Estate Planning Part 2: Basic Steps

What Is Estate Planning?

"Estate planning" is simply a way of providing for the disposition of the property, including your copyrights, that you accumulate during your life. An estate plan can, at its simplest, be reduced to the following questions:

  • To whom do you wish to leave your property? (The list usually includes family members and/or charities.)
  • What share of your property shall each beneficiary receive?
  • When should you transfer the property to the beneficiaries? (Often the only option is to transfer property at death, since the property is needed during your lifetime. However, those who have more than sufficient assets to satisfy lifetime needs may find that lifetime giving is an important part of an estate plan.)
  • How should you transfer the property to the beneficiaries? (Outright gifts are the most common form of transfer, but trusts can also be useful in tax planning.)

One of the key considerations in estate planning is "transfer" taxation, including estate, gift and generation-skipping transfer taxes. Not only can these taxes be expensive (reaching rates in excess of 55%), but the taxes are complicated, and may change depending upon who receives your property. Proper planning for transfer taxation is very important. Speak with a tax advisor to decide what is right for your unique situation.

Estate Planning Isn't Only for the Rich

Regardless of your financial outlook, everybody should consider some form of estate plan to dispose of his or her property. While complicated and expensive planning may be more appropriate for wealthy individuals, even people of modest means should plan for the orderly distribution of their property to the beneficiaries they choose.

The Importance of Preparing a Will

One main goal of estate planning is to execute an appropriate will - the legal document that contains instructions about what will happen to your money and property after your death. Fortunately, the will is, in most cases, a simple document that can be prepared inexpensively.

If you die “intestate” - or without a will - you may leave your children or other beneficiaries with a legal and financial mess that can take a lot of time, money and stress to clean up. There is another good reason to write a will: If you die intestate, then state law determines who gets your property at death, without any regard to your particular wishes or your survivors' needs.

The Basic Steps of an Estate Plan

1. Inventory and Valuation

The first step of estate planning is to list all of your assets and get a general idea of how much they are worth. While valuation is straightforward for most assets, it can be difficult with intellectual property like your music copyrights. If you have little or no idea what your copyrights are worth, consult a professional appraiser.

2. Determine the Beneficiaries of Your Estate

Next, identify the beneficiaries of your estate and what property or shares you want each of them to receive. The nature of your relationship to the beneficiaries and their needs will probably inform these decisions. This is also a good time to consider whether you are able and willing to make gifts to anybody during your lifetime.

3. Determine the Transfer Tax Consequences

After determining how you would like to leave your property, consider the tax consequences of your proposed dispositions. The basic question is: Will transfer taxes apply, and if so, are there ways to reduce my and my beneficiaries’ tax burden? If the taxes can be reduced through planning, you must then balance your original wishes against the tax consequences. Make sure to consult with a trusted advisor about any tax questions related to your estate planning.

4. The Estate Planning Documents

Once you have chosen your estate plan, it is time to prepare and execute the relevant documents to implement your plan. Again, a qualified professional may be necessary to assist you here. These documents will normally include a will, and may also include a revocable trust (sometimes called a "living" trust). In preparing these documents, you will need to choose your executors (or "personal representatives" as they are called in some states) and, if necessary, trustees and guardians.

5. Subsequent Changes to Your Estate Plan

An estate plan is generally not written "in stone." Your will in particular, and also revocable trust agreements, can and should be changed anytime that you have a change of heart or a change in circumstances (e.g. marriage, birth of a child, divorce, etc.). However, some aspects of your estate plan, such as lifetime transfers, may be irrevocable once made.