Estate Planning Is for the Wealthy, Right?
When Pops icon and “Queen of Soul,” Aretha Franklin died in 2018, she joined a long list of famous people who died intestate – without a legal will. The task that was thrust upon her survivors of settling her affairs was complicated. She was not alone: when Prince, another icon of the music world, died, his estate was a mess, as well.
Of course, you can say, “I don’t have that many assets -- it’s not that complicated for me.”
Actually, this probably isn’t true. You most likely do have assets and do need to think about estate planning in some form. Here are some common things that people say when thinking about estate planning.
“I’m Still Young, So It’s Not Important Yet”
If you own anything, you need to plan. And when you are young, you need life insurance which is dirt cheap. What about kids? Or younger siblings? This is the time to make arrangements for them if something happens to you.
“My Spouse Will Just Get Everything”
Both of you need a plan. Disputes can drag on for months or even years. Besides, what if your spouse dies with you or soon after? This will make matters even more complicated.
“My Family Knows What to Do”
Keep in mind, your family will all be looking out for their best interests, even when it comes down to who gets to keep pictures or your electronic devices. You don’t want to be the source of discord within the group of those you love.
“Once I Create a Plan, That’s All I Have to Do”
As they say, nothing is permanent except change. Your spouse may die before you expect it, or you may go through a divorce, or one of your beneficiaries might offend you or even die. Your will should be updated to reflect these things.
Estate planning is the process of anticipating and arranging for the management and disposal of your assets – your estate – in case you become incapacitated or die. Doing this while you are alive will minimize gift and estate taxes. Estate planning includes reducing or eliminating uncertainties over how probate is administered and thereby cuts expenses for your survivors. This puts you in control of your own goals and can be as simple or complex as you wish or need. You can also designate guardians for minor children.
In the United States, which we are limiting this explanation to, the process of estate planning is regulated. A family law expert can provide additional information. We list here a few of the component parts to estate planning:
Wills, Trusts and Advance Directives
Everybody knows what a will is. Wills are written legal documents that spell out who gets what. As long as they are legally created and witnessed, wills may be enough to keep your relatives out of probate court. However, there are no guarantees about this if you just use an online template.
Beneficiary designations can be done on an account by account basis. This may allow you to specify an heir to a specific retirement account or other pot of money. These types of pre-determined inheritances often escape the probate process.
A trust is a handy tool for directing distribution of assets after you pass away. They can control funds for those who are young or disabled. The goal of a trust is to manage the assets, whether stocks, business holdings, or property, in such a way as to maximize wealth for your heirs over a long period of time, rather than simply at your death.
Advance directives may or may not involve financial implications, but they will certainly involve personal ones. If you become incapacitated due to an illness, a car wreck, or dementia, the directive will detail how you are to be taken care of and what rights/responsiblities your heirs have.
As Benjamin Franklin wrote, “nothing is inevitable but death and taxes.” Various taxes play a big role in choosing the structure of an estate plan, including income, gift, and estate tax planning.
A good accountant or tax attorney can offer excellent strategies for avoiding excess taxes, such as distributing the property in incremental gifts during your lifetime. An example would be paying a grandchild’s college tuition.
Another strategy is a life insurance trust. This allows life insurance to pay estate taxes. Essentially it decreases the burden of taxes for life insurance inheritance by allowing it to pay for any estate taxes.
If you have a will and/or trust, the document will be filed with the Probate court. If you die without one, then the probate court will appoint a person to oversee your estate. Your creditors will make their claims, and then the remaining assets will be divided among your next of kin. There is a strict definition of this, and important people, such as beloved stepchildren, will not be included unless you have specified that they get a share.
The Final Verdict
Nobody likes to think of their own death, and it is easy to think that estate planning is not important because you don’t own a lot of assets or you are too young to need it. However, if you start the process at an early age, the rest of your financial life will be much smoother, and you are more likely to take care of finances because of a different mindset. And taking care of your estate is one of the greatest gifts of love you can provide your family.
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