The term “estate planning” covers a broad set of topics and can be both confusing and overwhelming to anyone who isn’t familiar with the concept. There is a wide variety of estate planning strategies available.
Regardless of wealth, everyone should consider establishing a plan for themselves and their families.
What is estate planning? Simply put, it’s the process of ensuring your assets are distributed according to your needs, wants and wishes. It also includes other matters like powers of attorney and advanced medical directives, which help dictate how finances and medical care are handled in the event you become incapacitated.
There are a number of different estate planning techniques ranging from relatively straightforward to extremely complex. As an estate planning introduction, let’s focus on three fundamental elements:
Most people understand what a will is, but what exactly does it do, and more importantly, what doesn’t it do? The goal of a will is to designate who receives your assets after you’ve passed, including any charities you would like to support. A will also allows you to name someone to oversee the distribution of your estate. The named individual is called the “executor” or “executrix.” One of the most important functions of a will may be the designation of a guardian for your minor children should you pass unexpectedly. A will is the most basic estate planning document and is inexpensive to execute–though there are sometimes added hurdles for Muslim clients. As much as a will covers, it is not a catch-all for your estate planning needs. For example, simply having a will does not avoid probate or the court appointed process of distributing assets. Even though a will spells out your wishes, a probate judge actually reads your will in court and makes determinations in case there are any ambiguities or challenges to the will.
This leads us to our next estate planning technique, a trust. Whereas a will must go through the public probate process, a trust is a private document that dictates the distribution of your assets, among many other functions. A trust allows for greater control of your assets both in your life and after. You’ve probably heard of a trust fund. That is simply a pool of assets that are named in trust for someone but can be accessed at varying periods of time according to how the trust is drafted. This is an area that can get extremely complex as there is a seemingly infinite number of trust combinations which are certainly beyond the scope of this article. However, the important trust features to keep in mind from a planning perspective are that they avoid probate (which is often costly and time-consuming), offer the owner more control of their assets and can also provide protection from creditors. As you might expect, a trust is more expensive to set up than the cost of a basic will.
If someone wants to give to charity, there are a number of ways to fulfill those wishes. Some people, for example, name their favorite charities or a trust as a primary or a contingent beneficiary. For those seeking to establish an income stream for a charity throughout their lifetime, one possible option would be to establish a charitable lead trust (CLT). Upon termination, if the CLT were properly established, the remaining balance would then go to the grantor’s beneficiaries.
A properly established charitable remainder trust (CRT) would do the reverse, giving beneficiaries an income stream while the grantor (or the person who establishes the trust) is alive, with the remainder going to the grantor’s favorite charity. Either option—CLT or CRT—can have multiple benefits, which include:
- Reducing or eliminating capital gains tax on assets that have appreciated
- Claiming income tax deductions for charitable giving
- Reducing estate taxes
- Giving to your favorite charity
- Giving to your designated beneficiaries
Your Azzad advisor can help you sort through the options that might be right for you and work with your attorney or tax advisor to create an appropriate giving strategy.
While we’ve covered a rough outline of basic estate planning, these represent just a few ways you can articulate your goals for transferring your wealth and making financial decisions. The process of estate planning can get very complex, but your Azzad advisor is here to help.