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Your Guide to Essential Estate Planning Basics

by | Apr 15, 2020

The truth is that not many people like to think about what will happen when they die. Now it’s one thing to think about what happens to a beloved collection of stamps or vintage cars. It’s another thing to think about how your spouse or children will carry on when you are gone. 

Estate planning helps to ensure that you have done everything possible to take care of those you love when you are gone. It helps to protect them financially. Oh, and you can decide who gets ownership of that red Mustang you love so much. 

It also helps to make decisions ahead of your death about who will make the financial decisions and personal decisions about your affairs.

What does it take to plan an estate? You must make many decisions about your affairs. 

Read on to learn all about estate planning basics and what it takes to take care of your estate before your death.

What Is Estate Planning?

Estate planning basics include making decisions about all kinds of things about yourself after you are gone. 

Many people get hung up on the word estate. They assume that estate planning only is necessary if you are uber rich or have properties and businesses. 

Anyone over the age of 18 who is working has insurance bills and can benefit from taking care of their estate. 

Remember, the decisions you make don’t have to be final ones. It’s smart to do the planning, organizing, and decision making about your estate. It can be tweaked as things in your life change over time. 

Why Is Estate Planning Important?

Estate planning is important for many reasons. 

  • You don’t want your loved ones having to figure out the answers to all these questions, financial and personal, in their time of grief. It allows them to follow your wishes as you lay them out in your estate documents. 
  • It also offers a level of protection for your loved ones regarding your finances. It can protect them financially long after you are gone. 
  • If you have dependent children, you can make decisions about who will care for them when you can’t anymore. 
  • If you are a business owner or have any assets, the estate planning makes decisions about what will happen to those things per your wishes. It can prevent future feuds over assets too. 

Do You Need Estate Planning for Tax Purposes?

Until very recently the IRS allowed Americans to write off estate planning on their income taxes. The expenses were considered tax-deductible and now no longer are. The Tax Cut and Jobs Act effectively changed that tax write-off. 

One of the basic goals of estate planning is to prevent your heirs from having to pay huge federal estates tax on your assets when you die. 

One suggestion is to gift assets before your death up to the allotted amount and then keep the rest of the assets inside the living trust. More on trusts in a minute. 

Because the rules on estate taxes are complicated and constantly evolving with law changes, it is smart to consult an estate planning attorney or investment specialist as you make decisions about your assets.

Will Vs. Trust

Many people confuse the terms will and trust. Some people even think they mean the same thing. They are not the same and used for different purposes. 

Your will, or your testament, is a legal document created to designate how your property and assets will be divided. It can also list your wishes for dependent children or pets and their care. 

Now, in essence, a trust does the same thing but it also includes a designated executor. Under a living trust, however, you can avoid the probate process for many financial matters. You can also keep your estate information private instead of part of a public record. 

Doing Your Estate Planning

While planning your estate can feel overwhelming and maybe a bit morbid, it isn’t something to be taken lightly. First, you want to be sure you are doing it with the correct legal steps. For this reason, it’s highly recommended to hire an estate planning attorney. 

This planning also requires you to make many important financial and emotional decisions. It’s important to talk over these decisions with trusted advisors and your loved ones.  You will need to access all of your financial documents and insurance papers as part of the planning, so be prepared to organize and include this information. 

Last Will and Testament

You’ve seen enough television and movies to know about the reading of the will. A will document can be quite simple, especially if you have a living will and living trust. 

You last will and testament will be the document that gets entered into the public record in probate court. It tells the living world how you want your assets divided.  Your will can designate who should care for your dependent children or pets and what should happen to your property. Often a will also include who inherits items that are important to you. A living will provide information about your wishes related to health directives. More on that in a bit. 

Living Trust

If you have assets like property or investments, a living trust is a smart idea. It allows your assets to be held in the living trust. You name an executor of the living trust. 

Because the assets are held by the trust, they don’t have to go before probate and taxes are avoided. For people who have large estates, it also keeps their finances private as they don’t become part of the public record. 

A living trust, sometimes called a revocable living trust, can be changed over time, so don’t feel like once you make one, you are stuck with those decisions forever. 

There’s one thing to note about a trust. When you are alive, you put your assets into the trust. They become the “property” of the trust. Now, when you are alive, you control the trust. But once you sign the assets over to the trust, you can’t get them back. 

Power of Attorney

One part of estate planning is to establish a person to be a durable power of attorney. If you become ill or injured and are unable to make your own decisions, the durable power of attorney can make them for you. This person acts as your agent making decisions on your behalf. 

Again, this person can be changed over time per your wishes. 

You want to make sure that the person you select for this role knows how you want your end of life care handled in the event of illness or an unforeseen accident. 

The power of attorney paperwork should be part of your estate so it can be accessed for the medical or financial world if the power of attorney needs them. This power of attorney paperwork expires on your death. 

Then the executor of your estate will continue. Often it is the same person who acts in both of those roles. 

Beneficiary Forms

A beneficiary is a person or group who you name that will receive benefits upon your death. You can name beneficiaries when you get a life insurance policy. You can also leave beneficiaries for investments.

First, you probably should not leave the beneficiary blank. Since you never know what can happen in life, you might want to designate who would get the funds if you die. 

Also, keep track of who you have designated. If you were married and named a spouse, then if you divorce, you want to change out the beneficiary designations (especially if you remarry!). 

You can also list contingent beneficiaries. Typically a spouse is listed as the beneficiary. But if something were to happen to both of you, say an accident, then the next listed beneficiary is your beneficiary. You can also designate that benefits be divided among several beneficiaries. 

Insurance Policies

Throughout a lifetime, you pay for a lot of insurance. You insure your house. You have car insurance. You have health insurance you have purchased or get through your employer. 

You need to take the time to gather up all the policy information and put it in your estate paperwork. In the event of your death, this makes life much easier for your executor to take care of all the pieces of your financial life. 

Again, this is a smart time to make sure if any of those policies come with death benefits that you have up to date beneficiaries listed. 

If you are ill, while this might be morbid, you want to look at your health insurance coverage for end of life care. If you need long term care of hospice care, you want to have a plan for how that will be paid for. 

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Health Directives

Health directives are an important part of your estate because it prevents your family members from making very difficult decisions when they are likely already under emotional distress. Likewise, medical professionals can’t allow decisions to be made on your behalf without the correct paperwork in place. 

You want to have an advance health care directive or a medical power of attorney. This allows someone you choose to make health care decisions if you are unable to make them. It also expresses your wishes concerning treatments, pain management, and organ donation.

You can also include a physician’s order for life-sustaining treatment. This used to be called a DNR (do not resuscitate) form. This gives your express wishes about whether extreme measures should be taken to sustain your life. 

Important Documents

The last thing you want is a loved one digging for insurance policy information or trying to find your investment documents. Make sure the executor of your estate has access and copies of all important documents. These documents should include:

  • The will
  • Living Trust
  • Power of Attorney paperwork
  • Insurance policies
  • Real estate deeds or titles
  • Stocks, bonds, annuities (certificates)
  • Bank accounts, mutual funds, and safe deposit boxes
  • Retirement accounts, 401(k) accounts, or IRAs policy information
  • Credit cards, mortgages and loans, utilities, and unpaid taxes

If you have done any funeral replanning (more on this too) include the information with these documents. When your executor needs to take over, all the information they need to execute your wishes will be in one place. 

Letter of Intent

While some might feel the letter of intent is unnecessary if you have a will, it is nice to include for more personal wishes. This is a letter written by you that is included with the estate paperwork. 

The letter spells out your wishes and intentions. It might also explain more personally why you made some of the decisions you did in your last will and testament. 

You express your wishes for charities you have supported going forward or the care of your pets, for example. 

Other Considerations

In your estate paperwork, you can

  • explain your funeral wishes
  • preplan your funeral through most funeral homes now
  • put your wishes in regarding your funeral
  • select who might eulogize you and make musical selections. 

Preplanning a funeral sounds difficult but it does make it much easier for the living loved ones you leave behind. 

If you are a business owner, you should plan for your business succession. There will be information in your will and living trust about the financial components. If you intend for the business to stay operational, you can include who might follow you in running the business and making decisions about the business going forward. 

If you have minor children, this can be one of the hardest and most important parts of your estate. Your will and living trust gives legal and financial clarifications for their care, including information about your wishes for their care. You can also plan for their financial care like college expenses, for example. 

If you have personal belongings that are important to you, include information about who gets those items and even why. It may help prevent issues between loved ones after your death. 

Cost of Estate Planning

It can be challenging to put a cost figure on estate planning. So much of the estate depends on how complicated your estate will be. You need to consider your assets, your dependent children, real estate holdings or your business. 

Whatever the cost, it’s smart to spend the money associated with estate planning. It saves your loved ones from being taxed on your assets and it makes sure your wishes are followed.

It also makes sense to hire a knowledgeable estate planning attorney. The laws frequently change and you need someone who knows the ins and outs of creating a proper estate to do your planning with you

Understanding Estate Planning Basics

Estate planning is a matter of getting your house in order and protected in the event of your death. While estates can be anything but basic, use these estate planning basics to get you started planning out your estate. 

For more information related to personal finance, be sure to visit our personal finance section.

Disclaimer: This article does not constitute legal advice and is not a substitute for obtaining legal advice from a qualified attorney.

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