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Estate planning: Not just for the 1%

There's a common misperception that estate planning is reserved for the wealthy, as an attempt to shield assets from the grasp of Uncle Sam—but nothing could be further from the truth.

In fact, estate planning is giving what you have to whom you want, the way you want, when you want and with the least amount of taxes and expenses possible.

Keep in mind that your estate is anything you own or have control over. That would include equity in your house, retirement accounts, a business or the proceeds of a life insurance policy. The manner in which you title these assets can have a profound financial and emotional impact on the beneficiaries.

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In truth, everybody already has an estate plan—some voluntarily; others involuntarily. A will is a legal declaration that names the person who will distribute an estate and determines the recipients. It is generally recommended that everybody, regardless of circumstances, delineate their desires in a will.

In the cases of those who die without a will and have assets that exceed debts and funeral expenses, their estates will be subject to "intestacy," a process whereby state laws determine how the assets are distributed.

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In this instance, lineage usually takes precedence over what the decedent would have preferred. It has a tendency to stray from common sense and cause family discord, and it should be avoided.

Failure to execute a plan can have dire consequences. A married couple with two children may have sufficient life insurance and a will that leaves all the assets to a surviving spouse. Should the husband pass away, his surviving spouse and their children are provided for properly.

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However, if his widow remarries, puts her assets in joint name and then predeceases her second husband, her children from her first marriage are effectively disinherited—because assets in joint name pass by way of contract and usurp the terms of a will.

Instead, parents can establish a revocable living trust that segregates any existing assets from those of a future new spouse and protects their own children from the negative impact of a second marriage. A deceased parent, in essence, can govern from the grave.

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Trustees responsible for managing such trusts have a fiduciary responsibility to adhere to their terms and are personally liable if derelict in their duties.

A living trust also sets the terms according to what the parent thinks is in his or her children's best interest. If I'd inherited $500,000 when I was 18, I would have had a red, shiny Porsche—not all beneficiaries are prepared to manage a lump sum at a young age. My living trust, therefore, pays for all of my son's college expenses but will only match his W-2 income if he doesn't graduate.

Who are your beneficiaries?

If a child is one, who makes decisions on his or her behalf? It's also not unheard of for ex-spouses to inherit life insurance benefits long after the divorce. Where is your will, and would your family be able to find it? If the will is locked in a safe deposit box, how would the executors prove they have the authority to access it—especially if that authority is, ironically, granted in the locked-up will itself?

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For those who are self-employed, who will run your business if you pass away? How much is it worth? Are you just guesstimating?

A business is an asset that could disappear without establishing a value while the owner is still alive. If there is more than one owner, they can each own life insurance on the other and agree to use the death benefit to buy out the decedent's share of the business at a predetermined price, ensuring the family receives its fair share.

"Half of all states impose a tax on estates at thresholds much lower than the federal allowance, with many ranging between $1 and $2 million."

Finally, there is a matter of estate taxes. Federal estate taxes are not due if the estate is valued at less than $5.34 million in 2014. Moreover, a surviving spouse can inherit an unlimited amount of money.

That sounds like a lot, but check your state to see if it has a death or inheritance tax. Half of all states impose a tax on estates at thresholds much lower than the federal allowance, with many ranging between $1 million and $2 million.

Why is this important? If you're single, have a $500,000 401(k) plan account, $250,000 in home equity and a $1 million life insurance policy, you may not feel rich, but your estate is worth $1.75 million. In some states, your beneficiaries would have to write a check to the state treasury.

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Fortunately, these circumstances can easily be avoided with the proper planning, and you'll likely sleep better at night when the process is complete. It's advisable to use an estate-planning attorney, as these matters require the attention of a specialist. While none of us will live forever, all of us—without question—should plan for a smooth transition upon our death.

—By Ivory Johnson, special to CNBC.com. Johnson is the founder of Delancey Wealth Management.