Estate planning is a key part of your end-of-life plans. An estate plan allows you to decide who gets your assets if you pass away, or if you become incapacitated and can no longer take care of yourself.
And while the word “estate” may conjure images of a mansion and acres of property, estate planning isn’t just for wealthy people. If you own anything of value, or you have loved ones who need to be cared for, you should have a plan in place.
There are many benefits to estate planning:
- Ensure the right beneficiaries and heirs get the right assets
- Plan for who will care for your dependents, including custody and financial support
- Minimize estate taxes, gift taxes, and other tax implications
- Make decisions about your medical care
Not having an estate plan can mean your belongings end up in the wrong hands. Lacking a plan will also cause emotional or financial stress for your loved ones, at the worst possible time.
Creating an estate plan
First, you’ll want to take an inventory of everything you own and estimate the value of all of your assets. This will make up your entire “estate” when you pass away.
You’ll also want to consider the needs of your family and any other loved ones who may be financially relying on you.
You can create an estate plan on your own, though it’s recommended to work with professionals with experience in estate planning, like an attorney or financial planner. These professionals can help you inventory your estate and value your assets—things like cash, investments, real estate, business interests, and other personal property.
What is a will?
Everyone needs a will, no matter how modest your estate is.
Sometimes referred to as the more grandiose “last will and testament,” it’s simply a legal document that states who gets your money, assets, and property after your death. In a will, you can designate beneficiaries and guardians for any minor children.
If you have children or minor dependents, make sure you document your wishes for their care (including a guardian) in your will. Your will should also include an executor, or someone who will oversee the probate process and disbursement of your assets. You can also make specific bequests to certain heirs.
What happens if you die without a will? Your estate will be considered intestate, which means your state’s laws will determine who receives your belongings. Laws vary by state, but typically defers to your spouse and children, or your family members.
You may have also heard the legal term “probate.” What does it mean?
When you die, your entire estate will go into probate, a process where the court decides what happens to your assets. Having a will doesn’t prevent your estate from going to probate, but it can make the entire process much simpler and faster. Not having a will can draw out the probate process, cost more to your loved ones, and potentially lead to your assets ending up in the wrong ends.
While there are some online tools to create your own will, it’s generally recommended to work with a lawyer, which (surprise) will cost money.
Consider life insurance!
If you don’t have life insurance, now may be a good time to purchase it.
Life insurance financially protects your family if you were to unexpectedly pass away by providing a death benefit. This benefit will cover your loved ones’ financial obligations (think debts and regular bills) for a period of time. If you already have life insurance, review your policy to ensure you have enough coverage.
Lemonade’s term life offering doesn’t require a medical exam, and offers a death benefit of up to $1.5 million, with term lengths between 10 and 30 years. Click below to get your quote.
Additional estate planning documents
Trusts
A trust is a legal arrangement that allows for more flexibility in your estate plan. They allow you to transfer parts of your estate to specific beneficiaries, and bypass probate. This can reduce the size of your taxable estate, saving you money.
There are a number of common trusts that you may need, depending on your financial considerations and personal situation:
- Revocable living trusts allow you to change or get rid of the trust at any point before your death. Once you pass away, your revocable trust will become irrevocable.
- Irrevocable trusts can’t be changed or terminated after you create it. However, irrevocable trusts have an added layer of protection against lawsuits and creditors.
- Charitable trusts allow you to donate money or assets to a charitable organization. Once these assets get added to the trust, they are no longer considered your personal property, which minimizes your taxable estate.
While trusts can be used for a wide range of purposes, they can be relatively expensive to set up and maintain, making them more useful for wealthier individuals and families.
Living will
Also known as an advance health care directive, this document outlines your medical care wishes in the case where you’re unable to make them for yourself, including long-term care or other special needs you may have.
In this document, you can also give a trusted person a medical power of attorney for your health care, which gives them the authority to make medical and healthcare decisions on your behalf. This provision comes into play if you become terminally ill or are on life support—nothing’s that pleasant to think about, but planning for every contingency is never a bad idea. Make sure your healthcare proxy is someone you trust.
Durable (or limited power) of attorney
Similar to a medical power of attorney, this provision allows someone to make decisions on your behalf, even if you become incapacitated—but it also includes financial and legal decisions in addition to medical ones. Durable POAs ensure you have someone who can handle your financial and medical decisions if you’re unable to, and is used in place of a living will if you have broader needs.
This includes managing your financial accounts or changing details in your estate plan. Without a power of attorney, a court will appoint someone to make these decisions for you.
For more specific transactions, like signing documents on a mortgage, consider a limited power of attorney, which, like the name suggests, only grants the power of attorney for specific requests.
Review beneficiaries on accounts
Make sure to also review the beneficiaries on your financial accounts, including your retirement accounts, payable-on-death accounts, transfer-on-death accounts, bank accounts, annuities, and other insurance policies. These specific designations often override what you write in your will (!), so make sure they are up to date.
Leaving a beneficiary designation blank may mean that the asset winds up in probate and the court decides who gets it. As an added backup, name contingent beneficiaries, or those who will receive the asset if the primary beneficiary dies before you.
Allow your loved ones to access your phone after you die
Your phone contains valuable information, including photos, contacts, reminders, files, and health data. Assigning someone as your legacy contact allows a trusted person to gain access to your phone after you pass.
If you have an IPhone, you can easily set up your legacy contact in your phone’s settings under the passwords and security category. If you have an Android device, you may need to contact your carrier.
Understanding estate tax laws
A large goal of estate planning is minimizing the estate and inheritance taxes. Typically, estate taxes are paid by your beneficiaries after they receive the inheritance. It’s important to do some tax planning and understand both federal laws and your state’s laws when structuring your estate plan.
Only estates worth over $12.06 million are subject to federal estate tax, which means wealthy estates may want to consider using trusts to reduce the amount of federal tax their heirs pay.
Most people reading this aren’t going to be passing on $12+ million to their loved ones. While the bulk of estates won’t need to worry about federal estate taxes, you should still read up on estate and inheritance taxes in your state.
Another tax you may want to be aware of is Income in Respect of a Decedent (IRD) taxes, which affects any income you may have that hasn’t been taxed at the time of your death. This includes savings bond income, individual retirement income payouts, sales commission, and other types of income. Hiring an estate planning attorney or tax professional can help avoid negative tax surprises.
Revisit your plan when needed
Life changes, so make sure to revisit your estate plan whenever a life event happens, including a marriage, divorce, childbirth, or loss of a loved one. You also may want to revisit your plan even if your circumstance hasn’t changed, just to make sure everything is up to date.
Planning for the end of your life can feel overwhelming, but it’s important to understand how a plan can help financially protect your loved ones and ensure your legacy is left behind in the way you intended it. Remember, any plan is better than no plan. The biggest mistake you can make when it comes to estate planning is not having a plan at all.
