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Estate Planning Essentials

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When we think about financial planning, we often focus on financial goals that will play out during our lifetime. We save for the big down payment on our first home, we set up 529 plans to send our kids to college, and we participate in our company retirement plans so we no longer need to work one day. It is human nature to focus on the initiatives that will benefit us now or in the near future, and it is against our nature to plan for life after death.

As a result, we don’t consider the proper steps that should be taken to ensure that our estate – a fancy word for whatever assets we own or owe at our death – is passed on in the most efficient manner. A will is a legal document that describes how you want your property to be transferred to others after your death. It provides clear instructions so that other family members do not need to make big decisions on your behalf. The instructions in the will are reviewed and executed upon through the probate courts. Probate is the legal process of establishing the validity of a will and distributing the estate accordingly. Probate offers the ability to challenge areas of the will and take a thorough look into the wishes of the deceased.

Luckily, there are some assets that avoid probate and automatically transfer ownership to other parties.

Why would one want to avoid probate?

  1. The probate process can take a long time to finalize: the settlement and distribution of the deceased’s assets will take much longer if the estate is highly complex and contested.
  2. The probate process is expensive: the more complicated the estate, the more expensive the process will be.
  3. There is no privacy in probate: given that the proceedings of probate court are publicly recorded and accessible, avoiding probate would ensure that those settlements are done privately.

Here are four things you can do to sure up your estate:

  1. Establish Joint Ownership Accounts:
  • Joint ownership with the “right to survivorship” avoids the probate process upon death as the deceased joint owner no longer owns the property and it is passed to the living owner. Four common types of joint ownership include:
    • Joint tenancy with rights of survivorship
      • If one owner dies, that owner’s interest in the property will pass to the other surviving owners.
    • Tenancy by the entirety
      • Effectively upon the death of a spouse, the living spouse takes the deceased spouse’s portion of the assets.
    • Tenancy in common
      • Two or more people have ownership interests in the property. Each owner has the right to leave their share of the property to any beneficiary upon that owner’s death.
    • Community property
      • Married couples can hold property as community property (house, land, etc.) with the right of survivorship.
  1. Set Up a Trust
  • A trust enables an individual to put their money to an intended use after they pass away. Not all trust accounts avoid probate, but two types of trusts that do are:
    • Revocable Living Trust
      • An individual places assets into the trust while they are alive and maintain the ability to access and receive income from the assets until they die. However, they are still required to pay capital gains and income tax on the assets in and received from the trust.
    • Irrevocable Living Trust
      • An individual places assets into the trust while they are alive, however, they cannot change or alter the trust as the assets are no longer held under their name. Capital gains are not considered a part of the individual’s estate and are not subject to estate tax once they die. Tax responsibility is passed onto the beneficiary.
  1. Give
  • If the asset is not owned by the individual at the time of their death, the asset does not need to go through probate. Some ways to avoid probate using gifts include:
    • The 2019 annual exclusion from gift tax is $15,000 per person, per year. If married, the couple can combine their annual exclusion.
    • The Gift Tax Medical and Tuition Expense Exclusion allows for an individual to make payments directly to an educational organization or medical provider on behalf of another individual without treating the payments as taxable gifts. Set up a 529 Plan to take advantage of the education side of this exclusion.
    • Gifts made to qualifying charities are deductible on an individual’s itemized tax return. Individuals can also deduct the value of these donations from the amount of gift taxes they owe.
    • A gift to a qualifiable political organization does not qualify as a taxable gift.
    • A gift from one spouse to the other does not qualify as a taxable gift.
  1. Designate Beneficiaries
  • Establishing beneficiaries on pension plans, life insurance proceeds, retirement plans such as IRA and 401k accounts, and health or medical savings accounts ensures that those assets will be excluded from probate.

The Burney Company is here to help you address your financial needs. Please give us a call today with any questions you may have.

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