We’ve scoured the Internet to identify questions most frequently asked about estate planning and compiled some answers in this easily digestible post. Without further ado…

What is estate planning?

Estate planning is the process of creating a blueprint for the preservation, management, and distribution of assets (car, home, business, savings, investments, collectibles, etc.) in the event of your death and/or mental incapacitation.

The goal of engaging in this endeavor is to maximize the value of your assets while ensuring a smooth transfer to your heir(s) (the person, people, and/or organization set to inherit them).

Do I need an estate plan?

A common misconception is that estate planning is just for the elderly or wealthy. The fact is, however, that if you own a bank account, car, home, furniture, or insurance policy, you too have assets; no matter how modest your estate is, you’ll need to establish a plan for how these are distributed upon your death.

Are estate planning fees tax deductible?

The Tax Cuts and Jobs Act of 2017 eliminated eligible deductions for estate planning fees. As a result, these are no longer deductible from your taxable income. These provisions are up for renewal in late 2025, however, when the current ones are set to expire.

What’s the difference between a will and estate plan?

As a key document ensuring an estate is settled in the manner the deceased had intended, a will communicates your final wishes concerning how assets and other possessions are distributed following your death.

While a will is part of estate planning, an estate plan is much broader and often more complex. The latter can also protect your assets while you’re alive; for example, various tools such as a power of attorney (a document that gives the party of your choosing the power to make legal decisions, such as signing documents or paying bills, on your behalf should you become incapacitated or can’t act on your own behalf) are included as part of this process.

Another common estate planning tool is life insurance. In the context of a comprehensive estate plan, this can go beyond providing cash liquidity via death benefit payments. For example, if you need to distribute property or business assets to more than one heir, life insurance can help equalize the split wherein one party receives the property and the other receives equal value in the form of death benefit proceeds from the insurance policy.

The bottom line? An estate plan pulls together multiple legal documents and therefore covers much more ground than a will.

What is probate?

Probate is the legal process used to administer a person’s estate after his or her death: verifying your will is valid and authentic, paying off any taxes or debts, and ensuring the correct parties receive all property and possessions.

While this process may seem pretty straightforward, probate is often very complicated, expensive, and extremely time-consuming for living family members depending on the situation at hand.

What happens if I die without a will?

When you pass away without a will (referred to as “dying intestate”), a court decides how to distribute your assets. Arrangements sometimes also include freezing your assets until an executor is appointed and determining how to split them among family members (with results likely differing from your desires). Consequently, the process can become extremely complicated, expensive, and time-consuming for your living family members.

Consider the well-documented (and seemingly never-ending) probate cases involving musicians Prince and Aretha Franklin. After Prince passed away in 2016, it took approximately 6 years to settle his estate. Meanwhile, Aretha Franklin’s estate is still in limbo now approximately 4 years after her passing. Admittedly, these are extreme examples due to the dollar value of their estates; but they should still make you think twice about forgoing a will due to the potential stress this can cause family members.

How can I avoid probate?

Proper planning will allow you to arrange your estate so as to avoid the probate process—at least for the majority of your assets.

Before we delve into some of these options, keep in mind that depending on the state where you reside, a beneficiary (or beneficiaries) can sometimes qualify for a simplified probate process or even skip probate entirely. To meet these conditions, your estate must be deemed a “small estate”: meaning that if its value falls below a specific dollar threshold, court supervision is not required for settlement.

For New Jersey, specifically, the current threshold is $50,000 if you’re the surviving spouse, civil union partner, or registered domestic partner ($20,000 for estate heirs under NJ’s intestacy laws in the absence of a surviving spouse or domestic partner).

The threshold is also $50,000 in New York, but you may still qualify if your estate is worth more as exempt property exclusions include one vehicle (up to $25,000) and up to $20,000 worth of furniture and household items.

Designated beneficiaries
If you have a retirement account such as an IRA, annuity, 401(k), or 403(b), you can potentially bypass probate for these assets provided you had named beneficiaries for the same (with death benefits from life insurance policies also passing directly to the designated beneficiary on an automatic basis).

Keep in mind that if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), spouses are entitled to half of anything the other spouse adds to retirement during their marriage; therefore, if you name others (in addition to or instead of your spouse) as beneficiaries, this can ultimately send your accounts to probate.

Proper asset titles
Joint asset ownership with a spouse, children, or someone else offers another probate-avoidance strategy. If you decide to go this route, just make sure the ownership structure is established per joint tenancy with the right of survivorship (JTWROS) or tenancy by the entirety (TBE) parameters.

In the former arrangement, tenants have an equal right to account assets as well as survivorship rights if another account holder passes away: avoiding probate and preventing the decedent from including his or her ownership interest in a will or bequeathing it to anyone other than the co-owner. Bank accounts and real estate are two examples of JTWROS assets.

A tenancy by the entirety, meanwhile, can only be arranged by married couples in U.S. regions that allow this (26 states currently permit this type of setup, each with its own laws regarding how the rules are applied). This type of structure creates a right of survivorship; should one spouse die, the surviving partner automatically receives the full title of the property or asset. Note that TBE assets often involve real estate.

What is a trust?

A trust—another method used to transfer assets after you pass away—dictates you appoint a trustee to manage and distribute your assets to beneficiaries. As with wills, trusts aren’t just for the wealthy and are created for various reasons we’ll discuss shortly. While many types of trusts exist, all fall within one of two categories: living or testamentary.

Living trusts offer both revocable and irrevocable options. The former is created while the trustor is still alive and can be adjusted during his or her lifetime given ongoing ownership of property or assets, while the latter is not easily altered as trustors relinquish control of assets to the trust itself: seizing ownership as a result. The trust goes into effect the day you sign it no matter which option you choose. A living trust is a very popular option since, unlike a will, it does not require your assets go through probate: saving your heirs both time and money.

Meanwhile, a testamentary trust—also known as a “will trust” or “trust under will”—is created by your estate executor with your last will and testament. This doesn’t go into effect until the will is probated and the executor settles the estate, actions which don’t occur until after the trustor’s death.

Read our article on the differences between wills and trusts.

What are some key documents used in estate planning?

The most commonly used estate planning tools include:

·      Power of attorney: a document that gives the party of your choosing the power to make legal decisions on your behalf if you ever become incapacitated or can’t act on your own behalf.

·      Living will or advanced directive: ensures an estate is settled in the manner the deceased had intended, communicating your final wishes concerning how assets and other possessions are distributed following your death.

·      Living trust: a legal document whereby your assets (anything of value such as a business, real estate, bank accounts, etc.) are placed into a trust account established while you are still living and considered the “grantor” as you’ve personally created and funded the account. A designated person (a “trustee”) is tasked with managing these assets for the benefit of the eventual beneficiary/beneficiaries.

·      Beneficiary designations: not only should you keep these updated but know that beneficiaries listed on several types of assets—including retirement accounts and insurance policies—supersede even your own last will and testament.

·      Life insurance: often leveraged to equalize an inheritance split.

In sum: estate planning FAQs

Navigating the estate planning process isn’t a very straightforward undertaking, and the consequences of making a mistake are often costly. That’s precisely why we recommend meeting with a CFP® professional to ensure your plan aligns with your intentions.

Have estate planning questions we didn’t cover? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific tax or legal advice or recommendations for any individual or business.