Managing Your Money All-In-One for Dummies (Paperback)

Before you can plan your estate, you need to understand what your estate really is. Many people think that estate planning involves only two steps:

But even though wills and death taxes are certainly important considerations for you, chances are your own estate planning involves much, much more. This chapter presents the basics of estate planning that you need to get started on this often-overlooked topic of your personal financial planning. Here you also discover that estate planning is every bit as important as saving for your child''s college education or putting away money for your retirement.

What Is an Estate?

In the most casual sense, your estate is your stuff, or all your possessions. However, even if your only familiarity with estate planning comes from watching a movie or television show on which someone''s will is read, you no doubt realize that you aren''t very likely to hear words such as, "I leave all of my stuff to...." Therefore, a bit more detail and formality is in order.

The basics: Definitions and terminology

What''s that, you say? You don''t own a house or any other real estate, so you think you don''t have any property? Not so fast! In a legal sense, all kinds of items are considered to be your property, not just real estate (more formally known as real property, as discussed later in the'' "Property types" section):

Your estate consists of all the preceding types of items - and more - divided into several different categories. (For estate-planning purposes, these categories are often treated differently from each other, but we cover that later.)

The types of property listed almost always have a positive balance, meaning that they are worth something even if "something" is only a very small amount. Of course, an exception may be your overdrawn checking account, which then is actually property with a negative balance. In the case of an overdrawn checking account, the "property" is the amount that you owe a person or company (your bank, in this case). So your estate also includes negative-value property:

REMEMBER

Basically, all the debts you have are as much a part of your estate as all the positive-balance items.

In addition to understanding what your estate is, you need to know what your estate is worth. You calculate your estate''s value as follows:

1. Add up the value of all the positive-balance items in your estate (banking accounts, investments, collectibles, real estate, and so on).

2. Subtract the total value of all the negative balance items (remaining balance of the mortgage on your home, how much you still owe on your credit cards, and so on) from the total of all the positive-balance items.

The result is the value of your estate. In most cases, the result is a positive number, meaning that what you have is worth more than what you owe.

(If calculating a net value by subtracting the total of what you owe from the total of what you have seems familiar, you''re right! In the simplest sense, calculating the value of your estate involves essentially the same steps that you follow when you apply for many different types of loans: mortgage, automobile, educational assistance, and so on.)

WARNING!

However, in many cases - including perhaps your own - determining what the parts of your estate are, and what they are worth, can be a bit more complicated than simply creating two columns on a sheet of paper or in your computer''s spreadsheet program and doing basic arithmetic. If you are a farmer, for example, you need to figure out the value of your crops or livestock. If you own a small one-person business, you need to calculate what your business is worth. Or perhaps you and six other people are joint owners of a complicated real estate investment partnership; what is your share worth?

For now, another point to keep in mind is that, in addition to what you have right now, your estate may include other items that you don''t have in your possession but will have at some point in the future:

When you''re figuring out what your estate contains and what your estate is worth, you also need to include your own personal accounts receivable - a business and accounting term that refers to what people or businesses owe you - along with your banking accounts and home.

One final term to cover is estate planning. By definition, estate planning means planning your estate. (Duh!) More precisely, you need to follow a disciplined set of steps that we discuss later in this chapter. Why? You want to protect as much of your estate as possible from being taken away, and you (not the government or a scheming family member) want to control what happens to your estate after you die.

Your estate plan typically includes the following components:

We discuss all of these aspects of estate planning in this book. If this collection of estate-planning activities seems a bit overwhelming, think of estate planning as parallel to how you plan your personal finances and investments. Your investment portfolio may be made up of individual stocks, bonds, and mutual funds, along with bank CDs or other savings-related investments. Then within each type of investment, you have further categories (for example, different types of mutual funds) that you may want to use.

Your investment objective is to sort through this menu of choices and put together just the right collection for your needs. You must also do the same with your estate plan. You need to have the right will and insurance coverage, possibly accompanied by trusts, if they make sense for you and your family. Furthermore, you may need additional estate-planning activities and strategies particular to your own needs.

Property types

You can have several types of property within your estate. Make a distinction between these types of property because various aspects of your estate planning treat each type differently. For example, in your will (see Book VII, Chapter 2), you can use different legal language when referring to various types of property, so remember to keep these distinctions straight.

We already mentioned one type of property - real property - and noted that real property refers to various types of real estate:

TECHNICAL STUFF

In addition to the actual real property itself, your estate includes any improvements that you can''t even see. For example, if you and three of your friends bought 200 acres of land with the intention of turning that land into a subdivision and you have spent loads of money on infrastructure - water lines and hookups, sewer lines and hookups, in-ground electricity and cable, and so on - those improvements (or, more accurately, your share of those improvements) are also considered to be part of your estate, along with the original real property itself.

Your estate also includes personal property, which is further divided into tangible and intangible personal property. Your tangible personal property includes possessions that you can touch, such as your car, jewelry, furniture, paintings and artwork, and collectibles (baseball cards, autographed first-edition novels, and so on).

REMEMBER

Your house is considered to be real property, not tangible personal property, even though you can touch it. Why? Because your house is permanently attached to (and thus made a part of) the land upon which it is built.

Your intangible personal property consists of financially oriented assets such as your bank accounts, stocks, mutual funds, bonds, and IRA. Of course, you can hold a stock certificate or mutual fund statement in your hand, but the stocks or mutual funds are still considered intangible personal property.

TECHNICAL STUFF

Technically, that stock certificate or mutual fund statement isn''t actually what you own; it represents your portion of the ownership of some company (in the case of the stock certificate) or your portion of that mutual fund in the companies'' stocks in which it invests. Financially oriented paper assets are typically intangible personal property, whereas actual possessions are tangible personal property. If you have any doubt about what category any particular item of your possessions falls into, just ask one of your estate-planning team members who we discuss later in this chapter.

Types of property interest

For each of the three types of property in your estate - real, tangible personal, and intangible personal - you also need to understand what your interest is. "Of course I''m interested in my property," you may be thinking; "After all, it''s my property, isn''t it?"

In the world of estate planning, interest has a somewhat different definition than how that word is used in everyday language, or even how the word is often used in the financial world (interest that you earn on a certificate of deposit or that you pay on your mortgage loan). More important, the specific type of interest in any given property determines what you specifically need to be concerned about for your estate planning.

Property interest is an essential part of almost all of your estate planning, from the words that you put in your will to how you may set up a trust, for two very important reasons:

The two main types of property interest are legal interest and beneficial interest. If you have only a legal interest in a property, you have the right to transfer or manage that property, but you don''t have the right to use the property yourself. By way of a very brief introduction to that topic, when you set up a trust, you name a trustee, a person who manages the trust.

Suppose that you set up a trust for your oldest son, Robert, as part of your estate plan, and you name your brother-in-law, Charlie, as the trustee. Charlie isn''t allowed to use Robert''s trust for his (Charlie''s) own benefit, such as to withdraw $10,000 for a trip to Paris. That''s called "Uncle Charlie goes to jail for stealing!" Assuming that Charlie does what he is supposed to do - and, more important, doesn''t do what he''s not supposed to do - Charlie has a legal interest in your son''s trust as the trustee.

Unlike his Uncle Charlie, Robert has the other type of property interest in his trust: a beneficial interest, meaning that he does benefit from that trust. Basically, you set up that trust to benefit Robert.

Now, to complicate matters a bit more, two "subtypes" of beneficial interest exist: present interest and future interest. If you have a present interest (remember, that means "present beneficial interest"), you have the right to use the property immediately. So if Robert has a present interest in his trust his Uncle Charlie manages, Robert may receive payments from the trust of some specified amount - say, $30,000 every three months, for this example. After Robert receives the money, he can do whatever he wants with it; the money is his to use, with no strings attached.

The other type of beneficial interest - future interest - comes into play when someone with a beneficial interest (that person is allowed to benefit from that property) can''t benefit right now, but instead must wait for some date in the future.

For example, you can set up the trust described to benefit not only your oldest son, but also your other two sons, Chip and Ernest. But you decide to take care of your three sons differently within that same trust. Suppose that after Robert receives his quarterly $30,000 payments for five years, his payments stop, and Chip and Ernest each begin receiving $30,000 quarterly payments at that point. Essentially, Chip and Ernest have a future interest in the property (the trust) because they can''t benefit right now; they benefit in the future.

Complicating factors just a bit more (last time, we promise!), someone with a future interest in property can have one of two different types of future interest: vested interest and contingent interest. If you have a vested interest, you have the right to use and enjoy what you will get from that property at some point in the future, with no strings attached.

(Continues...)

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