Have you thought about what would happen to the assets you have worked so hard to accumulate when you die? Of course, one thing is for certain: You definitely can’t take them with you when you depart from this world. Your residence, car, your vacation house, the funds in your 401k and IRA plans—all these are going to be left here when you die.
While you may assume that the people you love most are going to immediately inherit your possessions when you die, this is not always the case. Unless you specifically spell out your wishes through your will, the laws in your state is going to determine how your estate gets divided among your heirs—and there are no guarantees that you are going to like how that will be carried out.
This is why estate planning is very important. It enables you to retain control on how your estate is going to be apportioned in the event of your death or when you cannot anymore make your own financial decisions, such as when you become terminally ill and cannot communicate your wishes to your loved ones.
Many hold the mistaken notion that estate planning is only for the wealthy. Estate planning is for everyone who has something of value to leave to their loved ones. Even if your house is the only thing that you own that your children will stand to inherit, you still need to plan your estate. The following section will explain why.
Planning your estate may give you a sense of foreboding about your own mortality. However, you have to admit the fact that death can come at any time. When it’s your time to go, you will go whether you have planned for it or not. This is why it’s better to be prepared for it when you are still physically and mentally capable of allocating and deciding where your wealth should go and who should get it.
To bring home the importance of planning your estate now, consider the following advantages that it will bring:
You have the power to decide where your wealth goes and the law will respect it.
Anything that you put in your will is considered legally binding. If you decide to give all your wealth to your favorite charity and leave none to your children, they would not be able to do anything about it. If you want to include your faithful maid who has served your family all these years in your will then you can be certain that she will have a share in your wealth.
If you die intestate (without a will), the laws in your state will dictate how your assets will be distributed among your heirs. Even if you had originally wanted to provide a portion of your wealth to help care for children suffering from cancer through a foundation you have been supporting, there is a very unlikely chance that your wishes will be carried out when you die intestate.
You can plan your estate in such a way that taxes will not eat out a huge chunk of your estate.
When you die, your estate has to pay costly federal estate taxes in cash within nine months. Since not all estates have the cash to pay for these taxes, the deceased estate may have to dispose of some assets to come up with this amount so that the estate can then be distributed among the heirs.
However, there are steps that you can take now that will minimize or even eliminate the cost of the taxes that your estate has to pay when you die. Your estate planning attorney can recommend that you avail yourself of tax exemptions if you are married, reduce the size of your estate by giving away assets while you are still alive and purchasing life insurance to shoulder any estate taxes that are left. With a comprehensive estate plan suited to your personal circumstances, your heirs can enjoy what you bequeath to them without worrying that it will be substantially reduced by the tax obligations.
You get to assign people you trust as guardians for your minor children.
No one likes to think about the possibility of dying when your kids are still very young. However, this has happened to many people and the only thing that you can do to prepare for the eventuality is to secure them financially as much as possible by leaving them with a sufficient inheritance. A very integral part of this is assigning someone you trust and know to have the same care and concern for your children as you do to look after them and manage their inheritance until they come of age. If you die without assigning guardians for your children, the state will provide one for you but you won’t know if they will really care for your kids the way someone you trust would.
You get to assign a healthcare proxy as well as a living will indicating your wishes when you become incapacitated.
Estate planning does not only detail what will happen to your assets after your death. It also allows you to name a healthcare proxy which basically authorizes someone to make sound medical decisions on your behalf in the event that you cannot make them yourself. This can be your daughter, son, best friend or whoever you trust who will act in your best interest. You also get to state what type of life-prolonging medical interventions you want or don’t want to be given to you through a living will. These kinds of preparations will prevent a lot of family arguments in the event that you are not anymore able to make these decisions yourself because an illness or accident has rendered you incapable.
There are different elements in an estate plan. Wills and trusts are the most common.
Wills. A will is a legal document that shows who should get your assets and what portion of your estate they should get when you die. You also designate guardians to your minor children in your will as well as the executor or person in charge or your estate. If you die without a will, your assets will be distributed by the court among your beneficiaries following the rules in your state. It will also appoint a guardian for your children and the executor for your estate.
While the wishes of a deceased person will be respected by distributing his estate among the beneficiaries stated in his will, there are certain financial accounts that take precedence over who is named in the will. Beneficiaries named in insurance policies and financial accounts, for example, will be the ones who will receive the benefits upon your death.
Thus, it’s important to make sure that your will and your beneficiary designations in these accounts are up-to-date. Let’s say that you took out an insurance policy early in your marriage which named your wife as the beneficiary. However, she divorced you a few years ago because she found someone else. You didn’t change the beneficiary in this policy but in your will, you stipulated that everything you own would go to your new wife. You died. Your first wife is still going to receive the death benefits in your insurance policy because that takes precedence over your will.
Trusts. A trust is a legal arrangement which allows you to entrust some assets to an individual or organization. A trustee is tasked with managing the trust. A living trust is established during your lifetime while a testamentary trust is included in your will and will only go into effect upon your death.
Not everyone can use a trust as a tool to plan their estate because establishing one can be quite costly. However, if you have a substantial net worth of at least $100,000, you might consider opening one. You should also think about a trust if you have a lot of real estate assets or have a specific idea as to how you want your estate to be distributed among your heirs upon your death. A good thing about trusts is that they can greatly reduce your estate taxes and safeguard your estate from potential lawsuits and even from creditors.
There are different kinds of trusts—revocable, irrevocable, credit shelter, generation-skipping, qualified personal residence, among others—and each has its own benefits and drawbacks. It would not be a good idea to just create a trust without the help of an attorney. The complexity of trusts makes it essential that you should get legal advice and consequently legal help in setting one up.
Estate planning is an important tool in determining how your assets will be distributed upon your death. Thus, the best time to plan your estate is today. It’s also important to understand that estate planning is not a one-time activity. After you have established your estate plan, you have to review it regularly—at least once a year or every time there is a major change in your life such as marriage, death of a spouse, birth of a child or divorce.
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