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Estate Planning Explained


There are quite a few topics to cover when talking about your entire life's estate. For now, I will talk about the most common 3: Pensions, Life Insurance and Trusts. Let's begin by defining an estate.

What is an Estate?

An Estate is personally owned and NOT co-owned. This contains the total value of a person’s property assets after they pass away (i.e. their Net Worth). The formula is this:

Total property = real (land build) and personal (stocks, bonds, currency, art, cars, furniture). This is all that is owned by a person before a trust / will has been carried out. Beneficiaries are often children, spouses, and grand-kids.

Estates can be used to supplement income in retirement, a down payment on a home, college tuition and other life expenses. Permanent plans offer the most flexibility and benefits. You will need an estate planning attorney to help you legalize your wishes.


Pensions

Defined Pension plans - These are private pension plans offered by sponsors/employers, insurance companies and unions. They promise an amount or lump sum or combo depending on employees earnings, history, tenure, age, and not dependent on individual investment returns. Ex: government public sector & corporations offer pensions in lieu of increased pay.

Defined Contribution Plan: IRA, 401k, 403b, 457 plans.


Life Insurance

Life Insurance Companies: Northwestern Mutual, Mass Mutual, NY Life


Term Life Insurance policies give coverage for a specific duration (10-30years) if you outlive the term the policy ends with no payout. Generally, we can't withdrawn funds from a Term Life plan but there are limited exceptions (e.g. a specific add-on to your policy that allows it, etc.).

Permanent Life insurance policies give lifelong coverage as long as all premiums are paid, you’ll get all your benefits.

Be mindful to read the costs and benefits of each policy. They do discriminate based on age, health, occupation, etc. So you have to choose the most and best option for you.

Insurance companies promise to pay your next of kin/beneficiaries a lump sum payment (death benefit) if you die.


Do you need a Life Insurance Policy

Life insurance policies are primarily for your family in the event of your death, funeral expenses, debts or leaving a legacy for charity. These policies are important if you have dependents or a legal partner but not as important for single, childless people; unless you feel the need to pay monthly into a company out of charity or if you are sickly and want to leave something behind for your family when you die.


IUL: Indexed Universal Life (permanent life)

With IUL life insurance, you can also invest the amount that is in the account and withdraw money. Again, check to make sure your policy allows this.

Example: you can withdraw some of your death benefit to pay for long-term care expenses. Your premium can be waived if you become disabled and can’t work, etc. You can always withdraw money from your permanent life insurance policy (whole life/universal life plans) which build cash value over time.

Withdrawals higher than total premiums may be taxed as income. Loans are tax-free with an active policy. Use your cash value to pay premiums. It takes 10-15 years to grow a decent amount.



TRUSTS

These are like a will but offer more control. Trusts don’t go through probate. Probate is the time it takes to verify the validity of the will, when assets are collected and accounted for, debts and taxes are paid and probate assets are distributed.

The flexibility of a trusts gives you the power to decide more details on who, what, when, how, and why for your estate. A Trustee is the person or trust institution that is the legal owner of a trust. They are responsible for managing the assets placed into a trust and act according to the Trust terms. Trustees hold assets on behalf of a beneficiary (s).

Trusts can protect your heirs from creditors or beneficiaries inept at money management. Your privacy is maintained and you have control over your wealth.

Revocable trusts allow you to access your assets while you are alive (a.k.a. a Living Trust) and the remaining assets pass on after.


There are 10 types of Basic Trusts:

  1. Marital (A)

  2. Bypass (B)

  3. Testmentary

  4. Irrevocable Life insurance (ILIT)

  5. Charitable Lead Trust, Charitable remainder

  6. Qualified Terminable interest party (QTIP)

  7. Generation skipping

  8. Granter retained annuity (GRAT)

  9. A Revocable (Living Trust): assets skip probate, you retain control during your lifetime, flexible and can be dissolved/deleted anytime and becomes irrevocable at death. You can be the trustee (or co-trustee) and you can make plans to have a successor trustee to manage them in the event of your death/incapacity. It’s still subject to estate taxes and treated like any other asset you own during your lifetime.

  10. Irrevocable Trust: Transfers your assets out of your (grantor’s) estate and out of reach of estate taxes and probate but it can’t be altered by you after it’s been officially executed. You lose control, you can’t change terms and you can’t dissolve it. It’s primarily chosen to reduce estate taxes relieving you from tax liability that is generated from asset income. It also protects from legal judgment against you. Distributions usually have income tax requirements.


Each state has different laws about trusts. So do your own research before making a decision.



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