Keep hearing the phrase "estate planning" but don't know what it means? Then you're in the right place. Estate Planning is made up 8 major building blocks: estate, will, personal representative, beneficiary, guardian, probate, estate taxes, and planning. Here's what they mean, how they work, and some fun fact about them.
Definition: Your estate is everything that you own. You could refer to your things as “my estate” while you are alive, but the estate doesn’t really come into being until you die.
How it works: When you die, a person gets designated to gather your estate, calculate how much you own and how much you owe, pay any taxes and creditors, and then distribute the remainder of your estate either per your wishes (if you wrote a will) or as the state decides (if you died without a will). Once everything in your estate is distributed, the estate ceases to exist.
Fun Fact: Your estate is an extension of you, so when you die, your estate can get sued and your estate can sue others as if you were alive.
Definition: A will is a written document that allows you to transfer your estate when you die to whomever you wish.
How it works: While alive and mentally sound, you write a will (typed or handwritten) that specifies who you want to receive your property. You can also name a person who will gather and administer your estate, a person to take care of your children, alternative individuals to receive your property, and much more. In a will, you can create a future trust for your spouse, children, or even random people. Then, you sign the document in front of 2 witnesses and a notary public, and store it somewhere where it will be found when you die.
Fun Fact: If you change your mind and want to revoke your will, you can burn it!
Definition: A personal representative, sometimes called executor or administrator, is the person designated to gather, calculate, and distribute your estate when you die.
How it works: You can name a personal representative in your will. Often, people name their spouses, partners, children, other relative, or even a financial planner. Typically, family members don’t expect to be compensated for taking on this responsibility. If you do not have a will or if you fail to name a person or if the person you name refuses or cannot serve, a Judge will appoint a person to be the personal representative. Anyone a Judge appoints could request to be compensated for their work, which will come out of your estate.
Fun Fact: You can name a whole team of personal representatives all to act at the same time and to use any bizarre method of decision making when all your personal representatives cannot agree.
Definition: A beneficiary is a person who receives something from your estate.
How it works: When you write a will, you can name as many beneficiaries as you’d like, including multiple beneficiaries for the same exact property. If you die without a will, the beneficiary of your entire estate is whomever the state decides, which usually goes in the following order: spouse, children, grandchildren, parents, siblings, nephews/nieces, grandnephews/grandnieces, grandparents, aunts/uncles, cousins, their kids, their grandkids, more remote relatives, and then the state.
Fun Fact: Your beneficiary does not need to accept your gift. They can reject it, and the gift will go to someone else.
Definition: A guardian is the person who will take legal and physical custody of your children if both you and the other parent are no longer alive.
How it works: You name a guardian in your will along with an alternative guardian in case the first one refuses to take your kids or is unable to do so. When you die, that person becomes responsible for your children. If you do not have a will or if you fail to name a guardian or if all your guardians refuse or cannot take care of your kids, then a Judge will appoint a guardian for your children.
Fun Fact: In your will, you can technically restrict the guardian from removing your children out of the state, or even out of the house that they currently live in.
Definition: Probate is the process of going to court in order to administer a will or, if you don’t have a will, to have the Judge issue an order on who should receive your estate.
How it works: After you die, if your estate includes real estate or assets worth $75,000 or more, then your personal representative or family members or named beneficiaries must file a petition with probate court, which includes submitting a copy of your will to the court, if you have one. The Judge then either names a personal representative, if you haven’t, or gives power to the one you named in your will. The personal representative then follows probate rules in administering your estate, paying taxes, filing accounting, submitting forms, meeting court deadlines, and closing the estate. With a will, the probate process could be fairly fast, especially if you name a personal representative who is familiar with the process. If you don’t have a will, the process could get lengthy with family members fighting over your property.
Fun Fact: If your creditors fail to make a claim against your estate during the probate process, they are out of luck and cannot come after your beneficiaries to collect the money that you owe them.
Definition: Estate taxes are taxes your personal representative must pay out of your estate to the state and/or federal government.
How it works: If your net estate (after allowable deductions) is worth more than $11.4 million, then anything in your estate that is over the $11.4 million will be taxed at 40% by the federal government. If your net estate is worth more than $2.7 million, then anything in your estate that is over the $2.7 million will be taxed up to 16% by the Minnesota state government. Your personal representative is responsible for valuing your estate, filing your last income statement, and paying your estate taxes.
Fun Fact: If someone owes you more than $20,000, and you forgive their loan, you can write off the first $15,000 as a gift, but the other $5,000 will count against your estate tax exemption, meaning you will pay estate taxes even if your net estate is below the $11.4 million threshold.
Definition: Estate Planning is the process of preparing for your death and arranging your estate in such a way so as to avoid or minimize estate taxes, probate, confusion, expenses, and hassle.
How it works: You can create your own estate plan without professional help if you are well versed in tax law, estate tools, and finances. If you’re not, you can hire an estate planning lawyer who will listen to your goals, fears, concerns, and wishes, and will come up with a variety of estate planning options for you that will help you achieve the results you want. Once an estate plan is agreed on, you will need to sign documents, transfer titles, give gifts, and do whatever other action that is necessary to execute your plan.
Fun Fact: If your goal is to cause your family as much headache and problems as possible, then your estate plan might be to have no plan at all.
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