Estate planning isn’t just for barons and magnates. You don’t need to have Rockefeller attached to your name to take estate planning seriously. Estate planning is something that every adult should be thinking about. Good estate planning can reduce the burden on your loved ones and ensure that your wishes for health care and the disposition of your property are honored.
Without a clear, legally valid will, the disposition of your assets may not be what you want it to be. In most states, death without a will means that you have died “intestate.” When this happens, intestacy laws in the state where you live will dictate what happens to your property, bank accounts and assets after your passing. This can become a true headache for the ones you’ve left behind. The law may not actually divide your estate in a way that gives those closest to you what you intended for them to have. The probate process may also take more time.
Love and Responsibility: Why Estate Planning Is Important
There are many advantages to being proactive and thorough when planning your estate.
- Estate planning protects your beneficiaries and loved ones by leaving them with a legally binding, carefully planned process for executing your will.
- Knowing that you’re preventing any contentious situations that could arise among family members if your estate is ambiguous is often reason enough to get every last detail planned.
- Good planning can also reduce the tax burdens your beneficiaries will have after inheriting pieces of your estate.
- If you’re a parent of minor children, there is also the added incentive to make arrangements for the care of your children in the event that you should pass away before they reach 18 years of age.
There are many reasons for planning your estate, but you may not know where to start if you’re not used to working with legal or financial professionals.
How to Start Planning Your Estate
You may need to bring in a legal professional to help finalize your estate plans down the road, but you can actually begin setting the stage for an airtight estate right now.
Take a Complete Inventory of Your Assets
You can’t know what you’ll be giving away until you know what you have. Leaving a will behind means dividing up bank accounts, trust funds and savings among heirs. Start by listing all of your assets to get a picture of the decisions you’ll be making.
You may also want to make specific provisions for valuable and sentimental items. Parents of adult children can ask their children about items that they hold near and dear.
💡 You can consider “assigning” specific heirlooms or jewelry pieces to specific members of the family that have sentimental attachments.
Begin Thinking About Your Beneficiaries
Choosing beneficiaries is obvious for some people. Others need to do some deep soul searching to decide who they would like to name.
You may choose to leave all that you have to a spouse or child. If you have several children, your estate can be evenly divided. There really are no rules governing who you can choose as a beneficiary. Some people decide to include extended family, friends and neighbors in their wills.
💡 In fact, your beneficiary doesn’t have to be a person at all! Some people prefer to leave all they’ve accumulated in life to charitable organizations.
Review the Estate Tax and Probate Laws in Your State
Clarity and legal validity are the two big factors to focus on when drafting a will. It’s important to focus on using language that will ensure that your will is a legally binding, valid document based on estate tax and probate laws that exist in your state. You’ll need to know exactly what those laws demand before planning your estate.
Make sure you’re signing your will according to the rules for establishing a legally valid will in your state. A will may need to be signed by a witness in a situation that demonstrates that you are clearly not under any type of duress to ensure that your intentions will be ironclad in court.
⚠️ Keep in mind that the slightest ambiguity or “weakness” in your will could let a family member contest what you’ve written. This is where it’s helpful to work with a wills and estates attorney who can help you to create a document that can be easily executed.
Become Familiar With the Commonly Used Directives in “Wills and Estates” Speak
Estate planning comes with its own language. It will be important to know what some of these commonly used directives are. This quick review of the most commonly used terms in estate planning should give you a head start:
- Will/Testament: A legal document expressing a person’s wishes regarding how property is to be distributed after their death. A will should also name a single person to manage all property until final distribution.
- Trust: An arrangement allowing a third party (trustee) to hold assets on behalf of a beneficiary.
- Power of Attorney: A legal document permitting another person to act on your behalf.
- A Medical Care/Health Directive: A legal document designating a specific person who is permitted to make health care/medical decisions on behalf of another person if they become unable to make decisions.
- Living Will: A written statement detailing a person’s specific desires regarding medical treatment in the event that they can no longer express informed consent.
☝ Asset distribution is often the focus of estate planning, but you should also consider provisions regarding your health care.
There are hundreds of terms that lawyers use throughout the course of constructing an estate plan. You don’t need to know all of them, but you should at least feel comfortable with your knowledge of what the basic terms mean.
If you don’t understand a term that your adviser is using, ask for clarification. The assets you’re discussing are yours, and you need to know exactly what the plan is.
Keep Track of Account Beneficiaries
Many bank and investment accounts allow you to designate a beneficiary. If you have a “payable-on-death” beneficiary included on an account, that account will usually not be listed on your will. Many people prefer to designate beneficiaries for specific accounts because these accounts will not be included in the probate process and can be transferred much more quickly after your death.
⚠️ If you have designated beneficiaries on any of your accounts, be sure to review them and keep them up to date. If you’ve divorced and remarried, you may not want your 401(k) to go to your ex!
Common Estate-Planning Pitfalls to Avoid
The biggest estate-planning pitfall to avoid is not planning your estate! You can solve most estate issues simply by putting a clear, legally binding will in place. Here’s a look at some common pitfalls to steer clear of when you sit down to draft your will:
- Forgetting to update or refresh your will every few years. Family changes and additions can easily cause a document to become outdated.
- Failing to update your will when you move to a new state. Varying tax and estate laws could put the validity of your will in jeopardy. You’ll also want to review your tax strategy based on tax laws in the state you’ve moved to more recently.
- Not considering how the arrangement of your assets could stick your heirs with big tax burdens. For instance, IRAs and 401(k) accounts left to children at the peak of their earning potential can create tax burdens that could be avoided if assets were shifted.
- Not making plans in the event that a beneficiary passes away before you do.
- Failing to name a contingent beneficiary on retirement accounts and life insurance policies.
- Naming ultra-specific investments. While being specific in your will is a good thing, being too specific about some things can create unintended consequences. For instance, you might delegate 100 shares of a particular stock to a grandchild. If you sell those shares before your death, your estate may need to cover the cost of buying them back at present-day value.
- Adding too many nitpicky variables and stipulations that can create unnecessary red tape or legal conundrums.
- Leaving assets to a minor directly without addressing guardianship.
- Not adding a residuary clause that covers anything you may have forgotten to specifically name in your will.
- Not adding provisions for your own health care/end-of-life wishes.
The last time you ever look at your will doesn’t necessarily have to be the day you sign it. It’s wise to take your will out of the drawer every once in a while to evaluate what has changed since the day you had it drafted. Everything from new marriages to long-distance moves can necessitate alterations to your will.
The Pros and Cons of Seeking Professional Help With Estate Planning
Should you hire a professional to assist with planning your estate? In most cases, it’s a smart idea.
The laws and language related to estate planning are complex. Most of us don’t know enough about wills and estate laws to know when we’re making a mistake. That can mean leaving out something important or adding something that will have the opposite impact from what we intended. It’s always wise to at least have a professional look at your estate plan. You may have overlooked issues that could cause problems down the line. It’s also possible to have someone help you plan your estate step by step.
When using a professional to plan your estate, you’ll need to set aside time to meet. You’ll also need to pay for estate-planning services. If you have a relatively simple estate, that often means being billed for just a few hours of work. However, the cost is still a detracting factor for a lot of people.
The benefit of doing your own will is that you only have to pay for the cost of filing your document with your local probate court. The cost of making your own will is a lingering sense of uncertainty and fear that you might have made a mistake. Professional assistance may cost something, but it can buy peace of mind for both you and your heirs.