What is Estate Planning?
Estate planning is a financial and legal plan for the management of your assets after your death or if you become incapacitated. Some of the things that estate planning addresses include:
- Estate taxes
- Drafting a will
- Establishing trusts
- Charitable donations
- Naming beneficiaries
- Naming executors
- Choosing power of attorney
- Medical instructions if you are incapacitated
- Custody or guardianship of minors
- Care of pets
- Funeral arrangements
Anyone with assets should plan for what will happen to them at their death. Assets include cash, stocks, pensions, debt, life insurance, houses and property, cars, and other items of value, like artwork or collectibles.
Why is Estate Planning Important?
Too many people assume estate planning is only for the wealthy. Nearly everyone has an estate, no matter how small it is, and something will happen to it upon your death or major disability. If you want a say in what happens to your assets and any dependent children, you must have a plan in place.
For instance, if you become disabled and unable to manage your own assets, you will need a conservatorship or guardianship. If you have not named anyone, the courts will assign someone. Upon your death, without a plan, your assets will go to a spouse or children. If you do not have a family, a probate court will distribute your assets.
In other words, if you don’t make a plan for your assets, your minor children, and yourself, you have no say in what happens to them when you die.
What is Probate?
Probate is the legal process that recognizes your will and executor. State laws on probate vary, which is one reason it is important to work with an estate planning lawyer. Probate is simple and quick if you have created a thorough estate plan. If you have not, probate is a long process during which the courts decide how to distribute your assets.
You cannot avoid probate, but the more careful and detailed your estate plan, the less involved the courts will be. It’s beneficial to your heirs and beneficiaries to minimize probate, even though it cannot be eliminated completely.
What Are the Most Important Elements of an Estate Plan?
While anyone with assets or a family should have an estate plan, the elements needed will vary. These are some of the most basic and important things you should have in a comprehensive estate plan:
Your last will and testament is a legal document that outlines what you want to happen to your assets and any children after you die. Without a will, your assets go through probate and may be distributed in a way you don’t want. Your child may be assigned a guardian you didn’t choose. Reassess your will any time you have significant life changes, such as the birth of a child. It is also important to name an executor of your will.
Living Will and Power of Attorney
No one wants to think about it, but becoming incapacitated is always possible. If you are physically or mentally unable to make decisions, someone will have to make them for you. A living will is an advanced medical directive, which describes the medical care you want if you cannot communicate or make decisions.
Also, choose a power of attorney. This is someone who will make critical choices for you. Power of attorney includes legal, medical, and financial decisions. You can choose a different person for each type or one person you trust to make all the decisions.
A beneficiary is a person who receives specific assets upon your death. List and regularly update the beneficiaries of things like your life insurance policy, your pension or retirement accounts, and other similar assets.
Many people choose to establish a trust before they die. This is a legal entity that owns your assets and is controlled by a trustee. Trusts are not only for the wealthy. A trust is a useful way to manage your assets in one place and ensure they go to beneficiaries after you die.
Trusts are essentially safe ways to hold onto assets. It protects your assets from being used in a way you don’t want, for instance, upon your death or physical incapacitation. Trusts also protect assets from financial abuse by caretakers of elderly or disabled people.
Plan for Taxes
How or if your estate is taxed upon your death depends on state laws. Only the largest estates, those worth around $12 million or more, get taxed at the federal level. Some states levy taxes on estates smaller than this. Some states also have inheritance taxes.
If you have assets to pass on to children or others, you may want to make a plan for minimizing the taxes they will have to pay. Strategies include giving out gifts, setting up living trusts, making charitable donations, or forming a family limited liability company.
Estate planning is an important process for nearly everyone. Without a plan in place, you relinquish control over your assets and dependents. Take time to work with a professional to set up an estate plan, and then reassess it every few years and after major life changes.