What is estate planning?

Yahoo

5 hours ago

Estate planning is the process of legally deciding who receives your assets following your death and how they need to settle your affairs.
Making an estate plan can be valuable for anyone who has any assets, though different types of plans can be more beneficial for those with more wealth.
Estate plans help make things easier for your loved ones and ensure that your assets go to the people you want to have them.
Estate planning is the process of arranging who will receive your assets when you die. One goal of estate planning is to make sure your wealth and other assets go to those you intend to receive them — and not to others — with a particular emphasis on minimizing taxes so that your beneficiaries can keep more of your wealth.
Here's a rundown on estate planning and why you and your loved ones absolutely need it, regardless of how much wealth is involved.
Your estate is the accumulation of everything you own: your car, real estate, checking accounts, savings accounts, furniture, life insurance, investments and personal possessions, such as artwork or jewelry. Estate planning involves deciding who receives those assets following your death, how the process of moving your wealth will be legally administered and who will do so.
Unfortunately, many people fail to establish an estate plan, even those who would benefit significantly from it. There's an extreme lack of estate planning among people of all levels, says Jenny Xia Spradling, co-founder of FreeWill, a site that creates legally binding wills and trusts at no charge.
But good estate planning can also reduce family strife and provide clear end-of-life directives should an individual become incapacitated before ultimately passing away.
Get started: Match with an advisor who can help you achieve your financial goals
Estate planning can come in a variety of forms, from basic beneficiary designations when you open a bank or brokerage account to more complex and comprehensive plans. Below are a few of the most common elements of an estate plan and what you might want to consider.
Pros: Easy to set up at financial institution, can be changed at any time, supersedes any other plans
Cons: Supersedes any other plans, so if you don't keep it updated, your wishes may not be carried out
Who is it good for: Anyone with a financial account, regardless of wealth
Whenever you open a financial account, typically a bank, brokerage or insurance account, you'll be asked to provide a beneficiary for the account. The beneficiary is first in line to receive any funds from the account on your death. You may divide your assets among multiple beneficiaries, if you wish, and name contingent beneficiaries in case the primary beneficiaries are not alive.
Naming a beneficiary is quite important: Your beneficiary designation typically supersedes any other declaration in your estate. That's why experts urgently recommend you to name your beneficiaries. If you die without a will, accounts with named beneficiaries may at least still go directly to your heirs.
Pro tip: Don't forget about your investing accounts. If you have retirement or brokerage accounts, those can all pass to beneficiaries designated within those specific accounts too.
Get started: How financial advisors can help with estate planning
Pros: Can be relatively easy to set up, needn't be especially expensive, can be done via free online sites, especially basic wills
Cons: Estates could be stuck in probate, can be superseded by beneficiary designations, estates can be made public
Who is it good for: Anyone with assets, regardless of how much
A will is another key document in the estate plan. At death, it directs where the assets go that you own individually that lack a designated beneficiary. Without a will, the government gets to decide how everything is split and who takes guardianship of children and pets, a process that can vary by state.
Property that's owned jointly, such as with a spouse, passes directly to the surviving owner or owners. An executor will be appointed by the court to carry out the will and manage the distribution of assets when the time comes.
'Wills have been around for a long time and it doesn't take a lot to make a will,' says FreeWill's Xia Spradling. 'The legal code was actually designed to be easy for people to make their last wishes known.'
Wills that come into effect are examined in probate court, a public process that allows potential creditors to make a claim against the estate. Only after the estate is settled with creditors will the remaining assets be distributed to heirs in accordance with the will.
Probate can be a notoriously tortuous process, and it's not unusual for probate to take a year or even two to be completed. And it could be pricey as well, with fees of up to 5 percent of the estate.
Wills can be a cornerstone of an estate plan, but many people are turning to trusts these days because they can make settling the estate much less cumbersome, tricky and slow.
Pros: Can help speed estates to settlement, keeps estates private, can help mitigate taxes
Cons: Can be pricier to set up, especially for complex estates, requires legal expertise
Who is it good for: Those with more significant assets to protect and pass on
Trusts come in many varieties, and while it may sound complex, a trust is relatively simple at its core. A trust is a legal vehicle that allows a third party, the trust, to hold assets on behalf of a beneficiary. Trusts allow you a number of estate-planning options, not least of which is the ability to sail through probate court while maintaining a relatively high level of privacy.
Trusts allow you to control how your assets are directed after your death, not only to whom the money will be given but also under what circumstances. This control can be a valuable feature when directing assets to individuals with questionable ability or maturity to handle money. You can also choose the trustee(s) you want to manage and direct the trust on your passing.
While trusts can be complex, one of the simplest and easiest to execute is the revocable trust. Such a trust helps shepherd your assets through probate and directs the assets according to your wishes. You can even serve as the trustee and make changes during your lifetime. Trusts become worthwhile with surprisingly little money, as well, with at least one expert suggesting they begin to make up for the start-up costs for those who have at least $150,000 in assets.
More complex trusts with various stipulations (such as keeping spouses or profligate children at bay) may require the expertise of a skilled lawyer. And of course, you can also use trusts to bypass at least some taxes, one of the reasons for the perennial popularity of trusts.
Pros: Specifies your health care choices if you're incapacitated
Cons: Your decision may change when you're incapacitated but you may not be able to change the plan
Who is it good for: Anyone
Death is not the only situation in which you may be unable to make a decision. You may be alive yet incapacitated, and in this scenario it's quite useful to have a clear statement of your wishes. That's where a living will can be valuable, because it lays out your end-of-life care, including specific medical treatments to take or refrain from taking.
A living will is often combined with a durable power of attorney and sometimes an advance medical directive.
A durable power of attorney can serve as your financial proxy if you are living and can no longer manage your affairs. A medical or health care power of attorney manages your medical care if you can't.
An advance medical directive is the combination of a power of attorney for health care, a living will and HIPAA release forms. An advance health care directive describes what medical procedures you do or don't want and who has the right to make medical decisions for you if you can no longer make them yourself.
You'll need to figure out all your assets, including all financial accounts, as well as all tangible assets, such as cars, furniture, paintings and other collections. It can be helpful to document everything for heirs so that it's easier for them to find all the accounts and items. Anything that's missing from the list may not be subject to your will.
As you compile your assets, gather the necessary documents too. Keeping these documents updated and organized can save your family and your executor a lot of time and stress. You may need:
Real estate deeds
Bank account information
Investment account information
Safe deposit box documentation
Information about cryptocurrency you hold
Certificates for stocks, bonds and annuities
Information on retirement plans: 401(k) accounts, IRAs and pensions
Funeral prepayment plans
Instructions for any final arrangements
Your debts: credit cards, loans, mortgages or utilities
Tax information
Insurance policies
Any information on military death benefits
In addition to keeping these documents organized, make sure that your power of attorney and the executor of your estate are legally allowed to have access to these documents and have the necessary information, such as usernames, passwords and access codes.
It can be useful to establish contingency plans for your family, in case you and/or a spouse pass away earlier than expected. You can name guardians for minor children, set up life insurance and determine who is willing to act as executor for your estate.
You'll need at least a will, a power of attorney and a living will (also known as an advance health care directive). You may also want to name a health care power of attorney to carry out your medical wishes.
The will directs where your assets go and who will distribute them, while the power of attorney allows a confidant to take care of your affairs if you're unable. Power of attorney expires at death though.
The living will allows you to specify your health care wishes if you're incapacitated and unable to make the decision at the time. A health care power of attorney grants someone the authority to make decisions for you based on the living will or advance health care directive.
Once your plan is established, you need to review it regularly. You may have opened new financial accounts and closed others. Your family situation may be different or you may simply want some assets to go to someone else instead. If you don't keep your plan up to date, your heirs will not be able to adjust your will after your death.
These are the core steps for setting up an estate plan, though you'll want to carefully consider other aspects of a plan with this checklist for estate planning.
Get started: Match with an advisor who can help you achieve your financial goals
Estate planning helps you avoid many unfortunate situations, and while it can take some time and money upfront, you can avoid many worse problems later on. For example, if you don't provide a clear estate plan, the state will do what appears best in its judgment, which is unlikely to coincide with what you would choose to do. Don't leave your estate up to the state.
If you plan ahead, you can minimize the amount of your estate that goes to Uncle Sam and maximize the amount that goes to Aunt Sally. Clever structuring of flexible retirement accounts such as a Roth IRA, can help funnel more tax-free money to your heirs, while other tax-planning strategies such as strategic charitable giving can help you mitigate the tax bite.
Now is a particularly advantageous time for a Roth IRA conversion due to some changes in the tax code and historically low tax rates, though this strategy won't work for everyone.
Your family may normally get along well, but it's still wise to write a will so that things remain that way. The possibility of a cash grab may rile up some relatives, while others may hide a sentimental treasure that they hope goes unnoticed. Regardless of your wealth, careful estate planning helps prevent your family from squabbling, whether it's a little tiff or an all-out lawsuit.
When you don't have an estate plan, your family will be forced to jump through quite a few government hoops in order to distribute your assets. An estate plan can minimize taxes and expenses and help your loved ones avoid legal hassles. Plus, an estate plan may be designed to prevent your assets from becoming public, which can protect your family's privacy.
A good estate plan can also protect your heirs in a number of ways. If your children are minors, your estate plan can instruct who will take care of them and how they will receive money. It can also protect heirs from recrimination if a relative would otherwise accuse them of stealing. A living will can also help heirs avoid some of the difficult health decisions during a parent's end of life.
Learn more: When to get a financial advisor
Part of the value of the will is telling people how you feel about them and what they meant to you, says Xia Spradling.
You may have always intended for your niece to get that heirloom, but unless it's written out in the estate, anyone can make a dash for it. An estate plan ensures your assets go to the person you want to have them. By clearly spelling out your wishes — often with the help of a lawyer — you can help your loved ones remember you fondly or at least get what you intended.
Set up your estate right — think, a well-crafted trust — and you'll sail through probate court, likely the most annoying and time-consuming step of the entire process. Because of the ease of using a trust, more and more people are doing an end-run around the hassles of probate and setting up their estate this way. Plus, you don't need as much wealth as you might think to make it worthwhile.
Trusts can also be a valuable way to ensure that your money stays in the family. Structured correctly, a trust can keep a spendthrift nephew from blowing your lifetime of hard work in a few years. It may also keep money in the family if an ex-spouse tries to extract some of it.
Whether you're providing financial security, planning for your final memorial or burial services, supporting a cause you care about, or passing on traditions and values, an estate plan also helps you leave behind a legacy for your family to hold onto.
Planning ahead and keeping your will and other legal documents up-to-date will ensure that your family and loved ones are well taken care of and in the family, no matter what.
Estate plans are important and there are plenty of ways to get the basic elements of your plan together at a low cost on your own. But it's easy to make mistakes along the way — and those mistakes could cause additional stress and turmoil for your loved ones after you're gone.
Here are a few estate planning pitfalls to watch out for.
Avoiding the process: It's never too early to create an estate plan, and waiting until a health crisis or other emergency strikes can leave you unprepared.
Not speaking with a lawyer: While the internet is a great resource, it's not an ideal place to get legal advice. Trying to make an estate plan on your own can lead to incomplete or faulty documents, and potential legal problems down the road for the heirs. Speaking with an estate planning attorney is always a smart move.
Not sharing your estate plan: Not talking about your estate plan with your loved ones — or at least telling them where they can find a copy of the plan after you pass away — can lead to misunderstandings and disagreements after you're gone.
Ignoring digital assets: Make sure to include digital assets, like who will manage your social media accounts and who will inherit your cryptocurrency holdings, in your estate plan.
Not updating your plan: Major life changes — such as marriage, divorce, the birth of a child or the death of a family member — are ideal times to update your estate plan. Failing to do so can lead to potential legal battles among family members. A change in accounts or assets can also be a good time to update your plan.
Not including debt: When you die, debt is taken out of your estate's total worth if not accounted for. This can include credit card debt, personal loans, tax debts, outstanding auto loans, student loans and even mortgages.
An estate plan is not something you put together and then never touch again. Your estate plan can and should be molded to fit your changing needs throughout your life.
Here are a few major life events that should cause you to re-evaluate your estate plan to make any necessary changes:
Getting married
Having children
Large purchases such as buying a house
Getting a divorce
The death of a spouse or child
Opening new financial accounts
Changes in beneficiaries
Changing jobs
Increasing or decreasing income
Inheritance
Moving to a different state
Purchasing real estate in another state
A major change in tax laws
Plans to make a large gift
Estate planning can help prevent a number of potentially troubling problems from arising, even if you don't have a lot of money. By determining how you want to handle your estate before you pass, you'll save your loved ones a lot of effort, money and grief when it comes to dividing your estate. And more importantly, you'll get what you want, even if you're not around to see it.
Explore: What to do when you're the executor of an estate