First off, let's be clear - these are sensitive topics and aren't thoughts that anyone likes to linger on. But a little planning now can have a huge impact on our family's future, and that is worth talking about.
So, just what is estate planning? Well, once we either aren't around, or for some reason aren't able to articulate our thoughts -"incapacitation" is the legal term - an estate plan ensures that our wishes are honored, and the car we wanted to leave to a grandchild or the family heirloom that should always be passed down mother-to-daughter won't get caught up in the web like legalities of probate court.
The term "estate" really just means property, and can refer to a host of things that the average homeowner has. Some of these could be:
- Real estate
- A family business
- Cars, boats, RVs, and other vehicles
- Valuables and collectibles
- Cash and other financial instruments
- Sentimental objects
When looking toward the future, there needs to be a plan for each and every asset. Otherwise, without clear instructions in place, anything could happen to the things you have worked so hard for your entire life.
Beyond the Will
So you have decided that you need to look into estate planning. What steps should you take? First, you will need to take inventory of your assets. Assign each asset a corresponding value. Then ask yourself how you want to divide them, or who you want to leave your assets to.
Drafting a will is certainly part of estate planning, but it really is so much more and includes things like:
- Signing a financial power of attorney
- Completing Health Care Documents, including a health care power of attorney and living will
- Creating trusts
- Establishing guardians for living dependents
- Appointing beneficiaries or making changes to life insurance plans and retirement accounts
- Making funeral arrangements
- Preparing for estate taxes; scheduling annual gifting
Once you have taken these steps, be sure to organize documents, notarize those that require it, and store them away safely. You'll want to be sure that your executor and advisor have copies too.
Choosing an Executor
Now that the basics are on paper, work on naming a person who will represent you and carry out your wishes - your executor.
Choosing one person from a vast network of family and friends could feel daunting. Keeping two things in mind can narrow your focus: 1) pick someone who's health and age are respectively better and lower than yours, and 2) be sure that they respect your decisions and are ready to carry them out, come what may.
An executor's potential responsibilities are many, and can include:
- Filing court papers
- Taking inventory of the estate
- Distributing assets to beneficiaries
- Filing final personal income tax returns
- Paying remaining bills
We're saying it again because it's so important: be sure that your chosen executor will honor your wishes. And if you're thinking of choosing an individual who lives out of state, check with your estate planning advisor to learn if any state requirements apply.
Dealing with Taxes
Taxes can have a major effect on both your assets and your beneficiaries. Estate taxes are levied before assets reach beneficiaries. The goal is to pass on as much as possible to beneficiaries, and here are five ways to do just that:
- Giving gifts
- Setting up an Irrevocable Life Insurance Trust
- Making charitable donations
- Establishing a Family Limited Partnership
- Funding a Qualified Personal Residence Trust
We won't get into these in detail here, but they are topics that should definitely be discussed with your advisor.
So we've talked about what's involved in setting up an estate plan and why it's a key move for most people. But you could be wondering, "What are the risks of not creating a comprehensive estate plan?" To put it bluntly, if you don't have beneficiaries lined up, the state can and will take control of your assets upon your incapacitation or death. That means that how you are cared for and how assets are accounted for could be completely out of your hands.
This is a key thing to remember for even young families with minor children. If you want to determine who will raise your children in the event of a tragic accident, estate planning is a must. Even if you don't have dependents or much family to speak of, if you're passionate about a cause, non-profit, or charity, estate planning will allow you to use your assets in the way that suits you best.
DIY vs. Professional Advisor
It's not easy to learn the equivalent of years of research and experience on your own, but if you're ready to hit the books and slog through, it is possible to handle your own estate planning. But you could find yourself overwhelmed by terminology or hung up on details. Misinterpreting one law or overlooking an obscure clause could throw the whole plan off or even completely backfire, causing the opposite of what you intended.
That's where an advisor can come in and refocus your sights on the big picture. Advisors train for years for the chance to help you. They have done this before, they know your state's quirks and unique laws, and their experience is vast. They can help you to get your wishes down on paper and can smooth out seemingly complex legal wrinkles.
An estate planner can also help you to save money in the end by working to keep your assets secure while steering clear of probate court. When choosing an estate planner it's possible to work with a financial advisor, but it's also a good idea to bring an estate planning attorney on board. Financial advisors are not able to draft legal documents, and an estate planning attorney can make sure that you understand the legal implications of the decisions you're making. You will also have more planning options available.