What have you already checked off your financial to-do list? You may have taken some common actions, such as planning for retirement or purchasing life insurance. However, is an estate plan also on your list?
For many people, estate plans may not seem as essential as other financial considerations. They might even believe the misconception that estate plans are only for people in the highest income brackets. However, families at every income level can incorporate estate plans into their overall financial logistics. Here is a basic estate planning 101 guide on how to get started.
What Is Estate Planning?
The primary purpose of estate planning is to help ensure your wishes are respected if you pass away or are alive but cannot make your wishes known. Your estate is whatever you leave behind, regardless of its value, including land, bank accounts, material possessions, etc.
There are a few aspects of estate planning, and several ways to handle each. You can pass possessions on to family members, or donate them to charities. You can pay out liquid assets all at once, or distribute them over time through a trust. Whatever the case may be, your estate plan will be specific to your belongings and financial goals.
Why Is Estate Planning Important?
While you can't predict the future, you could prepare for it and help protect your loved ones. Considering estate planning while you're healthy and able to think clearly could give you the freedom to minimize (or possibly eliminate) the taxes associated with your death.
While most people understand the importance of estate planning, they often postpone it because thinking about death is difficult. But you could help protect your loved ones with an estate plan that helps you leave behind the legacy you want. Here are a few of the other reasons that estate planning is important:
Helping to Reduce Stress for Loved Ones
Dying without an estate plan can put the burden of distributing whatever you leave behind (i.e., anything in your name at the time of your death) onto important people in your life — who will want time and space to grieve your passing. Also, can you be sure the people you want to leave your possessions to will understand what you would have wanted or intended?
Failing to put legal documents in place to make your wishes clear could cause confusion or — worse — contention among your loved ones. Consider reaching out to a legal professional who could help you put a plan in place to smooth out the process for you, your family and other loved ones.
Furthermore, without an estate plan, a probate court would assume the duty of distributing your estate. This may produce a slew of unwanted problems for your loved ones. Probate courts create open records, which means the details of your estate and what your family and friends receive would become public.
More importantly, however, probate court means a judge would make decisions about how to distribute your assets. In turn, this may open the door to dispute among your beneficiaries, which could lead to additional litigation over what happens to what you've left behind.
Helping to Protect Your Children
An estate plan could help you protect your children if they're still minors. Without an estate plan in place, a probate court judge will determine guardianship for any of your children who are under the age of 18. An estate plan allows you to make this choice with your family and ensure the decision doesn't fall to a judicial stranger.
Leaving Money to Your Family or a Charity
You might consider planning your estate if you want to leave money to the next generation of your family or to a charity. A will — a basic component of an estate plan — is a legal document that is intended to communicate your final wishes. No matter your income bracket, a will could help offer clarity by defining your requests and offering instructions after your death.
Many estate planning techniques involving trusts and life insurance are available to help minimize estate taxes for wealthy individuals. If this applies to you, a charitable trust could help ensure that your estate is distributed to the people or charities you want to help — and are subject to safeguards that you establish.
Your estate plan could help create and fund a trust upon your death, to be overseen by trustees you designate. In addition, you could designate that the funds in the trust be used for specific purposes, such as education.
Trust funds offer flexibility and allow you to define requirements. You could indicate that if your adult daughter gets remarried and then dies, for example, the trust funds will then be distributed to your grandchildren instead of your daughter's surviving second husband.
What Are the Basic Estate Planning Documents?
Most estate plans include a handful of legal documents. As you get started, here are a few documents to consider looking into and including in your plan:
Last Will & Testament
This is the document most people are familiar with. Your will dictates how you will pass your assets or possessions on to your loved ones. You'll need to name an executor of your will, and this person will oversee the process of distributing what you leave behind according to your wishes. Your will can name guardianship for your children, too.
Power of Attorney
Power of attorney gives the person you name the ability to act in your best interest in a variety of scenarios. If you assigned someone power of attorney, for example, you would likely give them the ability to write checks or handle your bank accounts on your behalf, among other things, should you become too unwell to do so yourself. There are different types of power of attorney, and the specific powers that are being granted are outlined in the power of attorney document.
Advanced Medical Directive
Also known as a health care proxy or health care directive, an advanced medical directive allows you to designate someone to make medical decisions on your behalf should something happen that leaves you unable to communicate your wishes yourself.
Revocable Living Trust
Your estate plan may also include a revocable living trust, which details what you want to happen in multiple situations — from when you're alive and healthy to a scenario in which you're incapacitated or you pass away.
How Much Does Estate Planning Cost?
When it comes to determining an estate plan cost, know that it will likely vary depending on where you live and who you hire. Attorneys in large cities, for example, may cost more than lawyers in rural or suburban areas. Before making a final decision, reach out to an estate planning attorney who could help guide you toward the right solution for your needs.
Estate planning requires careful thought about what you want to happen to your money when you're unable to decide on your own. But it could be worth the effort to protect your loved ones. Remember, you could make changes to your estate plan as you move forward in life and your circumstances change. Keep this information in this estate planning 101 guide in mind as you get started and consider speaking with a financial representative for more information.