Don’t Leave Your Estate Planning Up to Chance

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A complete estate plan can help preserve your assets, reduce taxes, and support your loved ones. Learn wealth management and estate planning strategies.

Creating a well-structured and comprehensive estate plan is critical to seeking to ensure your assets are distributed according to your wishes and that as much of those hard-earned assets go to your intended beneficiaries, and not lost to the veritable plethora of costs, fees, and unnecessary taxes that arise during the settlement of an estate. Before you can structure your estate plan, you have to become familiar with what an estate plan consists of.

The Basic Components of an Estate Plan

The components include, but are not limited to:

Wills

A legal document (a written instrument that establishes, records, or formalizes legal rights, obligations, or agreements between parties)i that outlines how your assets are to be distributed after you die. A will can also grant guardianship for minor children. (More on wills below).ⁱⁱ

Trusts

A legal entity (an individual or organization recognized by law as having rights)iii that holds and manages your assets, which can occur during your lifetime and after you die, with instructions on how to distribute these assets. (More on trusts below).^iv

Power of Attorney

A legal instrument authorizing one to act as the attorney or agent of the grantor. The basic components of the power of attorney include:

The document must clearly identify both the principal (the person granting the power) and the agent (the person receiving the power).
The document must clearly outline the scope of authority, including when the agent’s authority begins and ends.
There should be a durable clause (if applicable).
The principal must sign the document, and in many jurisdictions, notarization and witnessing are also required.
Consider a revocation clause outlining how the principal can revoke the power of attorney, which generally requires written notice.
Power of attorney laws vary, so it is essential to ensure your document complies with the state requirements.

Health Care Directive

A legal document signed by a competent person that provides guidance for medical and health care decisions, for example, the termination of life support or organ donation, should a person become incompetent to decide on their own.^vi

Tax documents

There are many different IRS tax forms for reporting various kinds of income, expenses, and other financial data. Being knowledgeable of what documents may be required may help you in your preparations. Some of these tax documents include:

IRS Form 1041, U.S. Income Tax Return for Estates and Trusts – A form filed by the fiduciary of an estate or trust to report income, deductions, gains, and losses related to the estate or trust.^vii
Schedule K-1 (Form 1041) – A schedule that is part of the Form 1041 used to report a beneficiary’s share of the estate’s or trust’s income, deductions, and credits that need to be reported on their individual tax return.^viii
IRS Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent – A form, along with Schedule A, is used to report the final estate tax value of property distributed from an estate to beneficiaries.
IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return – A form filled out by the executor of a decedent’s estate to calculate and pay federal estate taxes.^ix
IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return – A form used to report gifts that are subject to federal gift and generation-skipping transfer taxes.
Form 706-NA, United States Gift (and Generation-Skipping Transfer) Tax Return – A form filed by non-residents who are not U.S. citizens to calculate estate taxes on U.S.-situated assets.^x
Employer Identification Number (EIN) for the Estate – Before filing an estate income tax return (Form 1041), a tax identification number for the estate, also known as an EIN, will be needed.
IRS Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes – A form that allows an executor to request extensions of time for filing and/or paying estate taxes.
Publication 559, Survivors, Executors, and Administrators – A publication by the IRS that provides guidance on completing federal income tax returns for you after your death and the estate. It also includes information on estate and gift tax returns that may need to be filed.^xi
Financial and tax records – Bank statements, investment account summaries, retirement account statements, and past tax returns.
Other related documents – Appraisal and valuation history documents, charitable giving documents, and property ownership documents.

A list of assets and liabilities

A Letter of Instruction or Intent

An informal document providing additional details and wishes not included in the formal legal documents, such as funeral arrangements, contact information for financial professionals they used, debt information, and other potentially relevant information.^xii

Consult a financial professional

Creating and modifying an estate plan can become very financially complex, and it may save you and your beneficiaries a significant amount of time and money by discussing your plans with a financial professional. They can work toward helping you optimize your tax efficiency, gifting strategy, and other financial decisions. Don’t let there be missing pieces of your estate plan – download our checklist today to help.

_{Important Disclosures:}

_{Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.}

_{This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.}

_{All information is believed to be from reliable sources; however, LPL Enterprise makes no representation as to its completeness or accuracy.}

_{This article was prepared by LPL Marketing Solutions.}

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_Sources:

[i] Legal Documents: What You Need to Know

[ii] What is a Will? - Estate Planning - Fidelity

[iii] What Is The Meaning Of A Legal Entity

[iv] What Is A Trust? - Fidelity

[v] How to set up and use a power of attorney | Fidelity

[vi] Time to update health care proxy | Fidelity

[vii] About Form 1041, U.S. Income Tax Return for Estates and Trusts | Internal Revenue Service

[viii] A Guide to Schedule K-1 (Form 1041)