What Goals Should Estate Planning Ideally Accomplish?

The goal of estate planning is to efficiently transfer a person’s assets upon their death to individuals or organizations that are important to them (e.g. family members, church, charity). These assets include real estate, retirement accounts, collectibles, and personal assets.

Is It Ever Too Late to Start Planning Your Estate (will or Trust)?

Once someone has died or become incapacitated, it is too late to begin estate planning. Leading up to that, it will not be too late to start estate planning. The earliest one should plan for their estate is when they are making adult decisions and experiencing life changes, which is usually not long after graduating from college and beginning a career.

What Is a Will? Does a Will Need to Be a Part of Every Estate Plan?

A will is a written declaration of what a person owns (e.g. real estate, retirement accounts, cash, collectibles) and how they want it disposed of when they die. A will also appoints someone trustworthy to be in charge of distributing those assets. A will needs to be a part of every estate plan. With that said, it serves as a secondary document in most estate plans, meaning that its purpose is to support a trust (i.e. the primary document).

What Are Other Key Components of An Effective Estate Plan?

There are many types of estate plans, some of which include trusts and some of which do not. An estate plan might include a revocable living trust. This type of trust takes on different names in different locations throughout the country. For example, it is referred to as a grantor trust in some parts of the country, and as a settlor trust in other parts of the country. Here in the Midwest, it is called a revocable living trust.

In addition to a trust, an estate plan typically includes three main documents: a pour-over will that supports the trust, a healthcare power of attorney, and a property or financial power of attorney. There are accessory documents to support the four main documents, such as a personal property memorandum, a living will, and a certificate of trust. Lastly, there will be funding instructions which help the client understand what they have purchased and how to best utilize it.

What Are the Common Types of Trusts and Their Purposes?

In my practice, the most common trust is the revocable trust, which is owned by the grantor or the person who creates it. Typically, the grantor of a revocable trust is also the trustee of the trust. A revocable trust can be changed at any time, meaning that it can be altered or revoked and completely eliminated. It is truly designed to be a transparent instrument during the person’s life, meaning that it does not interfere with their lives in any way. I like to equate a client’s revocable living trust with their shadow, since no one has every tripped over or misplaced their shadow; a shadow simply follows a person around and does what they do. A revocable trust is so transparent that the IRS doesn’t even consider it a thing during the grantor’s lifetime, which is why it uses the grantor’s Social Security number as its tax number.

The second most common type of trust is a special needs trust, which transfers assets to a person who meets the definition of a disabled person (i.e. a person who receives some form of government aid, such as Medicare, Medicaid, or SSI). Special needs trusts allow disabled people to inherit money without forfeiting their government programs.

Irrevocable life insurance trusts (which are affectionately called ILITS) are not used nearly as frequently as they used to be. These trusts used to be designed to remove net worth from an estate so that it wouldn’t get taxed with the federal or state estate taxes. The federal exemption is now over six million dollars per individual and over twelve million per couple, and in Illinois it is four million per person and eight million per couple. The type of clientele I typically work with is under those net worth figures, so we don’t use them as often. For high net worth individuals, irrevocable life insurance trusts are effective tools for reducing the value of estates and thereby reducing or eliminating estate taxes.

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