An estate isn’t just expensive property surrounded by a fence.
Your estate is everything you own in your own name, and your share of anything you own with other people. Your property can be real — meaning land and buildings — or personal, such as jewelry, a stamp collection, or a favorite table or chair.
Money is property, too, as are stocks and bonds, a mutual fund account, or a life insurance policy.
The actual value of your estate is computed only after you die — when you’re not around to figure it out. But it isn’t a mystery. The idea behind estate planning is that you know what you own, what it’s worth, and what you want to happen to it — both during your lifetime and after your death. If your estate is large enough, you may have to do some tax planning as well.
Leaving your estate
Since you own the property in your estate, it’s your right to say what will happen to it.
You might tell your spouse, your children, or your lawyer what you want to happen, but unless it’s written down, there’s no assurance your wishes will be respected.
There are several ways to make clear what you want to happen to your estate:
- You can write a will to specify who gets what after you die
- You can create one or more trusts to pass property, or income from that property, to others
- You can name beneficiaries on pension funds, insurance policies, and other investments so they will receive the payouts directly
- You can own property jointly with other people, so that it becomes theirs when you die
Since wills and trusts are legal documents, you should consult your lawyer about them. Naming beneficiaries is simpler, usually requiring only your signature. And owning property such as homes and bank accounts jointly — especially with your spouse — is fairly standard.
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What’s your estate worth?
Finding the value of an estate is a twostep process — adding up what it’s worth and then subtracting the expenses of settling it. Usually, the valuation is figured as of the date of your death. The alternative is to value the estate six months after you die, if waiting will decrease its value and therefore reduce the potential tax.
An estate’s worth is figured by finding the fair market value of its real, personal, and investment property. That’s not easy to determine ahead of time, in part because market values change over time, and in part because evaluators may appraise the same property differently. Just as everything you own is part of your estate, what you owe reduces its value. Your income taxes, mortgages or other debts, funeral expenses, and the costs of settling your estate — which can be substantial — are all deducted from your estate’s assets. So is the value of any property you transfer to a charity or to your surviving spouse if he or she is a US citizen.
Making a plan
Estate planning can be a complicated process because it requires forward thinking and sometimes difficult decision-making. While financial matters — potential estate taxes in particular — may require attention, the real issue is deciding what you want to do with your assets. So it demands attention from everyone, not just the very wealthy.
Setting a value
One workable definition of fair market value is the amount someone would be willing to pay for your property, and that you’d be willing to accept — assuming that neither one of you is under any pressure to buy or sell, nor guilty of any misrepresentation.
Estate ownership
If your estate includes everything you own, you want to be pretty clear about what ownership means. Most people think of real property when the subject of ownership comes up, but all kinds of property — bank accounts, stocks, mutual funds — can be owned in a variety of ways. The way you own your property determines the flexibility you have to sell it while you’re alive, and also what happens to it after you die. Basically, there are four ways to be a property owner:
- By yourself, as a sole owner
- As a joint owner
- In an arrangement called tenants by the entirety
- As tenants in common
In addition, if you’re married and live in a community property state, half of what you buy or earn during your marriage legally belongs to your spouse.
JT TN W/ROS. This cryptic acronym, which frequently appears on bank accounts and mutual fund statements, stands for joint tenants with rights of survivorship.
It means that both owners have equal access to the property while they’re alive, and the property belongs to the survivor when one of them dies.
For example, if you and your mother have a joint checking account with survivorship rights and your mother dies, the money is yours.
Estate implications
If you own property jointly with your spouse and you die first, only half the jointly held property is added to your estate. For example, if you and your spouse own a $200,000 house jointly, and you die, only half the value, or $100,000, is counted in figuring the value of your estate.
If the joint owner is someone other than your spouse — such as your child or a partner to whom you’re not married — the rule is that the entire value of the property is added to the estate of the person who dies first. If you owned a $200,000 house jointly with a friend, for example, the entire $200,000 would be added to your estate at your death — even though he or she would become sole owner of the house. The only way to avoid this situation, and the possibility of increased tax on your estate, is to be able to prove the amount that each of you contributed to buying the property if you purchased together.
Owning life insurance
Life insurance is a way to provide financial security for people who outlive you. A life insurance policy ensures that your beneficiary, or person you name, receives a death benefit, or sum of money when you die.
Death benefits are tax free to beneficiaries. But if you own the policy on your own life — which is customary — the amount of the death benefit is included in your estate. If the insurance payout is large enough, it might make your estate vulnerable to federal estate taxes.
One alternative is to have someone else — a spouse or child, for example — own a policy on your life and also be the beneficiary. When you die, the policy owner receives the insurance payment but the amount isn’t part of your estate. Another approach is to create an irrevocable life insurance trust that would own the policy. You can pay the premiums yourself with yearly gifts to the trust. Though you can’t change beneficiaries or borrow against the policy’s cash value, you can specify how the death benefit is distributed. But you should take this step only with legal and tax advice.
A third alternative is to purchase a second-to-die policy, which covers both spouses but pays the benefit when the second spouse dies. Your heirs can use the payout to cover any estate taxes that may be due. But unless your net worth is substantially more than the two of you can leave tax free, the potential benefits may not justify the cost of a second-to-die policy. Here, too, you should seek unbiased professional advice before you act.
Power control
Being a property owner gives you the right to control what happens to that property, at least as long as you are healthy, solvent, and of sound mind. And, of course, it also helps if you’re around to keep an eye on it. But what happens if you aren’t able to exercise control for one reason or another?
One solution is to grant, or give, power of attorney to your spouse, sibling, adult child, or close friend — someone you trust to act wisely and in your best interest. This attorney-in-fact, or agent, has the legal right to make the decisions you would make if you were able, as well as the authority to buy and sell property and to write checks on your accounts.
A lawyer can draw up the power of attorney for you, specifying the authority you are granting, and excluding those things you still want to control. It’s a good idea for you, as grantor, or principal, to update a power of attorney — or even write a new one — every four or five years so it will be less vulnerable to legal challenges.
A lesser power
Unlike someone with power of attorney, a payee representative can receive your income and pay your bills — but nothing more. You still control your other financial affairs. But this arrangement helps you keep your accounts in order if you can’t do them yourself because you’re ill, traveling, or just too busy.
Since an ordinary power of attorney is revoked if you become physically or mentally disabled, you can take the additional step of granting durable power of attorney. Unlike a limited or ordinary agreement, durable power is not revoked if you become incompetent, so you’re not left without someone to act for you when you need assistance most. But not all states allow durable power, so check with your legal adviser.
You can also establish a springing power of attorney, which takes effect only at the point that you’re unable to act for yourself. In every case but the last, you can revoke the power at any time or choose a different agent.
What Is Estate Planning? [Complete Guide] by Inna Rosputnia
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