Estate Planning FAQs: Estate Planning Strategies for Minimizing Estate and Gift Taxes

Let’s face it and get it out of the way. We all are (unfortunately) destined to die. In fact, the number one cause of death is birth. Did you know that quote is attributed to several people, including American comedian and actor Robin Williams, American musician John Mellencamp, and American writer and philosopher Alan Watts (however, the original author of the quote is unknown)? Either way, it’s inevitable for you, us, and anyone else reading this post.

But, there’s good news and bad news. The bad news is, when you pass death’s best friend and sidekick (taxes, a/k/a the government) is coming for your stuff. The good news is, we can help minimize their take and help you to ensure that your family, loved ones, favorite pet, or favorite charity, are taken care of.

We know planning for estate planning is a daunting task, filled with apprehension, tough conversations, and bewildering legalese. However, we’ve set up this post to help you demystify some of the terminology and get a head start on strategies that can minimize your taxable estate (and share for the government).

What is estate planning?

Estate planning is the process of organizing and preparing for the distribution of a person's assets and property after their death. Estate planning typically involves creating a plan for the distribution of assets, naming beneficiaries, and minimizing the impact of taxes and other expenses on the estate. Estate planning may also include the creation of legal documents, such as a will, power of attorney, and healthcare directive, to ensure that a person's wishes are followed in the event they are unable to make decisions for themselves.

Why is estate planning important?

Estate planning helps ensure that a person's assets are distributed according to their wishes and minimizes the impact of taxes and other expenses on their estate. Estate planning also provides peace of mind, when handled in advance, and can help prevent disputes among family members or other beneficiaries.

In the absence of an estate plan, an individual passes away “intestate.” The intestacy process means the distribution of a person's assets may be determined by state laws, which may not align with their wishes.

Advanced estate planning allows individuals to control the distribution of their assets and ensure that their loved ones are provided for after their death. Additionally, estate planning can also help to reduce the administrative and financial burden on loved ones by clarifying the process for distributing assets and settling debts.

What about inter vivos planning? What does that mean?

Inter vivos planning, also known as lifetime planning, refers to the process of arranging one's affairs and assets during their lifetime rather than after their death. This includes “gift taxes” (taxes that occur on any gifts made while you are alive - yes that is a tax too!). This includes the creation of legal documents such as trusts, wills, and powers of attorney, which can be used to manage and distribute assets in a manner that is consistent with the individual's wishes, but also (and arguably more importantly) includes creating plans to reduce your taxable estate in general.

Inter vivos planning is often used as a means of avoiding the probate process and minimizing estate and gift taxes. This means we can work with you to help you transfer assets to love ones, trusts (even for your pets), or your favorite charities, during your life time, to strategically transfer your assets for minimal (and often literally zero) taxes. Our philosophy is to help you maximize the tax code (the Internal Revenue Code), to grant your wishes. You worked hard, and the government shouldn’t take your hard earned money (regardless of how big your estate is).

There are many tools to use for inter vivos planning and a great example is a trust (although, keep in mind that there are many different types of trusts - contact us if you have questions). Trusts, for example, can be established during an individual's lifetime and used to hold assets that will be distributed to beneficiaries after their death. By establishing a trust, the assets held within it can avoid probate and potentially reduce estate taxes.

Additionally, inter vivos planning can also be used to manage an individual's affairs in the event they become incapacitated or unable to make decisions on their own. By creating powers of attorney and other legal documents, individuals can designate someone they trust to make decisions on their behalf and ensure their wishes are carried out.

Overall, inter vivos planning is an important aspect of estate planning that can help individuals ensure their assets are managed and distributed in a manner that aligns with their wishes while also potentially reducing taxes and avoiding the probate process.

What are the key components of estate planning?

The key components of estate planning typically include:

• A will: A legal document that outlines how a person's assets will be distributed after their death.

• Trusts: Legal arrangements where a trustee holds and manages assets on behalf of beneficiaries.

• Power of attorney: A legal document that allows a person to designate someone else to make decisions on their behalf in the event they are unable to do so.

• Healthcare directive: A legal document that outlines a person's wishes for medical treatment in the event they are unable to make decisions for themselves.

• Beneficiary designations: The process of naming beneficiaries for financial accounts, insurance policies, and other assets.

• Estate tax planning: Strategies to minimize the impact of taxes on a person's estate.

• Asset protection: Measures taken to protect a person's assets from creditors, lawsuits, and other threats.

It's important to note that the specific components of an estate plan will depend on an individual's personal circumstances, goals, and wishes. Estate planning should be customized to meet the needs of each individual.

What is a will?

A will is a legal document that outlines how a person's assets will be distributed after their death. In a will, a person can specify who they would like to inherit their property and assets, name a guardian for any minor children, and appoint an executor to manage the distribution of their estate.

A will becomes effective upon a person's death, and the terms of the will are carried out according to the laws of the state in which the person resided. It's important to note that a will only applies to assets that are owned solely by the person and that do not have a named beneficiary, such as life insurance policies or retirement accounts. You should also be aware of the fact that when a will is probated (submitted to the Register of Wills upon the testator’s passing), the will becomes a public document.

Having a will is an important part of estate planning, as it can help ensure that a person's wishes are carried out and can help prevent disputes among family members or other beneficiaries. It's important to keep a will up-to-date and to review it regularly, especially after major life events or changes in financial circumstances.

What is a trust?

As mentioned above (in the inter vivos answer), there are many different types of trusts, each with their own unique features and purposes. Some common types of trusts include revocable trusts, irrevocable trusts, living trusts, testamentary trusts, special needs trusts, pet trusts and charitable trusts. The specific type of trust that is right for you will depend on your unique circumstances and goals.

It's important to consult with a knowledgeable attorney to determine the best trust for your situation. A trust is a legally binding arrangement where a settlor creates the trust, and a trustee holds and manages assets on behalf of beneficiaries. In a trust, a person (the grantor or settlor) transfers ownership of their assets to the trust, and the trust then holds and manages these assets for the benefit of designated beneficiaries. This is an important step, you must “fund” the trust (or transfer property to the trust, by retitling the property).

There are many different types of trusts, each with its own specific purpose and set of rules. For example, a revocable trust can be altered or revoked by the grantor during their lifetime, while an irrevocable trust cannot be altered once it has been established. Other trusts can even be set up to own and operate businesses (trusts like “QSSTs” and “ESBTs” are great examples).

Trusts can be used for a variety of purposes, including reducing estate taxes, protecting assets, providing for dependents with special needs, and avoiding probate. They can also be structured to provide for the grantor during their lifetime and then pass on to beneficiaries after their death.

It's important to consult with an attorney and/or financial advisor when establishing a trust, as trusts can be complex legal arrangements with tax and other implications.

What is a power of attorney?

A power of attorney is an essential legal document that can provide peace of mind in case of unexpected situations. It allows you to appoint someone to act as your agent, giving them the power to make decisions on your behalf when you are unable to do so. This can be especially important in situations where you become incapacitated, whether due to illness, injury, or age-related decline.

There are different types of power of attorney, and the one you choose will depend on your specific needs. A general power of attorney gives your agent broad authority to act on your behalf in various matters, such as managing your finances or making medical decisions. A limited power of attorney, on the other hand, grants your agent the power to handle a specific task or responsibility.

Creating a power of attorney can provide many benefits. It can ensure that your wishes are carried out when you are unable to make decisions for yourself. It can also prevent disputes among family members and other loved ones, who may have different ideas about what is best for you.

At Lopes Law, we understand that the thought of giving someone else the power to make decisions on your behalf can be daunting. That's why our experienced attorneys take the time to explain the different types of power of attorney and help you choose the one that is right for your specific situation. We also work closely with you to ensure that your wishes are clearly expressed in the document, so there is no confusion or misunderstanding.

If you have questions about powers of attorney or need help creating one, contact Lopes Law today. Our team of experienced attorneys is here to provide you with the guidance and support you need to make informed decisions about your legal affairs.

What is a healthcare directive?

A healthcare directive, also known as a living will, is an essential legal document that helps ensure your medical treatment preferences are honored if you become incapacitated and unable to communicate. This legally binding document outlines your wishes for medical care, such as the types of treatment you would like to receive and those you would like to decline, as well as end-of-life decisions such as life support and organ donation.

Having a healthcare directive can provide peace of mind for both you and your loved ones, as it eliminates the guesswork about your wishes in the event of a medical emergency. It is important to note that a healthcare directive does not give someone else the authority to make medical decisions on your behalf; that is where a healthcare power of attorney comes in. By creating both documents, you can ensure that your medical care and personal affairs are handled in accordance with your wishes, even if you are unable to make decisions for yourself.

At Lopes Law, our experienced attorneys can help you draft a comprehensive healthcare directive that reflects your unique wishes and values. We understand that this can be a sensitive and emotional topic, and we are committed to providing personalized attention and guidance every step of the way. Contact us today to schedule a consultation and take the first step in securing your future medical care.

Who should I include in my estate plan?

When it comes to estate planning, many people often wonder who they should include in their plan. The answer to this question varies depending on each person's unique situation, but there are some general guidelines to follow.

First and foremost, anyone who wishes to inherit your assets should be included in your estate plan. This includes family members, friends, and any charitable organizations you want to support. You should also consider including individuals you trust to make important decisions on your behalf, such as an executor or trustee.

It's important to remember that estate planning is not just about who gets your assets when you pass away. It's also about ensuring that your wishes are carried out in the event you become incapacitated or unable to make decisions for yourself. This is why it's crucial to consider including a healthcare directive and power of attorney in your estate plan.

Overall, estate planning is a highly personalized process that requires careful consideration of your unique circumstances and goals. By working with experienced estate planning attorneys, you can ensure that your plan is tailored to meet your needs and gives you peace of mind knowing that your wishes will be carried out.

How often should I update my estate plan?

Estate planning is an essential part of ensuring that your assets are distributed according to your wishes after your passing. However, it is important to keep in mind that tax laws and regulations related to estate planning are subject to change. As such, it is recommended to review and update your estate plan every five years or after any significant life events, such as the birth of a child, divorce, or the death of a beneficiary.

In addition to major life events, changes in tax laws and regulations may also prompt updates to your estate plan. For instance, changes to the Unified Credit and Estate and Gift Taxes can significantly impact the tax implications of your estate plan. By staying informed of changes in tax laws and regulations, and by regularly reviewing and updating your estate plan, you can ensure that your assets are distributed according to your wishes and in the most tax-efficient manner possible.

What are Estate and Gift Taxes?

Estate and gift taxes are taxes imposed on the transfer of assets from one person to another. Estate tax is a tax on the transfer of assets after a person's death, while gift tax is a tax on the transfer of assets during a person's lifetime. These taxes can significantly impact a person's estate planning, as they can reduce the amount of assets that can be passed on to heirs or beneficiaries.

The Unified Credit is an important factor to consider in estate and gift taxes. The Unified Credit is a tax credit that applies to both estate and gift taxes and is based on the total value of the assets being transferred. The credit can be used to offset a certain amount of estate and gift taxes, but it is subject to change based on updates to tax laws.

It is important to work with an experienced estate planning attorney to ensure that your estate plan is up-to-date and in compliance with all relevant tax laws. This includes regular reviews and updates to your estate plan as changes in tax laws can significantly impact your planning strategies. By staying informed and working with a knowledgeable attorney, you can help ensure that your assets are protected and passed on according to your wishes.

How does estate planning help me save on taxes?

Estate planning can be a powerful tool for reducing tax liabilities and ensuring that your assets are distributed according to your wishes. By working with an experienced estate planning attorney, you can develop a plan that takes advantage of all available tax-saving strategies. One way that estate planning can help save on taxes is by reducing your estate's value through gifting or trusts. For example, a gift of up to a certain amount each year can be made to an individual without triggering gift tax, and creating a trust can help to transfer assets out of your estate, thereby reducing the taxable value of your estate.

Another way that estate planning can help you save on taxes is by taking advantage of the Unified Credit, which can be used to exempt a certain amount of your estate from federal estate and gift taxes. It is important to keep up to date with changes in estate and gift tax laws, as the amount of the Unified Credit and the thresholds for estate and gift taxes can change over time. By reviewing and updating your estate plan regularly, you can ensure that you are taking advantage of all available tax-saving strategies and protecting your assets for the future.

Still need more information?

Estate planning is a crucial aspect of financial planning that can help you save money on taxes and ensure that your final wishes are carried out. Proper estate planning can help you avoid potential legal issues, minimize taxes, and maximize the assets you leave to your loved ones. With the guidance of an experienced estate planning attorney, you can develop a comprehensive plan that is tailored to your specific needs and goals.

If you have any further questions or concerns about estate planning, final wishes, or tax savings, don't hesitate to contact our team at Lopes Law.

We are committed to providing personalized attention and guidance to help you navigate your legal challenges with confidence. Schedule a consultation with us today to get started on creating a comprehensive estate plan that will protect your legacy and ensure your wishes are carried out.

We are Philadelphia estate planning attorneys, however we can help with Pennsylvania or New Jersey estate planning. If you need help with estate planning in another state, please reach out and we can connect you with a colleague or estate planning attorney in another state. We are here to help.