The process of deciding who will inherit your assets after your death is known as estate planning. Making sure your wealth and other assets pass to the people you want them to (and not to others) is one of the objectives of estate planning, with a focus on reducing taxes so that your beneficiaries can keep more of your fortune. However, effective estate planning can also lessen family conflict and offer clear end-of-life instructions should a person become disabled before actually passing away.
Unfortunately, a lot of people don’t have an estate plan, even those who would greatly benefit from one. According to Jenny Xia Spradling, co-founder of FreeWill, a website that generates legally enforceable wills and trusts at no cost, there is a severe lack of estate planning among people of all socioeconomic levels.
Here’s an overview of estate planning and why, regardless of your level of wealth, you must do it.
Estate planning techniques
From straightforward beneficiary designations made when opening a bank or brokerage account to more intricate and extensive arrangements, estate planning can take many different shapes. The most typical estate planning components are included here, along with other things you might wish to think about.
Designations of beneficiaries
You will be asked to name a beneficiary for the account whenever you open a financial account, which is often a bank, brokerage, or insurance account. In the event of your death, the beneficiary will be the first to receive any funds from the account. If you’d like, you can distribute your assets among several beneficiaries and designate backup beneficiaries in case the principal beneficiaries pass away.
Choosing a beneficiary is crucial: Any other designation in your estate usually takes second place to your beneficiary designation. Experts strongly advise you to specify your beneficiaries because of this. Accounts with designated beneficiaries may at least still pass to your heirs if you pass away without a will.
Named beneficiaries are common in retirement accounts like standard IRAs and Roth IRAs.
Another essential estate planning document is a will, which distributes the assets you own personally and without naming a beneficiary when you pass away. Jointly owned property, such as that owned with a spouse, transfers exclusively to the surviving owner or owners. The court will designate an executor to oversee the execution of the will and the distribution of assets when the time comes.
Wills have been around for a while, and creating one doesn’t cost much, according to Xia Spradling of FreeWill. “The legal system was essentially created to make it simple for people to express their final wishes.”
The probate court reviews wills that become enforceable, which is a public procedure that enables possible creditors to assert a claim against the estate. The remainder of the estate’s assets won’t be transferred to heirs in accordance with the will until creditors have been paid in full.
It’s not unusual for probate to take a year or even two to be finished because it may be a notoriously painful procedure. Additionally, costs of up to 5% of the estate’s value might make it expensive.
Wills can be the cornerstone of an estate plan, but trusts are increasingly popular because they can make estate settlement far less complicated, difficult, and time-consuming.
Although it may sound complicated, a trust is actually rather simple at its foundation. Trusts occur in many different forms. Using a trust, a beneficiary can have assets held by a third party, the trust, on their behalf. With trusts, you have a variety of estate-planning choices at your disposal, not the least of which is the opportunity to breeze through the probate court while retaining a significant amount of secrecy.
With trusts, you may decide who will receive your assets after you pass away as well as the conditions under which they will be distributed. When giving assets to someone with questionable financial maturity or aptitude, this control may be a useful tool. Additionally, you have a choice as to whose trustee(s) would oversee and operate the trust after your passing.
Trusts can be complicated, but a revocable trust is one of the most straightforward and straightforward to set up. Such a trust guides your assets in accordance with your desires and aids in guiding them through the probate process. Even better, you can act as the trustee and make adjustments while still alive. Furthermore, trusts can be established for relatively little money; according to at least one expert, those who have at least $150,000 in assets can start to recoup their start-up costs.
A knowledgeable lawyer may be needed for more complicated trusts with numerous conditions (such as keeping spouses or wasteful children at bay). Of course, one of the reasons trusts continue to be so popular is the fact that you may use them to avoid paying at least some taxes.
There are other circumstances besides death when you could be unable to decide. It’s quite helpful to have a clear expression of your wishes in this situation because you can still be conscious but incapable. A living will can be helpful in this situation since it specifies how you wish to be cared for during your end-of-life care, including which treatments to accept or refuse.
A durable power of attorney, a legal document that enables a surrogate to act on behalf of the incapacitated person, is sometimes combined with a living will.
Advantages of a thorough estate plan
While it may require some time and money up front, estate planning helps you avoid many unpleasant circumstances and can help you prevent many worse issues down the road. For instance, if you don’t offer a clear estate plan, the state will proceed according to what it deems to be best in its opinion, which is probably not what you would decide to do. Don’t give the state control of your estate.
If you make advance preparations, you can increase the portion of your fortune that goes to Aunt Sally and reduce the portion that goes to Uncle Sam. While other tax-planning tactics, like as strategic charity giving, might help you reduce the tax hit, cleverly structuring flexible retirement accounts, such as a Roth IRA, can assist channel more tax-free money to your descendants.
Although this technique won’t work for everyone, the current tax law changes and historically low tax rates make converting to a Roth IRA an especially favorable option.
Reduces family conflict
Even if your family gets along well in general, it’s still a good idea to make a will to ensure that this continues. Some family members can become agitated by the prospect of a cash grab, while others would conceal a precious object that they want to remain hidden. Regardless of your wealth, careful estate planning can avert family disputes, whether it be a minor argument or a full-scale legal battle.
Specifies your instructions
Telling people how you feel about them and what they meant to you is a part of the value of the will, according to Xia Spradling.
Even if you may have always wanted your niece Bertha to get the heirloom, unless it is specifically stated in the estate plan, anyone can make a run for it. Your assets will go to the person you choose to receive them thanks to an estate plan. You can help your loved ones remember you fondly or at least obtain what you meant by outlining your wishes in detail, typically with the aid of a lawyer.
Saves time and money by avoiding probate court
The most tedious and time-consuming part of the entire procedure is probate court, so set up your estate properly by creating a well-crafted trust. More and more people are setting up their assets this way to avoid the difficulties of probate because utilizing a trust is so simple. Furthermore, it isn’t as expensive as you might assume to make it worthwhile.
Protects your family’s possessions
Trusts can be a useful tool for making sure that your money is kept in the family. If set up properly, a trust can prevent a wasteful nephew from wasting your lifetime’s worth of labor in a matter of years. If a spouse tries to take money away from the family, it might also prevent that.
Safeguards your heirs
Your heirs can be protected in a number of ways by a sound estate plan. Your estate plan can specify who will take care of your minor children and how much money they will receive. In the event that a relative might otherwise accuse the heirs of stealing, it can also shield them from recrimination. A living will can also assist heirs in avoiding some of the challenging medical decisions made during a parent’s final days.
To sum up
Even if you don’t have a lot of money, estate planning can assist prevent a variety of potentially troublesome issues from occurring. When it comes to splitting your estate, you’ll save your loved ones a lot of time, money, and heartache by making your wishes known before you pass away. More significantly, even if you’re not there to see it, you’ll still receive what you desire.