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What You Need To Know About Estate Planning

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In talking with clients looking to create estate plans, one of the main issues we regularly encounter is the misconception that estate planning is only for the rich.  This could not be further from the truth, and unfortunately, this pervasive misconception leads to complacency and a false sense of security.

Our typical estate planning clients are “ordinary” people and not CEO’s of Forbes 500 companies. In fact, we’ve created the phrase “a house, a car, a boat, and a bank account” to describe the financial situation of our typical clients. Our clients usually own a home, a car or two, a couple bank accounts, have a retirement account of some sort, a life insurance policy, and maybe a toy, like a boat or motor home. These individuals have worked hard to earn what they’ve accumulated and should not waste time, money, and energy going through probate.

Many people think that estate plans are only necessary if they have a large net worth or own many assets. The term “estate plan” means different things to different people. In its simplest form, the phrase refers to the process of ensuring that your property gets passed down to the people who you want it to go to after you die. Depending on the value of your property, tax implications can become a concern. However, this is the exception and not the rule. The basic purpose of an estate plan is to transfer assets at death in a cheap and efficient manner.

Estate taxes are not (and should not be) the driving factor for most estate plans.  In 2013, the Federal “exclusion amount” was increased to $5,250,000 for individuals.  Because of this increase, married couples can exclude $10,500,000 of property without paying any estate tax. This means that the first $10,500,000 of a couple’s estate can pass completely tax-free to their heirs. If your idea of estate planning is that it’s only a tax avoidance mechanism, then it would be true that only the very rich would need estate plans.

Accordingly, for most people, the purpose of an estate plan will not be to ensure they pay no estate taxes, but rather to make sure their assets are transferred to their heirs in the most efficient means possible (e.g. avoiding probate).

Without a living trust, in 2013, only the first $150,000 of property can pass without having to endure a probate proceeding.  With a house with equity, the small estate affidavit procedure is probably out of the question. The heir will now be faced with probate.  So, while most people won’t have to worry about taxes, most people will have to worry about the expense and inconvenience of probate.

(Click here for more information about the expense of probate.)

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