You may think that estate planning is only for the wealthy but that is not always true. If you have a family, own a business or any assets such as a home, car, savings accounts, or retirement funds, you might benefit from having an estate plan.
What is an Estate Plan?
An estate plan provides direction on who gets your assets and how they receive them once you have passed on. It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated.
An estate plan includes a collection of legal documents, each serving a unique purpose. Estate plans vary in their complexity depending on the needs of the individual, but most include the following:
Will
A will is a document that puts into writing your wishes as to how your assets will be distributed following your death. In the event of minor children, it may provide instructions on the care of the children by naming a guardian.
A will designates which beneficiaries will receive which assets. It names an executor who is the person you have chosen to be responsible for carrying out the details of the will. The executor will file the will with the local probate court and handle other tasks associated with closing out your affairs such as paying off creditors, notifying banks, credit card companies and government agencies.
Before the directions in your will can be carried out, it must go through state probate court. This is a public legal process where the court reviews the legal validity of the will and officially permits the executor to begin distributing the assets according to the will. Probate can take a long time in some states, which can cost money in court and attorney fees, all of which come out of the estate, meaning less will be paid out to the beneficiaries.
Trust
A trust is usually used for more complex financial arrangements and provides more control than a will. A trust spells out your wishes for your assets after you die, but it can also take care of assets while you are alive. A trust cannot be used to name a guardian for a minor child so in these cases a trust may accompany a will as part of an estate plan. Trusts can be managed privately, avoiding probate, and keeping it out of the public record.
There are two types of trusts:
- Revocable Living Trust- assets placed in this type of trust are transferred to your designated beneficiaries upon your death. You can act as the trustee while you are alive and have full control of the trust, changing or canceling provisions at any time. If you die or become incapacitated, your successor trustee will take over and distribute your assets according to your wishes.
- Irrevocable Living Trust- assets in this type of trust are taken out of your control and transferred to a trustee. You cannot revoke or modify the trust without the consent of the beneficiaries or court approval. Since assets are officially removed from your estate and placed into the trust, it has the benefit of reducing estate taxes.
Durable Power of Attorney
This document allows you to designate someone to act on your behalf to make legal and financial decisions if you become mentally or physically incapacitated.
Living Will
This document communicates your wishes for future medical treatment if you are unable to speak for yourself. It specifies which treatments you would or would not want in order to prolong your life.
Health Care Proxy
This document appoints an individual or “proxy” to make healthcare decisions on your behalf if you are no longer considered capable to do so. It allows the proxy to make decisions on matters that are not specifically covered in a living will.
Life Insurance
A life insurance policy can provide cash flow to offset estate taxes, pay debts, provide additional inheritance to beneficiaries, and pay for funeral expenses.
The Importance of Annual Reviews
Like all important financial documents, estate planning documents should be reviewed annually to address any changes in circumstances. Documents should be updated when any of the following occur:
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- You get married or divorced
- The birth, adoption, or death of a child
- The birth of grandchildren
- You acquire a new property or sell a property that was listed in your will
- There is a change in your income or the value of your assets
- You move to another state which may have different tax and estate laws
- You want to make a change to beneficiaries*, trustees, executors, or guardians or one of these designated individuals dies
*It’s important to note that beneficiary designations supersede anything that is listed in your will so it’s crucial they be kept up to date to reflect your current wishes. This includes beneficiaries and backup beneficiaries named on bank accounts, insurance policies, investments, and retirement accounts.
Remember to keep all important documents in a safe place and tell a trusted family member or friend where to find them.
Estate Planning Brings Peace of Mind
Estate planning is not always comfortable to discuss. It forces you to face your own mortality, make difficult decisions, and sometimes deal with complicated family dynamics. If you don’t take the necessary steps to put your directives in writing, state law will dictate where your assets go. This process can be time consuming and burdensome for surviving family members. Advanced planning allows you to have peace of mind by providing protection for you and your loved ones during your lifetime and after you die.
Estate planning does not have to be complicated, but a professional is your best resource for determining what type of estate planning meets the needs of you and your family. This can include a financial planner, a tax advisor, or an attorney who is familiar with federal and state estate laws.
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