Wondering what estate planning is, and when you might need it? Know this: estate planning is not a one-time, done-deal procedure that you do on your own. It requires professional support from an attorney and, in some cases, tax or financial advisors. We’re here to help.
What is Estate Planning?
Estate planning is the process of arranging what happens with your assets after your death. Most people associate this with writing a will. However, an estate plan is more sophisticated, part of which is the last testament (a will), together with many other tools. Since the state of your assets and personal affairs are probably changing constantly, the estate planning process is on-going and requires your attention and regular updates.
Why You Should Make an Estate Plan
If estate planning is such a complicated process, why bother with it? Especially if you doubt that you have substantial assets to be responsible for. Think twice, however. An estate represents everything that you own: personal belongings, real estate, savings and checking accounts, cars, investments, etc. The plan on how to divide them among your loved ones helps with your peace of mind, knowing that there will not be any issues or questions on how your possessions will be passed down. What’s more, if you follow the instructions of your estate planning attorney, you might provide for your family financial stability in difficult times.
Generally, an estate plan applies in two kinds of situations – if you are unable to make decisions on your own or in case of your death. Both case scenarios sound unlikely if you are young and healthy. However, accidents happen, and once they do, it is too late to come up with a plan that is on your terms.
Choice of Medical Treatments
Estate planning allows you to establish the ground rules on how you will be treated in case physical or mental incapacities make it impossible for you to communicate your wishes. You can layout your preferences about types of treatment and long-term medical care. The attorney will ask you questions about life support, organ donation, and other conventional medical circumstances. The plan is part of the elder law, which deals with general questions about the quality of life, financial, housing, and other aspects of aging.
Who Makes Decisions on Your Health?
Of course, no matter how elaborate your estate planning is, you can’t predict the future (not even if your wealth amounts to $4.4 billion). What you can do is appoint a person who will be responsible for resolving any other medical questions that could arise. Choosing a trusted individual means to be sure that your values, beliefs, and outlook on life will be respected even if you are incapable of expressing them.
Moreover, the estate plan clarifies who will be in charge of your assets in the event you are incapacitated in the long-term. This person, called a power of attorney, will take care of your financial and material possessions in your best interest. The aim will be to provide you and your family with as much comfort as possible in such an emotionally demanding situation.
Who Gets What?
In case of your death, proper estate planning should provide clear guidelines on how to proceed with your belongings, properties, credit card accounts, and debts. The idea is to distribute your wealth, no matter its size, according to your wishes. You designate who you want to be your beneficiaries. In the case of having minor children, you could appoint guardians in your plan. Besides people, you could choose to donate part of your assets to a charity that you support.
Another reason estate planning exists is that it allows a person to protect their wealth. It could guarantee it won’t get lost due to irresponsible spending. Moreover, you have the power to decide to allocate your money only for a particular type of expense, such as paying for college or health care.
Final Instructions and Guidelines
Apart from clearly stating your will regarding your assets, the estate plan could include instructions about funeral arrangements or how you want your kids to be brought up. You also name an executor of your will, whom you could inform in detail about your intentions. You can also leave a list of accounts — including user names and passwords — so your digital assets can be accessed.
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Pay Less Tax
Estate planning is essential for your heirs for a couple of more reasons. It allows you to reduce the amount or even avoid paying tax at all. The estate planning lawyer serves a crucial role here. It might be surprising to learn that without a plan, your family might end up in a complicated financial situation. Estate tax, along with other federal and state taxes, might constitute almost half of what your loved ones will inherit.
There are also laws and regulations related to health and life insurances that you should take into consideration in your estate planning. The attorney is there to lay out the bigger picture with all the consequences coming from each option. They will offer a piece of advice, but it is your job to make a decision. You could go with the most profitable alternative, the option requiring least documentation, or anywhere in between.
Why No Estate Plan Is A Bad Idea
If you regard estate planning as an obligation for the elderly, consider the people closest to you in your life. If you leave a messy and complicated business, it will just bring more pain and challenges for them to deal with — on top of losing you. And in the case of mental incapacity, you will also be profoundly affected by not taking estate planning seriously.
In case you fail to organize your assets on time, the court will come into play. Be warned: you might dislike what they decide about your properties, bank accounts, savings, and insurance policies. The court will also automatically appoint an administrator to deal with your case. It will designate a guardian for you, either in case of incompetence or for your children if there are minors involved.
Living with or having children with a partner you are not married to, or sharing life with a same-sex partner, might pose even more significant challenges. If one of you dies, the law might not provide the same support for the living partner as they would if it is a legal spouse.
What Is Probate?
When a person passes away, there is a general legal process to be followed, which determines the distribution of the assets. This is called probate. It applies both for deceased people that left their wills and for those who didn’t. The latter is also called intestate estate.
If there is a will, the probate court rules whether it is valid or not. The court appoints the executor designated in the will — or an administrator if there is no will. This person is responsible for assessing the values of the assets of the estate planners. Next, existing debts are paid off. Typically, creditors have a limited period to claim the estate based on money that the deceased owed them. The executor approves or denies the claims, while the creditors could contest with the court if they disagree. The following step in probate is to pay all taxes at the state and federal level. The administrator must file an income tax return for the deceased person.
After debt consolidation and taxes are paid, the executor suggests how to divide the remaining assets among the beneficiaries. If there is a will, the court follows the instructions of the deceased. If the person didn’t leave a will, their assets would be divided under the existing local probate laws. Commonly, it means that if you are not a next-of-kin, you won’t inherit anything.
A well-designed estate plan will most probably save your beneficiaries the complications and expenses related to a probate process. Even if you are not entirely aware of precisely what the probate court requires, you have no doubt heard terrifying stories. Thorough research of the regulations in your local area or a consultation with an experienced attorney will help you grasp the repercussions of not doing your estate planning properly.
Why Don’t You Want a Probate?
First of all, it is expensive. There are fees to be paid to both the court and the officials dealing with the estate. The more complicated the state of the assets, the longer it will take to settle the case. That means more costs. Probate also declares information about the estate publicly, so there is considerable loss of privacy. Finally, the lack of clear instructions leaves space for arguments and frustration among relatives.
How to Avoid Probate
Several estate planning tools allow you to transfer assets to your loved ones based on your wishes. Some of them are listed and explained below. But before running towards executing complicated procedures, inform yourself about the local probate regulations. Typically, the state laws where you live are the ones that apply to your assets. Real estate, however, is an exception. It is a subject of the regulations of the state where it is situated instead of where your permanent address is.
Most states require probate only if the estate value exceeds a certain amount. Others permit a more simplified procedure. The threshold could be as little as $3,000 in Alabama (excluding real estate) or as much as $150,000 in California.
When Is the Best Time to Start Estate Planning?
The answer is straightforward and clear – as soon as possible! We never know what tomorrow holds, so being prepared for any scenario is a good strategy. Even if you don’t own a lot of assets currently, it will only get more complicated over time. You can start simply by taking care of the present financial and material belongings you have. Later on, you can update and extend the plan. Also, there is one more reason you want to start as quickly as you can: some of the tools, such as a trust, require time to become functional. With all that being said, here is a list of some of the most common estate planning tools.
Estate Planning Tools
A last will and testament are some of the most commonly known tools. It gives instructions on what happens with your property, insurance, mortgages, investments, savings, and accounts. Remember, a will must undergo a probate process, including all of its drawbacks.
From the entire palette of tools, trusts are probably the most diverse and useful ones. A trust guarantees that the assets will be used properly. Through trust, you can divide the ownership of a property from the beneficial purpose it will serve. Spendthrift trusts, for example, protect the wealth from irresponsible spending. If you have a person with a disability in your family, you can set up a special needs trust. It will ensure that your loved one receives the needed support even after your death without losing governmental support. The same goes for Medicaid asset protection trust.
The deceased could appoint setting up a trust after their death or choose to found one while they are alive. There are two types of a living trust. A revocable living trust allows for the estate owner to designate themselves as a trustee. This way, they are still owners of the trust and can make changes. Moreover, the trust continues to be part of the assets, and the estate tax applies to it. The irrevocable living trust has a different trustee that manages the assets. They do not belong to the original estate anymore, and therefore, you don’t have to pay taxes.
Gifts During Lifetime
The law allows you to give a present to a loved one up to a specified amount of money without owing taxes. This way, you reduce your estate, which will make the amount of taxes you owe on your estate lower after your death. Check here more on the estate and gift taxes.
An advanced directive is a collective term describing all kinds of instructions you provide related to your health care. You can prepare a living will which clarifies your choices regarding medical treatments and funeral arrangements. You can name the health care powers of attorney to someone who will make any decisions in that area, aside from the ones settled in the living will or through your health insurance.
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Power of Attorney
There is also a general power of attorney, which allows you to appoint a personal representative to be in charge of your estate. It is broader than the health care power of attorney and applies to all your bank accounts, credit cards, life insurance, retirement savings, etc. Make sure this person is qualified as a durable power of attorney to hold in front of the court if you are declared incapacitated.
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Joint Tenancy and Ownership
If you share ownership on real estate or other assets, the property will automatically be transferred to the co-owner in case of your death. The same goes for a joint tenancy on bank accounts. Through joint tenancy and ownership, you can avoid probate court, and it simplifies the procedure for your co-owner (spouse, children, or business partner).
Most of the tools that allow you to designate a beneficiary or a guardian in the case of a minor won’t have to go under the probate process. The tool applies for things like pay-on-death accounts, life insurance, and savings for retirement.
In most cases, there are no taxes assessed on life insurance policies, so they are a perfect tool for your family to use to pay debts and taxes.
Letter of Intent
A letter of intent is not a legally recognized document, but it can provide insight into your intentions regarding the estate. This way, in case something is contested, the court could understand better what your wishes were.
Estate Planning Mistakes to Avoid
First, make sure you understand the plan. Ask your planning attorney for clarification and explanations. Read carefully and confirm if you have understood correctly. Don’t rely on the knowledge of your attorney. It is you, your estate, and your family that will be affected, so take responsibility that your wishes have been properly documented.
Do a double-check for any inconsistencies among all your estate planning documents. If you name one beneficiary on your life insurance, another on the savings account, and third in the will, the process will become more complicated. Moreover, it will open the door for legal maneuverings.
Estate planning is an on-going process. Make sure you review your legal documents together with your attorney every couple of years or after significant life events. These include divorce, the birth of a child, death of a relative, and more.
A widespread mistake when setting up trusts is to think that signing the documents in front of your attorney is enough. You haven’t completed the procedure unless you transfer the assets to the trust. To change the ownership, you will need to apply for new registration. If you don’t pass the possession to the trust, it is like it never existed.
What’s Your Plan?
The bottom line is the estate planning process is nothing more than putting your assets in order. Once you do that, make sure you put your plan in a safe-deposit box for keeping, and let the important people in your life know where it’s located and how to access it. Besides taking care of yourself and your belongings, having everything arranged to spare any complications is showing love and compassion to your loved ones.
If you already have an estate plan, did you consult an attorney? Let us know!
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