While there are many financial services and investment strategies to consider while you are young, estate planning is an important step that you should take to protect your assets. In short, estate planning gives you the opportunity to take real steps while you are alive to ensure that your family and loved ones are taken care of after you are gone, while also giving you control over how your assets are allocated upon your death. Talking about death is never easy, and planning for your own can be especially difficult. This may, in part, contribute to the fact that many people fail to create and implement an estate plan that is clear and legally enforceable. This failure can lead to confusion, and result in the misallocation of your assets or delays in moving your assets to your beneficiaries that need them.
In order to avoid any confusion or misallocation of your assets, it is crucial to take the time now to set up a comprehensive estate plan. Estate planning is centrally focused on creating an actionable plan that takes the guesswork out of where your assets are going after you are gone. Despite the importance of estate planning, many individuals put this important process off until it is too late. In this article, we’ll go over what estate planning is, and why it is so important. We’ll look at the components of an estate plan, and explore what estate planning involves. This should give you a good basis of understanding for moving forward with creating your own estate plan.
When creating an estate plan, it is crucial to have a clear understanding of exactly what it is that you want the end result to be. You should be fully aware of your financial affairs and where and how you want your assets allocated after your death. Going into the estate portion of financial planning with this understanding will allow you to save money on estate planning costs, which can be substantial, while also ensuring that your assets are truly allocated according to your wishes. Throughout this article, keep this in mind when considering how to approach the estate planning process. Although it can be uncomfortable, take some time to chart out what your ideal allocation of assets looks like, and then create a plan that will ensure this becomes a reality.
What is Estate Planning?
Estate planning is simply a process through which an arrangement is created to allocate assets to beneficiaries and heirs after an individual’s death. This arrangement can apply to either an individual or a family. Estate plans are created prior to a person’s death. By doing this, the individual whose assets are part of the estate plan has an active role in determining how and where their assets are allocated.
An estate is your total assets. These are broken into two broad categories; real property and personal property. Real property is any real-estate you might own, such as a house, rental property, or vacation home. Personal property is all of your remaining assets, such as cars and bank accounts. When creating an estate plan you’ll determine how you want to allocate both your real and personal property after you die.
The two primary vehicles utilized to move assets in an estate plan after a death are wills and trusts. We’ll dive into the distinction between wills and trusts in a subsequent section, but it should be noted that your estate plan will almost certainly involve one or both. When creating an estate plan with your attorney, you’ll need to work with an estate planner. An estate planner can guide you through the complex process of creating an estate, but before working with an estate planner you should have a general understanding of estates themselves, estate taxes and the estate planning process.
Estate planning can be done in such a way to minimize the tax impact of re-allocating assets after you have passed. This is, in fact, a central concern of estate planning. Understanding and navigating the complex interaction with state and federal tax laws is an important part of the estate planning process and underscores the importance of working with an experienced and knowledgeable estate-planning attorney.
Estate Planning Process
Estate planning can be uncomfortable, so it is best to understand the process before you embark upon it. This not only helps you prepare for contemplating your own mortality and grappling with difficult questions about beneficiary designations and how you allocate your assets after your death but also saves you money by reducing the amount of time you must spend with an estate planning attorney. That being said, there is no single correct path to estate planning. Instead, each estate plan varies depending on the person and their needs. In order to help demystify the probate process, we’ll provide a broad overview of what you can expect.
Estate planning involves working with an attorney that specializes in estate planning. You’ll want to work with a knowledgeable estate planner due to the complexities and tax implications involved with the allocation of assets after your death. You’ll also want to work with an estate planner who understands the advantages and disadvantages of certain actions and can guide you towards the path that limits the tax impact of executing your estate plan.
The first step in creating an estate plan is to gain an understanding of your total assets, both real and property, and how you want to allocate your assets to beneficiaries after your death. You will want to include things like real-estate, bank accounts, insurance policies, investments, retirement accounts, and business interests. During this step take some time to consider who you want to inherit your assets. You’ll also want to make a decision about who you want to execute your will and consider who you want to make financial decisions if you are ever unable to do so while you are alive. This also ties into an important aspect of creating a will, which is designating someone to make medical decisions for you if you are ever incapacitated. These are serious considerations that you should weigh carefully before engaging with an estate planning attorney.
Once you have a firm understanding of where your estate stands and how you want it allocated after your death, you will want to begin working with an estate planning attorney. In addition to estate planning attorneys, there are also online legal services that can be used to help you create a will. Many individuals wonder what are estate planning tools, and whether these tools can assist you in planning for your estate after you pass away. These tools may help you save on estate planning costs, but if you have a large number of assets or have more complicated plans for the distribution of those assets you will probably want to work with an estate planning attorney.
Drafting your will is a core component of estate planning and shouldn’t be overlooked. Failing to draft a will prior to your death will result in the state allocating your assets after your death, which not only removes your control over the process but can also incur hefty fees and penalties. Due to this, be sure to work with an experienced estate planner unless you are confident in your knowledge and ability in this area.
Estate planning involves much more than just creating a will. You will also want to consider whether a trust is appropriate in your situation, designate a financial power of attorney, file any beneficiary forms with your retirement and bank accounts, and make any of your final wishes known. Additionally, if you have children you will want to designate an adult to act as a steward of your property and assets until they come of age, and create a succession plan if you are a business owner.
Creating a comprehensive estate plan can be a daunting process. There are many moving parts and considerations that you must factor in. In light of this, you will want to take your time and ensure that each facet of your estate is covered in your estate plan. This highlights the need to work with someone experienced in developing a comprehensive estate plan. The advantage of taking time now to create an estate plan is that it gives you greater control over the process, and gives you peace of mind that your estate will be allocated according to your wishes after you pass away.
Will vs. Trust
Both trusts and wills are common devices utilized to create an estate plan. You’ll want to understand the difference between a will and a trust in order to determine which is more appropriate for your situation. In some cases, an estate plan will contain both a will and a trust, as each operates independently. However, in some situations a will and a trust serve a similar function, so discerning the differences between the two can be challenging at time.
A will is a useful place to start since nearly everyone should have one. Simply put, a will is a directive outlining how you want your property dispersed after you die. Wills only go into effect after you pass away. Through a will, you will designate an individual or entity to be responsible for executing your will. An important distinction from trusts to note is that wills pass through probate and become part of the public record. You must also be careful to assign all assets that are in your name through your will, otherwise, the court will ultimately determine who those assets go to. Put another way, if your property isn’t retitled to a trust and isn’t covered by your will, the state will determine how to allocate that property.
Trusts are a second popular device for estate planning. Unlike a will which goes into effect when you die, a trust can be executed when you are still alive. A trust is an arrangement where you place the title of property with a third-party entity, such as an individual or institution, which is known as a trustee. The trustee then sees the distribution of your property to those named in your trust in accordance with your instructions. Trusts give you the discretion to distribute your assets according to any conditions you may want to place on them. Trusts are also a popular device because they reduce fees associated with probate and can be used to avoid estate and gift taxes.
In general, trusts and wills are used together to create a complete estate plan. Trusts allow you to place certain property into the care of a trustee who will then distribute them. A living trust can go into effect while you are still alive, and since they don’t go through probate they don’t become part of the public record. In contrast, wills only go into effect after you die. Wills become part of the public record due to the fact that they go through probate. Trusts and wills are often used together since trusts aren’t appropriate for all assets, but can offer significant tax benefits.
Planning Early is Essential
In order to avoid having the state determine who gets your property after you pass away, a condition known as intestacy, you will want to have an estate plan in place while you are still living and capable of creating it. Estate plans offer security in knowing that your assets and property are allocated according to your wishes after your death. In order to create an estate plan, you will want to work with an experienced attorney who specializes in estate planning and is familiar with probate court. There are significant tax implications you should consider, so consulting with an expert is highly recommended.
Although estate planning can be an uncomfortable process, it allows you to ensure that your loved ones and family are taken care of. Because life is unpredictable, getting an early start is essential. At a bare minimum, you should consider creating a comprehensive will. Remember that you can always change your will should you wish, giving you flexibility in the future if your life circumstances change.