Estate planning can give you peace of mind
Estate planning might seem like something meant only for the old or sick, but that’s not the case — especially in today’s day and age. In a world of global pandemics and other unpredictable events that could put you or your family members into turmoil, it’s important to spend some time deciding what will happen to you or your assets if you become incapacitated or when you someday die.
Although this might be a gloomy thing to consider, having an estate plan in place can offer much-needed peace of mind if the unexpected occurs, and when the inevitable takes place. This type of planning can put everything in order for your loved ones, from a living will to insurance to the handling of estate taxes.
Here are some of the basics about estate planning that you’ll want to know, and a few reasons why you’re never too young to get started.
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What is estate planning?
The aspect of estate planning that most of us are more familiar with involves mapping out what will happen to your assets (bank accounts, real estate, other valuable personal property, etc.) when you die. But estate planning also involves thinking ahead to what will need to be handled if you become incapacitated due to illness or an accident. The goal of estate planning is to simplify the legal aspect of things for your beneficiaries so they don’t have to endure a lengthy and expensive probate process.
The planning process and the filing of the associated legal documents are typically conducted with the help of an estate planning attorney or an estate planner who specializes in the field. Estate planners may also have a background in areas like insurance and finance. A professional specializing in estate planning can help you prepare all the necessary documents and walk you through the challenges your designated beneficiaries may face.
More details on the various aspects of estate planning
One of the most important documents in your estate planning is your last will and testament. Wills are important because they determine who will receive your assets when you die. This might include money you’ve invested in retirement accounts (like a 401(k) and/or IRA), any businesses or patents you own and physical assets like properties and other things of value.
Durable power of attorney
A power of attorney allows someone else to handle your legal, financial and even medical matters. Durable means this person can step in even if you become mentally incapacitated due to illness or other circumstances. Although you can appoint one person to be your durable power of attorney, you can also split out powers of attorney between different people to act in a particular area. For example, you might choose someone to act just as your financial power of attorney.
Health care proxy
A health care proxy is a type of advanced directive. The person named in your health care proxy is your medical power of attorney and is able to make medical care decisions on your behalf in the event that you cannot make them yourself. There are other types of health care directives you may consider in your planning as well.
If you provide a significant portion of your family’s income, it’s a good idea not only to have a life insurance policy, but also to truly understand how much life insurance you need. These policies will not only help support your family in the event of your death, but they can also provide the cash needed to keep your assets intact. For example, they can help pay for unexpected tax expenses.
Living trust or revocable living trust
Setting up what’s called a living trust allows you to start planning for the allocation of your assets while you’re still alive. Most living trusts are revocable, which means you can change them whenever you want, though some people may opt for irrevocable trusts that cannot be changed.
If you or one of your beneficiaries are passionate about a particular charity, this will allow for either of you to donate a portion of your assets.
Funerals can be expensive, with the average one costing between $7,000 and $10,000 in 2018. Making a plan for how you’d like your funeral to be handled and paid for is an important element in estate planning, and it takes a lot of pressure off your surviving family members.
Naming a guardian
If you have any dependents or minor children, it’s important to name a guardian for them somewhere within your estate planning documentation. This ensures your loved ones will be taken care of by the people you trust most in the event of your death. This is particularly critical if you have special needs dependents.
The transfer of assets can result in complicated federal estate tax and inheritance taxes on the state level as well. For this reason, tax planning is another element of comprehensive estate planning regardless of the value of the estate. This type of planning will facilitate a smoother distribution of assets without unexpected tax expenses.
Naming an executor
You’ll also want to name an executor of your estate. This person will be responsible for carrying out all your wishes and instructions within the estate planning documents. This person plays the important role of ensuring things are carried out the way you intended them to be.
Why estate planning is important
Estate planning is important because it guarantees your assets are distributed the way you’d like them to be. Although you might think the value of your estate doesn’t warrant a plan, consider that estate planning encompasses far more than just bank accounts and also encompasses health care decisions that may be made on your behalf.
If you happen to die without an estate plan in place, the state you live in will likely allocate your assets on your behalf. This can be messy for a number of reasons, especially because each state has its own protocol. Roughly speaking, most states will first try to give your assets to your spouse and children, followed by your living parents or siblings. If this isn’t what you want, or if you want to allocate your assets in a particular way, it’s best to create an estate plan ahead of time.
Because estate planning can also involve health care directives and powers of attorney, it can also play a valuable role should you become incapacitated and require long-term care. This is something that could happen to any of us at any time due to the unpredictable nature of life and accidents.
Another thing to consider is the stress that a lack of planning can put on your living family members. Maybe your kids believe they’re entitled to something your spouse wants, or your siblings swear you promised them the vacation property you’ve shared since childhood. Whatever your assets and financial affairs look like, a lack of planning can cause a lot of tension and irreparable emotional damage in the family after you’re gone.
Without a plan in place, you may inadvertently leave your loved ones to take the matter to probate court to fight for certain assets. This can be an expensive and drawn-out legal process. You can avoid leaving drama behind you by taking measures to properly plan out your estate, and appoint the right people to carry out your wishes once you’re gone.
How to get started with estate planning
Once you’re ready to get started with estate planning, it’s good to be aware of the federal and state taxes that may be involved. Different states handle estate planning taxes differently, and depending on the size of your estate and specifics of how you plan to allocate your assets, it might be a good idea to hire an attorney.
Beyond the complications of tax laws, there are a few other ways you can get started with regard to your estate planning before involving an attorney. To start, you might write down your beneficiary designations and explain what you’d like each one to inherit. If you have kids, maybe it’s time to call up the person you trust most and ask whether they’d be willing to become a legal guardian. You might also start thinking about who you’d like to appoint as an executor and health care proxy, and start having honest discussions with those people.
Finally, if you haven’t yet, start shopping around for the best life insurance for your needs. The right insurance plan will offer a lot of comfort to your family should the worst happen. And in the present, it will provide good peace of mind for you to know they’ll have the income they need.
Estate planning might seem like something you don’t have to worry about just yet, but if you have any financial accounts worth inheriting or any family members counting on you, it’s a good thing to start now. An estate plan can be something you slowly put together, just like your retirement plans. It doesn’t have to be time-consuming or expensive, and an expert estate planner can help facilitate the process.
Start by talking with your beneficiaries and executor to share your plans, and then reach out to a professional to help you put them in writing. That way, even if the unexpected does happen — the people you love most will be left in good hands.
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