Estate Planning 101: What You Need to Know

Estate planning involves the allocation of assets to the next generation. Estate planning is a crucial process that helps individuals to manage and distribute their assets in the event of death or incapacitation. It involves creating legal documents, such as a will and trust, to ensure that your assets are distributed according to your wishes and to minimize taxes and other expenses.

In this article, we will discuss what estate planning is, types of trusts as well as how life insurance can be a key factor of a successful estate plan.

First, What is Estate Planning?

Estate planning is the process of arranging for the management and disposition of your assets in the event of your incapacity or death.  It involves creating legal documents, such as a will and trust, to ensure that your assets are distributed according to your wishes and to minimize taxes and other expenses. 

It can be used as a way to provide for loved ones in the event of your death and can also be incorporated into your overall estate plan. It is important to consult with a qualified attorney and financial advisor to ensure that your estate plan and life insurance needs are properly addressed.

What is an Estate Plan?

An estate plan is a set of documents that outlines your wishes for your assets, healthcare, and guardianship in the event of death or incapacitation. It typically includes a will, designations for guardianship, a healthcare power of attorney, beneficiary designations, a durable power of attorney, a personal letter of intent and possibly a trust.

Let’s take a look at these documents in more detail.

Wills, Trusts, and Beneficiaries

Wills

A will allows you to pass on certain assets, known as probate assets, to your beneficiaries. These assets go through the probate process before being distributed to your heirs. However, some assets are non-probate assets and bypass the will and probate process. These include assets in a trust, life insurance policies, 401k plans, IRAs, pensions, financial assets with a “payable on death” or “transfer on death” designation, and real estate owned jointly with another person.

Trusts

A trust is a legal agreement that allows assets to be managed by a trustee for the benefit of specified beneficiaries. The trustee is responsible for overseeing the trust and distributing assets to the beneficiaries according to the terms of the trust. Unlike probate assets, assets in a trust bypass the probate process and are distributed directly to the beneficiaries.

Revocable Trusts

Revocable trusts, also known as living trusts, allow the grantor (the person creating the trust) to retain control over the assets placed in the trust during their lifetime. The grantor can make changes to the trust, such as adding or removing beneficiaries, or revoking the trust altogether. The assets in a revocable trust are still considered part of the grantor’s estate for estate tax purposes.

Irrevocable Trusts

Irrevocable trusts, on the other hand, cannot be changed or revoked by the grantor once they are established. The grantor gives up control over the assets placed in the trust and they are no longer considered part of their estate for estate tax purposes. This can provide significant tax benefits, as the trust pays its own taxes on any income generated by the assets.

However, the restrictions can be burdensome over time to the heirs and the grantor can’t change the trust’s terms.

It is important to consult with a qualified attorney and financial advisor to ensure that your estate plan and trusts are properly structured to meet your specific needs and goals. They can help you to evaluate the pros and cons of revocable vs irrevocable trusts and determine the best strategy for your estate plan.

How is Life Insurance Used in Estate Planning?

Life insurance can provide a financial safety net for your loved ones by paying out a death benefit to cover end-of-life expenses. Additionally, for individuals with significant assets, it can be used as a tool to help manage estate taxes.

Main Benefits of Life Insurance in Estate Planning

• Quick financial support to beneficiaries. Life insurance allows your beneficiaries to receive prompt financial assistance upon your passing. After the insured person dies, the designated beneficiary can file a claim with the insurance company and receive the death benefit within a matter of weeks.
• Easy access to funds to cover financial obligations. A death benefit can provide fast access to funds to cover final expenses and taxes, bypassing the often-lengthy probate process during which a court decides how assets are distributed. This can be especially beneficial when dealing with a large estate.
• Tax-free inheritance for your family. Beneficiaries are not subject to income tax on the death benefit, unlike with other assets such as traditional retirement accounts.

When used as a part of an estate plan, life insurance policies can be structured in a variety of ways to achieve specific goals, such as providing liquidity to pay estate taxes or creating a trust to manage the proceeds for the benefit of beneficiaries.

It is important to consult with a qualified attorney and financial advisor to ensure that your estate plan and life insurance needs are properly addressed. They can help you to evaluate your overall financial situation and develop a plan that is tailored to your specific needs and goals.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein.  All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).  Please read the disclosure statement carefully before you engage our firm for advisory services.