. The assets may still be subject to estate tax depending on what tax
planning strategies you choose to employ. The trust is revocable so you can take assets out of the trust later if you wish, you can also change the
beneficiary designation within the trust or who serves as trustee.
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What is a Power of Attorney?
A Power of Attorney names someone to act on your behalf. This person is called your attorney-in-fact. This power can be limited to a specific time
or for a specific purpose (this type is called a Specific Power of Attorney) or it can be all encompassing (this type is called a Durable Power of
Attorney). If you have a durable power of Attorney and you become incapacitated, your attorney-in-fact can act on your behalf during your
incapacity. If you do not have a power of attorney and you become incapacitated, someone must initiate a special proceeding with the court.
You must then be declared legally incompetent. The court will then name someone to manage your affairs. This may or may not be someone you want
managing your affairs. This can be lengthy and costly, proper estate planning with a durable power of attorney can avoid this outcome.
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What is a Health Care Power of Attorney?
A Health Care Power of Attorney does for you in the medical field what a Power of Attorney does for you in the medical field. It names a person to
act on your behalf and make medical decisions when you can not answer for yourself.
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What is Probate?
Probate is the formal process in which your will is admitted to the court, if you have one, your debts are paid and your assets are distributed to your
heirs. Not all of your assets go through probate. Some assets, like some insurance policies, assets in a revocable living trust and joint bank
accounts, are private contracts. They are distributed according to the terms of the contract. The probate process be over in as little as three months or
it can take several years. Probate is a public process and the probate records are open to the public.
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If I have a Revocable Living Trust, do I still need a will?
YES! The trust is only valid for the items that are actually transferred to the trust. If you forget to transfer title of an asset or choose not to
place an asset in your trust and die without a will, those assets will be distributed according to the state's plan, not yours. If you have minor
children, a will is necessary so you can have a say in who will be the guardian for your children. If you have a Revocable Living Trust, you need
what is called a Pour Over Will. This will names a guardian for your minor children if necessary then takes all of you assets and instructs that they
be "poured" into your trust and distributed according to those terms.
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How much does estate planning cost?
That will depend on the complexity of your estate and what documents you require. The Firm at Fisher Park will provide you with an estimate before any work is done.
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