Estate planning is similar to a will, in that it is the preparation of tasks and who will receive your assets after your death. This type of planning often involves which assets will go to which heirs, but also how your estate taxes will be settled in order to maximize the wealth kept by your beneficiaries.
The value of your assets in the estate will determine whether you need a will, revocable trust, or asset protection trust. Good estate planning can help avoid stress on your family after your passing, and also provide direction should you become incapacitated before your death. Most estate plans are set up with the help of an estate law attorney.
Why Would You Need an Estate Plan?
Arrival of Children
If you have children, then you will want to ensure they are looked after in case of your death. Choosing a guardian and ensuring children are cared for are incredibly important matters.
When you go into probate the proceedings are public. This means everything you own, and who receives it, is made public. An estate plan will help you to avoid probate.
Probate is a costly process that can be up to several percent of your overall estate. In these cases, having an estate plan avoids probate, giving significant savings to your beneficiaries.
If you are someone who is interested in philanthropy, then an estate plan can ensure the causes you care for are properly funded.
How Estate Planning Works
There are a few simple steps to start your estate planning.
- Create a Will: Your will should state who you want to inherit your property and also should name a guardian if you have young children.
- Consider putting your property in a living trust: Although this is not necessary, it will avoid your beneficiaries going through probate court.
- Make health care directives: If something happens to you and you cannot consent to medical decisions, you should have a living will in order to have your wishes followed.
- Make a financial power of attorney: This person will have the authority to handle your finances and property if you are not able to do so.
- File beneficiary forms: Naming a beneficiary for bank accounts as well as retirement plans allow you to make the account automatically payable to them upon your death, and skip probate.
- Obtain life insurance: This essentially protects your beneficiaries.
- Cover funeral expenses: Whether you want a funeral or cremation, you should set up a payable-on-death account at your bank and deposit funds into it in order to pay for your funeral or related expenses.
- Protect your business: Set up a plan for your succession with your business.
- Organize documents: Store all of the required documents that will make it easy for your beneficiaries to settle your estate.
Benefit of Estate Planning
Whether you have minor beneficiaries, or even adult beneficiaries an estate plan can ensure they are protected. Not only will an estate plan protect from them making bad decisions, but it will also prevent outside influences and problems with creditors.
If you have a beneficiary that is a minor, then a guardian or conservator will be required to be appointed to oversee the minor's needs until they are an adult. This can protect your family from the legal expenses required to designate a guardian and trustee for minor beneficiaries.
Reduces Tax Burden on Beneficiaries
When someone passes away, the beneficiaries or heirs of an estate will be required to pay state and federal estate taxes, also known as state inheritance taxes. Putting together an estate plan can help you to reduce and eliminate estate taxes. This can be done by setting up an AB or ABC trust.
Estate planning allows you to seal assets so that they cannot be touched if a lawsuit occurs. This is why you can set up an estate plan to protect your assets while you are still alive, but also to continue after your death.
States How Assets are Distributed Clearly
To avoid wasting both time and money, an estate plan will clearly state out what is to happen after death. This plan can also state what to do if you become mentally incapacitated before death. This will state who gets what, how they will get it, and how much. This helps to avoid fights within the family and probate as well.
Probate is the process of validating the will of someone who has passed away. Probate puts a value on those assets, pays the final taxes and bulls, and then distributes everything else to their beneficiaries. Probate is a long and expensive process. It typically requires the help of an estate planning attorney, which means most people hope to avoid probate. Avoiding probate is generally a good plan, and can be done by creating an estate plan.
How Much Does an Estate Plan Cost?
The cost of estate planning varies based on your assets but typically range anywhere from $800 and $3,000.
Basic estate planning includes:
- Power of attorney
- Medical power of attorney
- Medical directives
There is also the option of starting a trust. Trusts can cost a few thousand dollars, while a basic living trust may cost under $1,500. If you have a trust with multiple assets or need to generate a multigenerational trust, then may cost more.
Do You Need an Estate Plan?
Probate can often cost up to 5 percent of the estate, which means you should avoid probate at all costs. Estate plans are important for anyone who owns real estate, has multiple beneficiaries, wants to prevent their family from high taxes, or simply make it easy for your family to distribute your assets after death.
If you do not have an estate plan, you can alternatively use a will. The difference between a will and an estate plan is that a will is simply a document stating which heirs receive which assets. Wills that come into effect are examined in probate court, and this means that a will can cause more hassle, as it does not prevent probate.