Estate planning is vital, but many people don’t fully understand what estate planning is and how it works.
You should realize that without an estate plan, a judge, who knows nothing about you, will determine who gets your property and who will care for your minor children.
So, let’s find out what estate planning is.
What is an Estate?
An estate is basically your net worth from a legal standpoint. It comprises all the property that you own or control, such as your home, car, bank accounts, and any small assets you have to your name.
Your estate also includes any licenses and rights you might have to intellectual property like a song or a book, and all other funds that would be generated upon your death, such as through life insurance.
All your debts are also part of your estate. It’s also worth noting that your estate property may be in your name, in a joint ownership plan, or through a trust.
So, what is estate planning?
Estate planning involves planning for the possibility of being incapacitated as well as for death.
It is one of the key steps you take to ensure your wishes regarding your healthcare and your death are honored, and that your loved ones are well taken care of after you’re gone.
A properly drawn estate plan can answer various legal questions that usually arise whenever someone dies. A proper estate planning can help you determine the following:
- How your assets are managed during your lifetime
- How and to who your property will be distributed after your death
- Who should handle your funds if you become incapacitated
- Who will handle your personal and health care if you no longer can’t care for yourself
- Who will manage your assets after your death
- How you can save taxes through the use of estate planning tools
- Who will care for your minor children after you are gone
Goals of An Estate Plan
An estate plan is drafted to achieve various goals. Here are some of the most important:
- To provide for loved ones – The most important estate planning goal is to make sure that your loved ones are provided for if you become incapacitated or die. All other goals are secondary to this goal. Your loved ones may include your spouse, children, grandchildren, nieces, nephews, and even pets.
- To reduce taxes – Another important goal of estate planning is to minimize taxes. When you reduce the amount of taxes that apply to your assets, you’ll be able to maximize the number of assets that your loved ones will get. This goal will help you attain the goal of ensuring your loved ones are provided for after you are incapacitated or death.
- To protect assets passing to heirs – An estate plan can help you protect assets going to your spouse, children, or other beneficiaries from creditors and future spouses in the event of a divorce.
- To avoid probate – Many people will do whatever it takes to avoid probate. You probably have heard several of those probate horror stories from friends, colleagues, and even the media. The stories are the main reason people try to avoid probate. That may mean that avoiding probate is one of the goals for creating an estate plan.
- To avoid family feuds – Choosing someone to manage your estate if you become incapacitated, or you pass away, and deciding how your assets will be distributed, when it will be distributed, and how your loved ones will get it after your death will play a significant role in averting family fights and expensive probate court proceedings.
What is Part of an Estate Plan?
An estate plan is composed of several vital documents, each with a different purpose. The documents include a last will and testament, a living will, a health care power of attorney, a financial power of attorney, and a trust.
Let’s take a more in-depth look at each document:
- A Last Will and Testament – This document is the most integral component of an estate It allows you to choose who will inherit your property and who will take care of your children. It also allows you to appoint an executor to ensure your wishes are implemented.
- A Living Will – This document allows you to spell out the kind of care you want if you are hospitalized and not in a position to make any decisions yourself. For example, you may have some strong religious beliefs regarding certain types of health care. You may consider including that in your living will.
- A Financial Power of Attorney – With this document, you can choose a trusted agent to make not only medical decisions but also financial decisions on your behalf. You can grant them specific access to your accounts to help make sure your bills and loan payments stay current.
- A Healthcare Power of Attorney – If you don’t like the idea of spelling out your medical treatment issues and preferences in a document, then you can capitalize on a healthcare power of attorney. A health care power of attorney allows you to choose a trusted person to make medical treatment decisions on your behalf.
- Trust – With a trust, you can set aside money and other property for individuals and charity organizations. The best thing about trusts is that they don’t go through probate, and hence your heirs will be able to receive their inheritance quite faster and without any serious issues.
Do You Need an Estate Plan?
To begin with, you should know that an estate plan is not a preserve of the rich. It is for everyone, regardless of age, or the size and complexity of the estate. An estate plan can help you accomplish the following:
- Identify the loved ones that you wish to inherit your property upon your death.
- Make sure that your assets will be transferred to your chosen inheritors, as quickly and with as few legal issues as possible.
- Avoid the time and costs that come with the protracted probate process by utilizing estate planning tools such as living trusts.
- Prescribe the forms of life-prolonging medical care that you wish to receive in the event you can’t make your own decisions when that time comes.
- Spell out the kind of funeral arrangements you would like, and how various funeral expenses are to be covered.
It is advisable to engage a reputable estate lawyer to guide and inform you through the estate planning process. This will significantly impact how accurately your most critical interests are represented.
Estate Planning Bottom Line
As you can see, estate planning plays an integral role in how you manage your money and the lives of your family members and other loved ones.
If you pass away without distributing your assets to preferred beneficiaries, the law courts of the state you live in can do the distribution on your behalf through a process known as intestacy.
Your loved ones would need to go through the legal system to claim ownership of your property, and this can be a protracted, expensive, and emotionally overwhelming process.
If you have no beneficiaries to your estate, your property could revert to the state. A simple estate plan can help in avoiding all these issues.