The estate planning process sounds like a chore, and planning for your own illness and death does not seem like a fun weekend activity. However, estate planning is important to plan a solid future for your family.
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When tragedy strikes, you want to have a plan in place. Who should make decisions about your health care if you are unable to do so? Who will take care of your young children if something happens to you? Who should distribute your property and other assets when you die? Who should receive specific items? These issues and more can be addressed in a comprehensive estate plan.
What Is Estate Planning?
Estate planning is the process of making decisions about what happens to you and your assets in the event of death or incapacity, and creating legal documents that contain your wishes. A comprehensive estate plan may include the following:
- Last will and testament
- Financial power of attorney
- Health care directive and living will
If you die or become incapacitated and you do not have an estate plan, then someone you do not know could end up making important decisions for you.
For example, you may know who you would want to care for your minor children if something happened to you. However, without instructions in your will, a court can appoint a guardian for them or place them in foster care. Perhaps you have strong feelings about being put on life support. You could make things easier for your loved ones if you already have your wishes stated in a legal document.
Why Is Estate Planning Important for Families?
If you die or become unable to make decisions about your health care or finances, your family could have difficulty figuring out what should be done and who should do it. The burden on your family will be even heavier if they must go through a long and expensive probate process with the courts. For the following reasons, estate planning is vital for families.
1. Estate Planning Can Help Reduce Taxes
Your estate, which consists of all the property that you leave behind when you pass away, may be subject to several types of tax. These “death taxes” can apply at the federal and/or state level. Commonly discussed taxes include estate taxes, which are taken out of your estate, and inheritance taxes, which are paid by the people who receive assets from your will.
Estate taxes exist as the federal level and in several states. This type of tax is calculated from the estate’s net value. Currently the federal estate tax only applies to estates valued at more than $11,700,000, so this tax will not apply for many people. Inheritance taxes are required in very few states, and not at the federal level. In the states in which an inheritance tax applies, there are typically exemptions for close relatives. With the right estate plan, you can reduce these taxes.
One way to ease your tax burden is to transfer assets, whether financial assets or real estate, out of your estate before you die. Trusts are a popular way to transfer assets in a carefully controlled manner. There are several different types of trusts with different purposes. For example, an irrevocable trust can bypass estate taxes, whereas a revocable trust is subject to estate taxes but is not subject to the probate process. Another advantage is that assets that you put in a trust usually cannot be reached by creditors.
Another tax planning method is gifting your assets. Sometimes, gifts with a high monetary value are subject to a gift tax, so plan your gifting carefully. Consider these 10 methods to reduce estate taxes to learn more.
2. Estate Planning Protects Your Children
Whether you have minor children or adult children, there are steps that you can take to make sure that your wishes for them are carried out when you die. If you die without an estate plan, then a court might end up making decisions that affect your children and other dependents.
In a will, you can identify the person you would want to care for your children in the event of your death. You can also pick an alternate guardian, in case the first person you chose is unable to perform the duties of a guardian, or if they die before you do. If you do not have a plan in place, a court may appoint a guardian for your children or place them in a home.
Estate planning could still benefit your family if your children are eighteen years of age or older. You could use either a will or a trust to leave property to your children. You have many options for distribution if you choose to leave assets for your children in a trust. If you are concerned about their ability to manage a large sum of money, you can give specific distribution instructions to your “trustee,” or the person in charge of overseeing the trust. Another option would be only to allow distribution when the adult child reaches a certain age.
Setting up a revocable living trust can be much more expensive than drafting a will. Weigh your options carefully as you decide which estate planning documents are best for you.
3. Estate Planning Can Help Your Beneficiaries
Careful estate planning can help you make sure that your property goes to the intended beneficiaries. A beneficiary is someone who receives your assets. The term “beneficiary” is often used to refer to the person who gets an inheritance through a will. However, the term also applies to someone who receives benefits under certain policies, such as life insurance.
You can designate beneficiaries in your last will and testament. Consider the following as you think about who you would want to name as a beneficiary:
- Friends
- Children
- Spouse
- Charities
- Neighbors
Be sure to identify individuals with their full legal name and specify which charities or other organizations (if any) you wish to receive assets from your estate — being clear about who should have what can help your beneficiaries avoid unnecessary fights. It is important to note that you can leave assets to minor children as well. Since minor children cannot claim the property, you could have their guardian serve as trustee and hold the property for them until they can own it outright.
If you die intestate (without a will), then your assets may not be distributed in the way you would have wanted. The probate court will apply laws of intestacy to determine how to distribute your estate, and may also appoint someone to manage the distribution of your estate.
If you have a will, though, you can name an executor, who is the person who manages the distribution of your estate. An executor may also play a massive role in the probate process. If you name an executor in your will, then your family can take comfort in having someone that you chose managing your affairs rather than someone who the court appointed.
In addition to taking care of your loved ones through your last will and testament, do not forget to make beneficiary designations for your accounts and policies, including:
- Bank accounts
- Investment accounts
- Retirement accounts and other retirement plans
- Life insurance policies
- IRA
4. Estate Planning Could Make Things Easier for Your Family Members
You can do simple things to make things easier for your loved ones when you die. Consider taking these steps to make the burden on your family just a little bit lighter:
- Make a comprehensive estate plan
- Update estate planning documents after each life event, or at least every five years
- Store documents in a safe place
The first step to planning your estate is to assess your situation and determine what documents you will need to make a challenging situation easier for your family. How can you make sure that your children, spouse, pets, and others who you care about are taken care of in the future?
Do not forget that estate planning is for people from all walks of life. Even if you feel that you do not have much wealth, what you have can be vitally important to you and your family. The last thing you would want is for your surviving spouse and family members to have a legal battle over estate assets. In fact, the probate process can take as long as two years to distribute your assets. Such a battle could be avoided through sound estate planning.
Plan For Medical Emergencies, Too
In addition to protecting your family’s financial assets after you die, do not forget to have a plan for what happens if you are incapacitated and cannot make decisions for yourself. First of all, you will want to appoint a financial power of attorney, which grants someone authority to make financial decisions on your behalf and manage your financial affairs.
A living will, also called a health care directive, health care power of attorney, or advance directive, contains your wishes for the type of medical treatment you would like to receive if you are unable to communicate your wishes.
Your medical directive includes your health care decisions, treatment preferences, and wishes for end-of-life care. You will also designate your health care agent (or “agent” or “health care proxy”) in your directive, which gives someone authority to make medical decisions for you and ensures your wishes are respected. It is helpful to families to have your guidance during such a challenging time.
Do It Yourself
All these documents may sound daunting and time-consuming, but much of it can be done on your own using online estate planning tools.
Explore DIY options through our partnership with Quicken Willmaker & Trust by Nolo
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