It is not avoiding taxes or probate. Estate planning is deciding how your wealth should be transferred to the next generation (or other heirs of your choice), then determining which legal tools to use to meet those goals.
Only after establishing how you want the assets distributed do you consider ways to reduce taxes, to avoid probate and to pursue other goals. Lawyers and others like to call the process estate planning, but it really is best to think of it as inheritance planning. That puts the true purpose of the process in the forefront.
To begin the inheritance planning process, you need to take these steps:
Make a list of all your assets and liabilities. You can’t prepare an effective inheritance plan without this information. And a professional, no matter how skilled, can’t do anything without this starting point. Don’t forget frequently overlooked assets such as pension plans, life insurance policies, trusts of which you are a beneficiary, and inheritances you are likely to receive. Your heirs will inherit only your net assets, so you’ll need to compile a list of all your debts, including whether or not the debts are secured by certain property.
Decide how you want the assets distributed in the future. The traditional goal is for major assets to be inherited first by the spouse, if he or she still is alive, then by the children, usually in equal shares. Smaller amounts or specific items might be designated for special friends or other relatives.
Of course, you don’t need to follow the traditional route. You might want to favor one child over others, or you might want the bulk of your assets to go directly to your children instead of your spouse. Many people decide to give a portion of their estates to charity. The only real limits placed on your choices are that a spouse cannot be completely disinherited (unless there is a valid prenuptial or postnuptial agreement) and children can be completely disinherited if the intention is made clear in the will.
As part of this step, you’ll have to consider secondary goals. For example, do you want your spouse to inherit everything but only so that the property could not subsequently be inherited by a second spouse or family instead of by your children? Would you like to leave property to your children and grandchildren but with strings attached, so that they don’t waste the property or have to reach certain goals before getting the property? There are ways of accomplishing both your main and secondary goals, as long as you make the goals clear.
How much do you want to give now, and how much later? It’s easier to reduce taxes and other costs if you are willing to part with some of your wealth now. Some people want to do that, others don’t want to or can’t afford to do so.
Work with one or more estate planning professionals to develop a plan that achieves your goals and also takes into account estate taxes, probate and other concerns. An average middle-class individual might need to work but only with an estate planning attorney. Other individuals might need to add a life insurance agent, business appraiser, trustees and other professionals.
Implement the estate plan after you fully understand it. Many people have great estate plans designed by skilled professionals, then they fail to fully implement the plans. They don’t set up trusts recommended by their planners or fail to transfer assets to the trusts. Maybe life insurance is not purchased as planned, annual gifts to children are not made, or each spouse does not have title to enough assets to take advantage of the lifetime exemption equivalent. Don’t let any of that happen to you.
Let your heirs know what you have decided and how things are set up. You can meet with them directly. You also should put together a letter of instructions that gives basic information such as where your will is kept, who your financial advisers are, as well as a summary of your assets and liabilities. This document should be updated at least annually and be accompanied by recent tax returns and an outline of your estate plan, at the minimum.
As you can see, from your point of view an inheritance plan really involves people more than law, life insurance, trusts and other legal tools. Your focus should be on how you want to provide for people both now and after you are gone, and how you want people to remember you. Then you should communicate your decisions clearly to the people involved.