June 2011 | www.selectasset.com
Estate Planing Basics

". . . but in this world nothing can be said to be certain, except death and taxes."

  -Benjamin Franklin, 1789

It seems that the word 'estate' is a source of confusion for many people.  Estate does not mean a large property, nor does it mean something that is of enormous value.  Estates are not something possessed solely by the wealthy.  Just about everyone has an estate, from the individual with assets galore to the young girl who received a nice piece of jewelry for her 16th birthday.  To be sure, if you possess anything of value that you would pass on to someone else after your death, you have an estate.  
The laws concerning the distribution of one's estate after their death vary from country to country.  For example, in Japan and France, as well as in most Muslim countries, a portion of an estate is subject to forced heirship.  This means that a share of the deceased's assets is automatically bequeathed to his or her dependents, despite what his or her wishes may be.  
Many other countries rely on instructions left, legally and in writing, prior to death.  Because our clients come from diverse backgrounds and it would be impossible to touch on the laws of so many different countries, the information in this article is general in nature.  It will be useful, however, to give you an idea of the benefits of estate planning.
First, let's look at some of the main tools used in estate planning:


A will is the cornerstone of any estate plan.  A will is a legal document, enforceable upon your death, which leaves instructions as to how your property and assets should be distributed.  A will can also designate a guardian for any minor children you may have.  The importance of preparing a will can not be overstated, as dying without one will leave you "intestate", or in simpler terms, it will leave the distribution of your estate in the hands of the state.


In addition to wills, which are enforceable upon death, a good estate planner can assist you in setting up a trust.  Trusts are created during your lifetime, and are regulated by a trustee, appointed by you.  Benefits of setting up trusts include the ability to control the distribution of your assets in the case of irresponsible beneficiaries, and since the assets belong to a trust rather than to an individual, trusts are able to "pass outside of the probate".  In other words, they can avoid some of the taxes that are imposed upon estates and inheritances.
Speaking of taxes, there are several that can be imposed by both the federal and local governments, and herein lies the major incentive for estate planning.  Estate planning aims to maximize the value of your estate by reducing the amount that must be paid in inheritance taxes.  A good estate plan takes into consideration these taxes and how to limit them.  While the laws governing these taxes differ from country to country, the general idea is the same.

  • Estate tax

Also known as "death tax", in the USA, for example, estate tax is imposed by the federal government (and by some states) on the value of your entire estate.  Some deductions and exemptions are permitted - for example, it is possible to deduct funeral expenses, debts paid from your estate, and the value of assets passed to your spouse or to a charity. In the USA, the federal "death tax exemption" is set at $3.5 million, though with the help of an estate planner, trusts can be used in such as way as to increase this exemption.     

In the UK, the estate tax (actually called the inheritance tax, or IHT) is 0% on the first £325,000 (called the nil-rate band), and 40% on the rest of the value of the estate, which includes any gifts made by the deceased in the 7 years before death.  Deductions include assets left to charity, some political donations, and small gifts of up to £250 given to separate individuals.          

  • Inheritance tax

In the US, inheritance tax is quite a separate thing.  While estate tax is levied on the estate of the deceased, inheritance tax is imposed upon the recipient of the inheritance.  There is a $12,000 annual exclusion for each person to whom a gift is made, however, even larger gifts can be made without being hit with inheritance tax . . . by using special trusts set up during your lifetime.
Trying to navigate through the details concerning wills, trusts, estates, gifts, inheritances, and taxes is quite a complex task.  With proper estate planning, you can be sure that your tax liability will be minimized leaving a greater portion of your estate to your beneficiaries.