Estate planning is the process of designating, during your life, the disposition of your assets upon your death in a manner that attempts to eliminate administrative uncertainties, reduce taxes, and maximize asset protection. The process of estate planning typically includes preparation of legal documents such as a Will, but it also includes restructuring of assets and beneficiary designations, all in the context of minimizing taxes and maximizing asset preservation. As part of this process, it even may be advisable to make lifetime gifts to family or charity.

Failure to have an estate plan results in your assets being distributed according to the probate laws in your state, which typically provide that if you are married and have children, your spouse and children each will receive a share of your assets. As a result, your spouse could receive only a portion of your estate, which may not provide sufficient support, and any inheritance passing to minor children will be managed by the court during the children’s minority and distributed to them outright at age 18.  If you and your spouse are both deceased, the court will appoint a guardian for your minor children without input from you.

A typical estate plan provides for the disposition of your assets upon death through a Will and Revocable Trust. The Will designates the executor of your estate, a guardian for any minor children, and directs your probate assets into your Revocable Trust. Your Revocable Trust then provides for the ultimate disposition of your assets. Revocable Trusts avoid the publicity and fees of probate if assets are placed in them during your lifetime or are payable to them at your death by beneficiary designation.  A Revocable Trust can be drafted to take advantage of death tax credits and asset protection upon your death by establishing trusts for your spouse and children that will not be subject to death tax or claims of their creditors. Making provisions for managing your affairs upon your incapacity should also be part of your estate planning. A durable financial power of attorney will allow a designated individual or corporate fiduciary to manage your financial affairs should you become incapacitated without going through the process of having you declared incompetent and a guardian appointed for you by the court. A health care power of attorney allows a designated individual to make health care decisions for you if you are incapacitated. A “living will” can provide that you do not want to be put on life support or receive food or hydration if you are terminal, in a persistent vegetative state, or in the final stages of Alzheimer’s or other dementia.

Do you need tax and asset protection planning as part of your estate plan? Most assuredly you do.  Under current law, there is a credit against estate tax of $5,250,000 per person, so a married couple has a combined credit of $10,500,000. That credit will be indexed for inflation. While this seems like a large figure, if you combine the equity in your home(s) and the value of retirement accounts, other liquid assets, business interests, and life insurance proceeds, are you close? Do you anticipate an inheritance or the sale or your business? Even if currently you do not need extensive estate tax planning, you should consider the income tax implications of your assets upon death, such as what is the most tax-efficient designation for your retirement accounts. Most clients are interested in ensuring that the assets they have worked hard to accumulate are protected from creditors, including claimants, subsequent spouses, spendthrifts, and former spouses of children. By establishing trusts and carefully selecting the trusts’ terms and fiduciaries, clients can protect their estates from these exposures.

Another component of the estate planning process is evaluating your assets and considering whether they should be restructured. If you have an interest in a closely-held business, what happens to that interest upon your death and should a buy-out agreement be considered? Should you be investing in exempt assets such as retirement accounts, tenants by the entireties property, and life insurance? Under the North Carolina constitution, life insurance payable to a spouse and/or children (or a trust for their benefit) is exempt from the claims of creditors of the insured or his estate. If you own liability-generating assets such as rental property, you might consider moving that property into a limited liability entity such as a limited liability company or at least procuring a large liability policy. Are the methods of distribution for your retirement accounts formulated in such a way to maximize asset protection and minimize income and estate taxes? If you have a taxable estate, it might be prudent to make lifetime gifts of your property to others or to charities to reduce your estate by the value of that asset as well as all of its appreciation and future income.