Everyone Should Have an Estate Plan

While it is often overlooked until later in life, a well-constructed estate plan is a vital part of a holistic financial plan.  An estate plan involves arranging for the management and distribution of one’s assets after death or incapacitation. Regardless of one’s net worth, creating and updating an estate plan will help maintain greater control, privacy, and security of one’s financial legacy.  With the guidance of financial and legal professionals, an estate plan can also ensure that heirs and beneficiaries receive assets in a way that manages estate taxes, gift taxes, and other types of taxes.  In this blog post, we will explore the basics of estate planning, the role of trusts, and how to select a trustee. 

What is estate planning? 

Estate planning is the process of establishing how one wants their affairs to be handled in the event they are unable to handle them on their own.  The following are some of the goals of an estate plan: 

• Asset protection
  • Estate planning may help protect assets from creditors, lawsuits, and other potential risks. 
• Incapacity planning
  • Estate planning documents such as Powers of Attorney allow one to appoint a trusted person to make financial and medical decisions on their behalf.
• Avoiding probate
  • Probate is the legal processing of a deceased person’s will, or the estate of a deceased person without a will.
  • Estate planning tools such as trusts can help avoid the time-consuming and costly process of probate, ensuring a smoother transition of assets.
•  Tax efficiency
  • By managing estate taxes, gift taxes, and other tax liabilities, more of an estate may be preserved for the beneficiaries.
•  Control and flexibility
  • Estate planning may allow one to specify how and when assets can be distributed, and that they are used to support loved ones, values, and charitable endeavors. 

What is a trust? 

A trust is a legal document and fiduciary arrangement that specifies how and when one’s assets will pass to their beneficiaries.  While there are various types of trusts, they are often used to maintain control of wealth, protect assets, maintain privacy, and avoid probate.  There are three main parties in establishing and executing a trust: 

• Grantor 
  • Also known as the trustor or settler, the grantor is the individual or entity that creates and funds the trust.
  • The grantor determines the purpose and scope of the trust, selects the trustee(s), and names beneficiaries.  
• Trustee
  • The trustee is the person or entity appointed by the grantor to manage the assets for the benefit of the trust’s beneficiaries.
  • As a fiduciary, the trustee has a legal obligation to act in the best interests of the beneficiaries, and they must follow the terms of the trust. 
  • The trustee’s primary responsibilities include managing the trust assets, making investment decisions, distributing income or principal to the beneficiaries, keeping accurate records, and filing taxes for the trust. 
• Beneficiary
  • The beneficiary of a trust is the individual, group, or entity designated to receive the benefits of the trust. 

Revocable trust vs. irrevocable trust 

There are various types of trusts, but one of the main distinctions of a trust is whether it is revocable or irrevocable: 

• Revocable trust 
  • A revocable trust, also known as a living trust, can be modified, amended, or revoked by the grantor during their lifetime.
  • One of the key benefits of a revocable trust is its flexibility. This type of trust allows the grantor to retain control of the assets while alive and specify how the assets should be managed and distributed upon their death.
  • One advantage of revocable trusts is that they can help avoid probate. Assets held in a revocable trust are not considered part of the probate estate. Therefore, they can pass to beneficiaries faster and more privately than assets going through probate.
  • Once the grantor dies, the revocable trust becomes irrevocable.

• Irrevocable trust
  • An irrevocable trust cannot be modified, amended, or revoked by the grantor once it is established. 
  • One of the key benefits of an irrevocable trust is asset protection. Once assets are transferred into an irrevocable trust, they are no longer considered a part of the grantor’s estate and may be shielded from creditors, lawsuits, and estate taxes. 
  • An irrevocable trust may also be used for tax planning purposes. Certain types of irrevocable trusts, such as irrevocable life insurance trusts (ILITs) or charitable remainder trusts (CRTs), can help manage estate taxes or provide tax benefits. 

How to select a trustee 

Choosing the right trustee is crucial to the success of one’s estate plan.  Here are some qualities to look for in selecting a trustee: 

• Trustworthiness
  • A trustee should be honest, reliable, and capable of responsibly handling financial matters.
  • A trustee must act in a fiduciary capacity, meaning they are legally bound to work solely in the best interest of the beneficiaries.
• Financial savvy 
  • An ideal trustee should understand investments, accounting, and tax implications. 
• Communication skills
  • A trustee should be able to communicate effectively with the other parties.  One should also consider whether the trustee has the time to fulfill their duties.

In some cases, it may be more appropriate to appoint a professional trustee, such as bank, trust company, or attorney, especially with complex trusts or large estates.  It is also important to name a successor trustee in case the primary trustee is unable to fulfill their duties due to illness, incapacity, or death. 

Overall, crafting an estate plan can be a complex process, but it is essential to a holistic financial plan.  Through advanced planning, one will ensure that their assets are managed and distributed according to their wishes.  Additionally, laws change over time, and it is important to review an estate plan regularly and modify it as necessary.  At Glassy Mountain Advisors, we are here to guide you through your financial planning needs.  If you have any questions about estate planning or other topics, please contact Matt Altman CFP® (maltman@glassymountainadvisors.com). 

Glassy Mountain Advisors does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

Asset protection plans should be developed and implemented well before problems arise. Due to the fraudulent transfer laws, asset transfers that occur close in proximity to the filing of a lawsuit or bankruptcy can be interpreted by the court as a fraudulent transfer. Proper structuring of these assets is imperative. Please seek proper legal and tax advice prior to engaging in re-titling/structuring of any assets. Please note that laws are subject to change and can have an impact on your asset protection strategy.