Estate Planning 101

By Adam Day, CFP®, RICP®, CFT-I™
Senior Wealth Advisor

Estate planning is a vague topic; at its core, it is simply a collection of legal agreements created to organize your property and assets in addition to conveying your intentions if you become incapacitated (or when you pass away.)

We will take the next two months to explore this topic – from the introduction to more complex planning.

Estate planning is hard to understand: who needs an estate plan? What does that entail? Does everyone need a trust? How is a trust taxed?

Starting with some of the basics:

Who needs an estate plan?
It really depends on your wishes for the future, but it’s recommended that everyone has some semblance of a plan. Most individuals could benefit from a Will, Advanced Directives such as a Healthcare Power of Attorney and Living will, and a Financial Power of Attorney.

What is a Will?
Among other things, it gives you the opportunity to decide (and put in writing) what will happen to all of your property and possessions in the event of your death. Who gets the ’67 Corvette? What about mom’s wedding ring? A Will also names guardians for any minor children, makes your wishes known regarding funeral and burial arrangements, and can protect your loved ones from unnecessary confusion and conflict.

What about planning for before I pass away?
Now is where the Advanced Directives come in, which designate who will make decisions if you are unable. Additionally, this document puts in writing your wishes in those circumstances. The Financial Power of Attorney gives authority to another person to manage your finances if you are unable. Preparing these documents can save time and headaches later on. You might even be surprised to learn that they are recommended for college-age kids before they head off to school. If a situation arose where the parents needed to access information regarding their children’s health, they would not be able to do so.

What is a trust? Do I need one?
Consider a trust as a separate entity that will hold instructions and/or property for you. You can choose to give the instructions/property to the trust whenever you want. The trust is required to follow your instructions for the property held in said trust.

There are many types of trusts, with each one put into place for various reasons. In some cases, trusts are employed to pass generational wealth along at an early age, or to avoid the probate process. A trust can go into effect after death or set up early in life.

Trusts usually fall into two categories: Revocable or Irrevocable. A revocable trust means the trustee maintains control so changes can be made at any time. An Irrevocable trust means the trustee is giving up the majority of control.

I think I want a trust, but which one is right?
The matter of which trust is entirely dependent on your wishes or goals, and every situation is different. Remember, the trust is just an entity to which you give something. A Revocable trust is mainly the instructions, but you do not necessarily give something to this trust yet – you would be funding it in the future.

Let’s say that when I pass away, I want my house to go to the trust. Since you are maintaining control, this remains in your estate from a government perspective. Typically, funds start moving into the Irrevocable trust right away. You are also relinquishing most of the control. From a government perspective, it is out of your estate, which means depending on the timing, it is usually not counted towards your estate tax. For example, I am giving my vacation house to my trust now, so it is out of my estate, and my children can benefit from it right away, and I understand I no longer have control over it.

What about taxes?
The main thing to remember is that income taxes differ from estate taxes. For example, annual gifting is can fall more in line with estate taxes and limits. Both need to be considered upon design, thus the importance in consulting a tax and legal professional when starting and funding trusts.

Establishing a well-designed estate plan is critical and can provide tremendous relief to you and to those you care about most. It’s always important to meet with a qualified estate planning attorney or advisor to help with the design. Any life change usually warrants an update or review of the current plan. An estate plan is just one piece of the puzzle, and should coordinate with your taxes, investments, and fit into your overall financial plan.

Want to learn more?
Email me at aday@wqcorp.com with questions and be on the lookout for next month’s article as we dive into more complex topics.

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Not legal or tax advice. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. Wealthquest Corporation is an SEC registered investment adviser with its principal place of business in the State of Ohio. Registration does not imply a certain level of skill or training.

For more information about Wealthquest, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov/ or contact us at 513-530-9700.

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