Last Updated on January 5, 2024 by Rachel
What, Why and Hows of Estate Planning
In essence, estate planning is a collection of legal documents that enumerates what should happen to your assets and to whom they go to when you pass away. Estate planning is all about assuring that your assets go to your loved ones and that your last wishes are respected. In part, it is giving them protection from the Internal Revenue Service (IRS). Essential to estate planning is transferring assets to heirs with a goal toward creating the smallest possible tax burden for them. The common misconception is that estate planning is only for the rich, however, each one of us has assets that may be in the form of cash, investments, land, vehicles, etc. Without estate planning, all your assets go to the government when you pass away. Setting assets aside, estate planning also establishes health care decisions and who will be able to make them in the case that you are incapacitated or unfit to make your own decisions. In some circumstances, family conflict may arise, which is why appointing a estate executor would also be a great plan to avoid conflict and to assure that your plans and decisions are respected after passing away.
There are many factors to consider when planning your estate. Let’s go over them one by one:
Traditionally, a will is a legal document which specifies what happens to your assets upon passing. These apply only to assets that are solely owned. They can specify who takes legal guardianship of any dependents you may have, and yes, this includes your pets. Upon establishing a will, you are able to assign an estate executor that will enact your will when the time comes. This is an important task that should be assigned to a highly trusted person. They will be in charge of executing your wishes outlined in the will. The executor shall pass the inheritance as outlined once taxes and debts have been paid and filed. Take note that in order for a will to be executed, it must go through a probate court. Probate is when the court oversees the distribution of assets and may, in some cases, take up about 10% of your estate value for expenses.
Financial Power of Attorney
A financial power of attorney is a legal document that is prompted when you are unable to make financial decisions for yourself. You will select a person to manage your finances on your behalf. It is inherently important to select an individual who you deem financially responsible and is trustworthy. Not only will they be handling your money and investments, making decisions in this aspect for you. They will also be assigned to oversee any debts you may have and how to liquidate certain assets to take care of the debts. This is an important task to undertake because not only does this entail the individual power over your finances, it may also determine how much your loved ones will be able to receive as inheritance after the fact. Take note that this individual does not have to be a lawyer, as long as you deem them financially capable of controlling your assets.
This legal document encompasses any choices need to be made regarding end-of-life treatment or in case of any medical reasons you are incapable of communicating your own decisions in regards to this. The living will should outline any diseases, ailments, medication, etc. that you presently have. This document will take care of communicating what is outlined as to your preferences with respect to life-support, feeding tubes, a DNR order, organ donation and palliative care. If, however, you are unable to make a decision for yourself simply because you’re not sure what you would want when the time comes. You can assign a health care proxy who will make the decisions for you regarding the aspects mentioned above. Trust and awareness is key in this task. The health care proxy must be aware of your health state and any and all diseases and illnesses you may have. And at certain circumstances where they would need to make decisions without a living will, you must be sure that they know you well enough to know what the right decision would be for you.
Beneficiaries are the inheritors of your estate. They will be the ones to receive, not only assets, but also dependents you may have. Ideally, beneficiaries would be family members, spouses, parents, and/ charities that you may want to receive your legacy. You may be able to assign assets in different forms and sizes specifically to each person. Even as small as passing a vintage record player may be outlined in the will with a specific beneficiary in mind. These benefactors will be the people receiving your legacy.
The importance of a trust can be pointed back to the above mentioned, Probate court. With a trust, you will be able to transfer property to a trustee until your beneficiaries can claim it. This helps with minimizing the taxes and probate expenses that your estate may undergo before reaching your benefactors, and can restrict the probate court’s decisions in distributing your assets. There are generally two different kinds of trusts that you need to take note of:
- Living Trust: Refers to an individual assigning themselves as trustees and being able to maintain control over your own assets. With this type of trust, you will be able to make changes on certain aspects like beneficiaries and the terms of inheritance.
- Irrevocable Trust: This type of trust is the total opposite of the previous one. The trustee position is transferred to a different individual and they take over the control of your assets. However, the upsides to this type is that it is irreversible, which means you and anyone will be unable to change beneficiaries and terms of inheritance. This type is also subject to a minimized estate tax which means a bigger inheritance for your beneficiaries.
Outlined below are some general tips on estate planning, take them with a grain of salt, and decide what would be best for you and your circumstances:
- Consult a lawyer to guide you in planning your estate. There are many legal documents and requirements involved and going to a professional will benefit you greatly and lessen the headache of figuring things out.
- Talk to your loved ones regarding medical, financial, and other aspects. Those who need to be aware of certain things in your life, let them know, it will help in making decisions if they are in those positions.
- Do your research. Much like this article, there are countless more out there that can give you more specific and thorough information that will guide you on what you need and what you want.