While the thought of having a personal “estate” may conjure images of Vanderbilts, Rockefellers, and the other wealthy elite, an estate is probably the most common thing for a person to have. By definition, an estate is simply the property under an individual’s name. It can include everything from a home or business to bank accounts and retirement funds.

Taking steps to plan for the future of your estate can be one of the most important things you do. In fact, dividing and bequeathing your property is the very last official action you make. To ensure that loved ones can make the most of what you are able to leave them, it is important that you learn the different parts of estate planning and consider how they might affect you.

Last Will and Testament

Often considered the most basic and essential aspect of estate planning, a will provides legal instructions for the division of property after the death of an individual. A person who has a valid will is known as a “testator.” The person instructed to carry out a will after the testator’s death is simply called an “executor.”

When a testator dies, his or her will must be checked for validity and its actions ratified as being legal. “Probate” is the process where a court looks over a will, deals with any conflicts and approves or carries out its requests. Probate can be formal or informal. Formal probate is done entirely by a probate court and can take several months to a couple years to complete. Informal probate occurs when a court gives approval for a legal representative to carry out the will. It is often much faster than formal probate.

A person who dies without a will is referred to as dying “intestate.” If an individual dies intestate, state statutes and a court appointed administrator determine how to divide his or her estate. Unless agreements are made between the inheritors, intestate divisions are usually split between the surviving spouse and adult children.

While wills are the most essential part of estate planning, they are also the most basic. A standard will provides little flexibility for wealth distribution, does nothing in the event of testator incapacitation, is a matter of public record, and is fully exposed to probate fees and taxation. Because of these short comings, many people wish to add other legal arrangements to their estate planning.

Living Wills and Power of Attorney

A living will is a very simple document that is easy to overlook, but can be key to a family’s well-being. A living will provides instructions for medical care in the event the testator is incapacitated mentally or physically. Its goal is to not only ensure that a testator’s wishes are carried out, but also to alleviate his or her family from the responsibility of making a difficult decision. Living wills are often overlooked, often briefly surging in popularity whenever a media-circus erupts around a single case where family members go to court over the care of an incapacitated individual.

Creating an authorization of power of attorney can be as important as a living will. If you are mentally or physically incapacitated, power of attorney allows an individual to take legal action in your place. It is particularly important for people who own joint property, bank accounts or businesses. If incapacitated without denoting power of attorney, an individual freezes all legal actions he or she would be involved with. While it is possible for someone to gain this legal power for an incapacitated adult, the court proceedings required can be extremely lengthy and costly.

Trusts

A variety of trust options exist for individuals who want to exert more control over their property than a will allows. A “trust” is simply a legal entity created to hold property. An individual who creates a trust is called a “grantor.” Trusts are controlled by one or more “trustees” who operate them in the best way to benefit the predetermined “beneficiaries,” the individuals who receive trust assets.

The “living trust” is the most used trust for individuals looking to pass their estate’s value to other people or charities. In a living trust, the grantor usually takes on the roles of both trustee and beneficiary initially; the grantor can control and benefit from his or her property, even though it is owned by the trust. Upon his or her death, the grantor’s trust passes to a predetermined trustee who will manage and eventually distribute the trust assets to beneficiaries. The transactions of trusts are private and, unlike wills, not subject to public records or probate.

Trusts provide much more flexibility compared to wills. A detailed trust allows a grantor to put any number of restrictions or amendments to the distribution of wealth. Additionally, if a person acting as trustee and beneficiary suddenly becomes incapacitated, the role of trustee can be passed on, while the original trustee still remains the beneficiary. In this way, a trust can provide for needs of the person who created it, even while he or she is unable to control it.

Gift Giving

Estate planning should also take into consideration charity and gift giving into account. Giving gifts to would-be-inheritors is often a method individuals use to avoid taxes, but if done incorrectly, can lead to higher taxation on estate inheritance in the future.

Similarly, well-constructed estate planning can involve trusts committed to charitable contributions. Money and assets added to these trusts can appreciate in value after the grantor’s death, providing the charity with more money than the grantor could have given while alive.

Who Owns What?

An important aspect of estate planning is determining the state of ownership of all property associated with the estate. Wills and probate only deal with the property officially belonging to the testator. Joint-ownership of property through marriage or another arrangement keeps property out of probate because it is already owned by another person.

Joint-ownership, marital property, or “life tenant” policies combine the ownership of property so that a surviving partner gains full control after a death. It is important to know the details of ownership because it affects how property is handled after a death.

Filing for joint ownership seems like a great method to bypass probate and probate costs, but it comes with inherent risks. People added to a joint ownership have as much legal control of the property as the original owner. Bank accounts can be accessed and emptied by either party, causing problems if the money was relied on for future plans. Similarly, property that is jointly owned often cannot be sold or altered without permission of both owners. Because of these risks, joint-ownership titles should only be sought if both parties have similar plans for the future and trust each other implicitly.

Death and Taxes

While people make efforts to avoid probate costs and court fees for the estates they leave behind, taxation is a much more encompassing process. Probate only handles property that needs to be distributed by a will or intestate laws. Taxation looks at all property that an individual held at death and shortly beforehand. The taxable estate includes all property (owned outright and joint-owned), investments, recent donations, trusts, and life insurance policies. While much of an estate can be declared either tax deferred or tax exempt if passed on to a spouse or charitable donations, estate and gift taxes on inheritances can be extremely high. Local estate taxes can vary greatly from state to state. Research and legal advice should be sought to protect against any unexpected estate taxes.

Simplifying the Future

Many people avoid estate planning because of the inconvenience of cost and the uncomfortable concept of their death. The simple fact is that death or serious accidents cannot be controlled; however, if the proper steps are taken, almost everything legally associated with an unfortunate event can be organized. A plan and proper legal arrangements keep unnecessary fees, taxes, and court battles from plaguing a family after the death of a loved one.

Contact an experienced lawyer or financial advisor about the plans you have laid down for the future and what else you can do to ensure property moves seamlessly between the survivors of a death in your family.

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Essential Concepts in Estate Planning