What Is Estate Planning and Why Is It Important

Cropped shot of a senior couple meeting with a consultant to discuss paperwork at home

Many people avoid thinking about estate planning because it brings them face to face with their mortality. However, failing to express your post mortem desires could leave your family at the mercy of the state regarding the disposition of your assets. You could also expose your loved ones to unnecessary taxes, as well as familial discord. 

So, what is estate planning and why is it important?

Let’s take a look. 

What is Estate Planning?

In the simplest terms, estate planning is the process of designating how you want your assets to be handled in the event of your death or a disability that renders you permanently unable to make such decisions independently.

The nature of the term “estate planning” could lead you to think it only applies to the wealthy. However, you probably have an estate regardless of your financial standing. Your car, furniture, house, bank accounts and insurance policies are all elements of an estate. 

And, when you think about it, you’ll probably be happier if the people for whom you care came into possession of these items. To ensure that that happens, you’ll need to document your wishes. In other words, you’ll need to say who you’d like to see get what, and when you’d like them to have it. 

Moreover, having this happen at minimal expense is likely to be a concern as well. Should your cognitive abilities be compromised before you establish a will, you could be declared intestate, triggering outsized taxes, legal fees and court costs.

Do yourself and everyone in your inner circle a favor.

Plan your estate. 

Why Planning is Important

An estate plan goes beyond a will. While people tend to think of the two as interchangeable, they are not. Granted, both inform the disposition of your assets. However, estate planning also covers areas including identification of the individual who would be empowered to make medical and financial decisions on your behalf should you become incapacitated and unable to express your wishes. 

Other benefits of creating an estate plan include:

• Retaining Control – You can outline the medical directives you’d like to have followed in terms of treatments you’d like to receive or avoid. You’ll also be able to direct the disposition of proceeds from insurance policies, annuities, retirement accounts and other financial instruments. What’s more, estate planning can be used to establish trusts to ensure that your assets are passed on in a way that is most beneficial to your heirs in terms of taxes.

 Protection For Your Children – The courts could determine custody of your children if you have no surviving spouse. This means that your children could become wards of the state and placed into foster care if no family member steps forward to accept the responsibility. An estate plan gives you the ability to discuss this with your family and friends in advance so that you can designate someone you can trust to provide the best care possible for your children.  

• Protection For Yourself – Falling victim to an incident from which you are left permanently incapacitated could leave you at the mercy of anyone who comes along and makes the strongest claim. However, granting durable power of attorney in a living will gives you the ability to designate the person or people you’d like to have placed in control of your legal, financial, and medical affairs. 

• Time and Money Savings – This can still matter, even when you are no longer among the living. Under certain circumstances, with no clearly defined plan in place, a state court can appoint a probate officer to go through every detail of your finances. This person will then apply the laws of the state to satisfy financial obligations and decide how the allocation of your assets should proceed. This can mean extensive paperwork, court appearances and potentially years of ongoing litigation — the funding of which will come directly from your estate, all while your family has no access to your assets.

Tax Savings – Granted, federal estate taxes currently only apply to assets of $12.06 million or more. However, that can change with each new presidential administration. Meanwhile, 12 states impose estate taxes and an additional six have inheritance taxes. Maryland actually has both. Massachusetts and Oregon tax estates of $1 million or greater, while Nebraska’s inheritance tax is applied to estates of $10,000 or more. This becomes a real concern when you consider that a modest home can be worth $1million these days. Establishing trusts, granting irrevocable gifts, and setting up joint accounts can sometimes spare your loved ones these burdens — if done in advance. 

Why People Fail to Plan

As we mentioned above, many people avoid estate planning because they’d rather not entertain notions of their demise. Another group of people believe that it isn’t worthwhile because they think they don’t have enough assets to make it useful. 

Still others think it will be too expensive or too time consuming, or that they’re simply too young to be concerned with it. However, as illustrated above, estate planning is about more than just the disposition of your stuff. Plus, the inevitable can happen at any moment, regardless of your age. 

Crafting Your Estate Plan 

While it might seem like a daunting task, estate planning can often be accomplished more easily when broken into its constituent parts and taken one step at a time. These include inventorying your assets, considering your family’s needs, deciding how you want things to proceed and making a list of your beneficiaries. It’s also a good idea to take note of the tax laws applied to inheritances in your state and determine what you can do to minimize liabilities. 

Granted, some of this can be pretty involved, so it might be good to bring in some professional help as well. And finally, you should think of your estate plan as an ongoing concern. Factors can change between now and the day your plan is needed, so look back at it from time to time and make updates as needed.

Let’s take a look at the elements of an estate plan in more detail.

Conduct an Asset Inventory

You might be surprised to realize how many assets you’ve accumulated over the years. By and large, they can be divided into two categories — tangible and intangible.

• Tangible Assets – Your home, rental properties and or any other real property fall into this category. Vehicles such as cars, trucks, motorcycles, mobile homes, and boats are considered tangible assets as well. Your watch collection, artwork, baseball cards, bottle caps, coins, stamps, and the like also come under the heading of tangible assets. Items such as jewelry, clothes, shoes, and home furnishings are also included in this classification.

• Intangible Assets – Bank accounts, CDs, stocks, bonds, mutual and index funds as well as other financial instruments are considered intangible assets. So too are life insurance policies and health savings accounts, as well as retirement accounts such as IRAs and the like. Annuities and business ownership interests are also intangible assets. 

Once the inventory is conducted, you’ll need to establish each item’s value. A professional appraisal might be required in some cases, such as with a home or similar asset. Financial statements from banks, brokerages and the like can help establish the valuation of intangibles. 

Family Needs

This step is all about protecting your assets so that your family can benefit as much as possible from them. Make sure you have enough life insurance coverage to take care of your spouse and children, as well as to defray the costs of your memorial service. 

Funerals can be quite expensive. Covering such expenses before they’re needed can result in significant cost savings. Taking such action will also spare family members from having to do so and reduce the likelihood they’ll overpay out of feelings of guilt or obligation. 

A guardian should be named for your children if they’re underage in case your spouse is unable to care for them for whatever reason. It’s also a good idea to identify a secondary guardian, just in case your primary is unable to accept the responsibility.  These designations will ensure that people who share your values — and will act in accordance with what’s best for your progeny — will care for your children.

Review Beneficiaries

Retirement and insurance accounts usually ask you to name a beneficiary and it is important to do so. Such designations can supersede wills, so make sure you list the people you want to have control over those assets. 

It’s also important to review those documents from time to time to ensure that those listed are the people who matter to you now. Let’s say you remarry, but your first spouse is still listed as the beneficiary of your retirement account. Your current spouse will experience an unpleasant reckoning should your original spouse decide to stake a claim. 

Just as with guardians for your children, it’s important to name secondary beneficiaries in the event your primary beneficiaries are unable to accept the bequests. And, above all, make it a point to always name someone — otherwise the state could decide who gets it.

Writing Your Will 

Having completed the steps above, you are now ready to enumerate your wishes in a formal document. There are a number of different ways to go about this and it can be as simple or as complicated as you choose to make it. 

An online template might serve quite well for simple estates. In more complex situations, working with an estate-planning attorney can help avoid potentially costly mistakes and miscommunications. Either way, it’s important to be certain the document is properly executed and notarized. 

Give careful consideration to who gets what and why — and be specific in your language. Leaving things vague can result in extreme familial discord if the heirs are left to argue over what you were trying to say. It’s very difficult to divide tangible assets equally, so designate a specific recipient or direct that the asset be liquidated, and the proceeds split evenly. 

You’ll also need to designate a person to serve as the executor of your will. This individual will see to it that your directives are conducted according to your wishes. You’ll want to place someone who has proven themselves capable of handling responsibility — as well as paying attention to detail — in this role. They don’t have to be a lawyer or an accountant, though the task often falls to a person with a legal or accounting background. 

Your will should also contain your living trust directives; including the establishment of trusts and your medical care wishes. You might also need to grant powers of attorney to one or more individuals. You’ll need to authorize someone to conduct your finances, as well as to speak for you in medical situations in which you’re incapable of stating your wishes on your own. You can also grant limited powers of attorney to different people for different situations. It’s a good idea to have secondary people named to these positions as well. 

It can be useful to include a letter to be read before the contents of your will are disclosed. This can help your family understand why you made the decisions you did and help them achieve closure. 

Document Storage

Once complete, all associated documents should be stored in a place that is readily accessible by the person you designate as your executor. They should also have the passwords to your online accounts and be made known to your banks and financial institutions. 

Electronic wills are legal and can be executed digitally. However, you must be careful to meet the requirements governing these documents to ensure that they are afforded the respect you intend them to have. The rules covering these vary from state to state, so make sure your e-will is valid in the state in which you live if you choose to go this route. 

In addition to the document governing the apportioning of your assets, you might also need to provide documentation of any trusts you establish, your living will delineating how your medical treatment is to be conducted, and documentation of granting powers of attorney. Insurance policies, deeds of trust, ownership documents, bonds and other financial instruments should be placed there as well. All of these go hand-in-hand with your will and should be stored in the same place. 

Leaving behind a plan for the disposition of your assets is one of the best things you can do for the people you love. Ultimately, estate planning is about more than just making your wishes known, it can also be the glue that holds your family together during a very trying time.  

And, that’s another reason estate planning is important.

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