Having an estate plan is among one of the most important things you can do for your loved ones. For anyone new to the concept of estate planning, it is easy to get overwhelmed, but do not let this deter you. In some instances, it may be as simple as meeting with an attorney and preparing your documents such as a will, power of attorney, and trust. If there are more complex assets, such as business interests or a variety of investments, you may need more guidance on the appropriate strategies.
A common misconception many people have is that estate planning is only for those who are older or have substantial wealth. However, estate planning is not only for the wealthy. Without a plan in place, settling your affairs after you are gone could have a long-lasting, and costly, impact on your loved ones even if you don’t have a pricey home, large IRA, or other valuable assets to pass on.
What is an Estate Plan?
An estate plan is a collection of legal documents that specifies how you want your assets distributed when you pass away and how you want people to handle your financial and health decisions if you become incapacitated during your lifetime. A complete estate plan will help you to feel confident about the future, knowing your loved ones will be taken care of and that the legacy you leave behind is the one you want.
These are Six Common Estate Planning Documents:
1. Will. The will is the standard document in most estate plans. It is a legal document that sets forth your wishes regarding the distribution of your property and the care of minor children. It names the executor or personal representative that will administer the distribution of your assets and can appoint the guardian of minor children who will oversee their custody until they become adults.
2. Living Will. A living will expresses end-of-life care wishes rather than simply leaving them up to the person you named in your healthcare proxy. This typically covers pain relief and whether you want a ventilator or resuscitation.
3. Durable Power of Attorney. This document appoints a trusted person as an agent to act on your behalf for financial and legal matters if you become unable to do so yourself.
4. Healthcare Proxy or Power of Attorney. This document appoints someone you trust to make medical decisions for you when you no longer can, giving that person access to your medical records.
5. Living (Revocable) Trust. A revocable trust holds and provides management of your assets while you are alive, and it names the beneficiaries of it when you die. You can make changes at any time to your living trust. A living trust then becomes irrevocable (it cannot be changed) at death. Having a trust allows your heirs to avoid going through probate, which can be a costly and time-consuming process.
6. Personal Property Memorandum. This document allows you to specify who will receive tangible personal property items such as jewelry, artwork, and other items not covered in the will. This is not a formal document and can be changed at any time.
Consider these Four Reasons for Having an Estate Plan:
1. It Protects Young Children. Nobody thinks of dying young, but if you are the parent of small children, you need to prepare for the unthinkable. This is where having a will comes in. Listing your wishes in a will ensures that your children are cared for in a way that you approve. This is where you will name their guardians. Without such a will, the courts will step in and assign a guardian.
2. It Protects Beneficiaries. The main component of estate planning is designating the beneficiaries for your assets, whether it is a summer house, IRA, or stock portfolio. Without an estate plan, the courts will often decide who gets your assets, a process that can take years, be very costly, and even get ugly. A court does not know which sibling is most responsible and which should not have free access to cash. Nor will the courts automatically rule that the surviving spouse gets everything.
3. It Reduces Family Messes. We’ve all heard of those horror stories. Someone with money dies and the war between family members begins. One sibling may think they deserve more than another or one sibling thinks they should oversee the finances. These disagreements can get nasty and end with family members pitted against each other. An estate plan will allow you to choose who controls your finances and assets if you become incapacitated or die so that your assets are handled the way you intended. It can also help you make customized plans if necessary, such as making arrangements for a child with health problems or setting up a trust for a child who may be better off not inheriting a lump-sum. And, if you had more than one spouse or have children from more than one marriage, an estate plan is absolutely necessary.
4. It can Save your Heirs Taxes. Essential to estate planning is transferring assets to heirs in a way that creates the smallest possible tax burden. Even with just a little estate planning, one can reduce the estate tax and income tax that may be payable by the beneficiaries on your estate assets and income. Without a plan, the amount of estate or income taxes your heirs owe could be significant.
The bottom line is that if you want to make sure your assets and loved ones are protected when you no longer can do it yourself, you need an estate plan. Without one, the courts could decide how your assets are divided, who gets to raise your children, and your heirs could face an unnecessarily high tax burden. Your CPA can work alongside your estate attorney and financial advisor to help you create a plan that ensures your estate planning goals are met.