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Victorian home--example of real propertyIn the past, particularly in the United States, great fortunes were developed due to innovation provided by the change in our culture from an agricultural to industrial society. Over time it became a concern that families were passing wealth generation to generation, thereby retaining unfair power. There was virtually no middle class.
One way the United States government decided to deal with this situation was to make each generation "start over" to some degree by imposing estate taxes. This would break up the wealth.
Today these historic rules can hurt us since we now have a middle class. -
Antique desk and chair--Example of personal propertyEstate planning starts with the human life value. A person cannot provide assets for his family if he dies prematurely. Consider a 25-year-old male who works for 30 years. If he averages over his working life $50,000 per year, then his "human life value" is $1.5 million. That is an asset. To protect that asset, an estate planner would make sure this worker had a large life insurance policy, money for the family in the event of premature death. -
U.S. currencyWhen a person lives to accumulate some wealth, it typically consists of personal property such as jewelry and real property such as a home. Further, there may be cash and bonds, which are considered liquid assets. Estate planning directs the distribution of these assets to the people the person would like them to go to. -
When creating an estate plan you may use several tools.
The aforementioned life insurance is the initial tool that "guarantees" that there will be an estate. At death a will directs the assets to the particular heirs. A trust is a legal instrument that allows you to "park money" for specific or future use.
For example, if you have an 18-year-old who is careless with money, you may not want to leave him with $50,000. Instead, you might set up a trust that dictates he receives $5,000 upon your death.
The most complete estate planning tool is the will. The will allows a person to list who gets what when she dies. Further, they can set up income for their families. Virtually any distribution of assets can be accomplished through a will. It protects heirs from being disenfranchised.
Another estate planning tool is "gifting," which allows a person to give away assets up to a certain amount before she dies. Everyone is allowed to do that up to a certain amount. Gifting reduces the estate size, thereby reducing estate taxes. - If you do not do something to distribute your assets at your death, the federal government will do it for you. This is known as dying "intestate," and basically your assets are fair game with only a certain percentage going to direct descendants.
- Estate planning is simply evaluating your financial situation and determining in a nonpressured way how you want your assets to work for you and your family; you can actually "control things" from the grave.
