The Basics of Estate Planning
While it might not be the most glamorous task, estate planning can save a plethora of complications in the wake of a loved one’s passing. Regardless of how much a person owns, if they pass away without a plan, they risk being unable to bequeath their belongings to the right people.
Failing to leave a plan for an estate means leaving loved ones unprepared for the decisions they will have to make, as well as the possibility of state and local laws creating obstacles in intended inheritance. They may also run into issues with higher-than-necessary taxes. Leaving a clear estate plan helps not only the individual in question—but also those closest—with the complexities of this process.
What Is an Estate?
The word estate, in this case, refers to everything that a person possesses. This includes land, real estate, valuables such as antiques and collectibles, as well as personal possessions such as cars, clothing, and jewelry. Financial assets are also included in a person’s estate: bank account balances, investments, business funds, and life insurance policies.
A person’s estate is basically the net worth of their belongings, minus any liabilities he or she may have, such as unpaid bills and loans. Regardless of an estate’s size, it is important to plan how those possessions are divvied up at the end of someone’s life.
What Is Estate Planning?
Estate planning is the way a person can choose what happens to their assets. This can be done by the individual or a family member, and it’s the easiest, surest way to make sure that possessions go where intended.
Often, we think of estate planning as synonymous with wills; however, a will is only part of an overall estate planning strategy, one that will ideally include a will, a living will, a power of attorney, and trusts.
Why Estate Planning Matters
Estate planning allows a person to decide how their assets are inherited. Estate planning also provides an opportunity for an individual to make decisions about their own health, future medical care, and funeral arrangements while they are still capable.
This can help ensure that their wishes are followed even if they become incapacitated. It can also make some of these decisions easier for family members that otherwise may be left to make choices without a road map. Coping with a loved one’s passing is already difficult enough; the last thing you want is to have family members squabbling over entitlements.
Considering people can die at any age, there is no ideal age at which estate planning should be done. Anyone with financial assets should consider how they want them handled in the event of their passing.
FYI: While planning an estate, there are many legal and official documents that should be organized and stored in a safe place where they can be accessed as necessary by authorized persons.
Four Key Components of Estate Planning
Depending on the size and complexity of an estate, planning its inheritance can be a complicated process. However, we recommend everyone get advice regarding the following four key components:
A will is a legally binding document that specifies what happens to a person’s assets after their death. This applies only to assets that are not owned jointly. These documents can also indicate intended guardianship of dependents.
The person the will is for is called the testator, and his or her will should name an executor, a trusted person (typically a family member or friend) that is tasked with carrying out the wishes outlined in the will. After the testator has passed away, their will is filed through probate court. This is to effectively certify the validity of the will. Once inheritance taxes have been paid and any debts settled, the executor handles the remaining provisions.
Rather than detailing what should happen to a person’s assets after death, a living will is a legal way for an individual to outline their wishes for their own health and care in the event that they are unable to communicate these kinds of these decisions due to mental or physical disability.
Living wills can provide peace of mind by giving doctors and family members a guide to what a person does or does not want to have done in order to keep him or her alive. This can range from CPR to the use of ventilators, antibiotic treatment, pain management, and organ donation.
There is a wide range of factors to consider when putting together a living will. These options should be discussed with a doctor before putting together this type of document; however, studies have shown that seniors are more likely to discuss end-of-life care with their lawyers than with their physicians.
FYI: A living will differs from a Do Not Resuscitate (DNR) or a Do Not Intubate (DNI) order. According to the Mayo Clinic, these can be included in a living will but should also be added separately to a person’s medical file with their primary physician.
Power of Attorney
A power of attorney is a legal document that differs from the two already outlined on this page. This document allows someone to appoint a person to act on their behalf in legal and medical matters. The individual designated as the power of attorney does not need to be a lawyer, but they do need to be ready and willing to make important decisions for the person in question.
Whoever is chosen as a power of attorney should be trusted and capable, as they potentially have a lot of influence over important aspects of a person’s life. This can include financial control, decisions about medical care, and management of real estate.
The scope of what a power of attorney is responsible for depends upon the specifics outlined in the document. This can be done on a temporary or permanent basis and can grant general authority to a person or give them the right to make only one kind of decision (medical, financial, or other). Power of attorney can be written so that it is effective immediately, but it can also be done in a way that is dependent upon a set of circumstances. For example: the loss of mental capacity on the part of the individual drawing up the document.
A trust can work in a similar way to a traditional will. While there is a common perception that only the wealthiest people have or set up trusts, the truth is that it is a valid option for anyone considering how best to move forward with their estate planning.
Like a will, assets are detailed and specified as part of a trust. Unlike the will detailed above, trusts do not have to go through the same process of being filed through probate court. This can save on time and, in some cases, on the taxes that go along with executing a traditional will. There are two different categories of trust to consider:
- Living Trust: The more flexible form of trust, a living trust allows an individual to name themselves as trustee and maintain control over included assets. This means that changes can be made to beneficiaries as well as the terms of the inheritance.
- Irrevocable Trust: This type of trust transfers control from the individual and requires someone else to be the trustee. These kinds of trusts can’t be altered, but they are subject to lower estate taxes than both living trusts and traditional wills.
Fun Fact: The Federal Reserve tracks and provides information on wealth inheritance and wealth concentration in the United States.
What About Taxes?
Speaking of taxes, in planning for what should happen to an estate there are a number of variables to consider. There are two kinds of taxes when it comes to estates: the estate tax and the inheritance tax.
The estate tax must be paid before the money, and other assets included in the estate are released in accordance with the will. Essentially, these are taxes paid by the deceased (or specifically by the estate itself). There is a federal estate tax that applies to assets that exceed a certain value. Some states require an additional estate tax to be paid to the state government, though the rate and thresholds for exemptions vary from place to place. It is best to check on these specifics for the location where the will is going to be executed.
Inheritance taxes are paid by the person receiving the assets from a will or trust. This tax rate will vary depending on location, and in some states, certain inheritors (such as spouses or children) are exempt from paying this tax. In others, estates are taxed in multiple ways. Maryland, for instance, requires that an estate be taxed by the federal government, by the state, and then again as it is inherited by those designated in the will.
Do Not DIY Your Estate Plan
When it comes to estate planning, DIY (Do It Yourself) is not the best approach. There are many elements and legalities to consider, and completing any step in this process incorrectly can not only cause frustration for the owner of the estate but also for their family, friends, the executor of the estate, the power of attorney, their trustees, and beneficiaries.
If the paperwork is not filled out or filed in exactly the right way, a variety of problems can arise. These include a power of attorney with too much or too little power, beneficiaries getting more or less than intended, and financial hardship brought on by unforeseen taxes.
The best way to be sure that the often-complicated financial elements of estate planning are addressed effectively is to consult with a lawyer that specializes in elder law. Finding a professional that is familiar with the requirements and process for estate planning in a specific state guarantees that nothing gets mistaken or overlooked.
Deciding what to do with a lifetime of possessions and assets is not an easy task. There are many things to consider when planning how to best prepare loved ones for the future. Most people benefit from having a combination of a will, a living will, a power of attorney, and a trust of some sort. However, each person’s situation is different, and the most effective way to prepare for any possibility is to sit down with someone qualified to help with estate planning. Remember, every state has unique laws governing the process of estate planning, so the best place to begin is with an elder law specialist.
Frequently Asked Questions
- What kinds of resources are available to help with estate planning?
There are a variety of resources available to assist with estate planning. This includes free helpful information from sites like AARP. There are also databases that provide contact information for certified estate planners by location. A lawyer specializing in elder law is the most valuable resource for this important process.
- Is a lawyer required for a will to be legitimate?
A will does not need to be written or reviewed by a lawyer to be legally binding. However, in the interest of making sure an individual’s wishes are outlined and detailed effectively, a consultation with a lawyer can be beneficial.
- How are a person’s debts taken into account in the execution of a will?
After a will is filed through probate court, the executor of the estate uses the assets included in the estate to settle any outstanding debts before fulfilling the wishes outlined by the individual with what is left.
- What happens if a person does not leave a will?
If an individual did not make plans for their estate and left no will or trust, state law will apply to that person’s assets. This includes what happens to the individual’s property and money, and it can also impact the way medical decisions are made if that person becomes incapacitated. That is why having a will, a living will, and a power of attorney are so important.
- Where should I keep my will?
A will should always be kept somewhere secure. Many people choose to store their wills with other important documents in home safes. It may also be a good idea to provide a copy to the person named as the executor of the estate, as they will need access to it in order to file it appropriately through the probate court.