How will your assets and other possessions be handled when you pass? Can you be sure your financial and medical wishes will be followed if you are incapacitated? How do you save your heirs from excessive taxation?
Here are five things to know about estate planning and how to structure your final wishes.
What Is Probate?
To understand your estate planning options, it is critical to understand probate. Probate is a process followed by a court of law to settle a deceased person’s estate. While probate can be useful — for example, it allows the court to make the final decision about how to divide assets in a contentious estate — many try to avoid it. Why? Because probate can take years to finalize and can be expensive (up to 10% of the estate in some cases).
Create a Will.
A will is one of the most common forms of estate planning. A will does not keep an estate out of probate, but it provides a road map from the deceased on how they want their estate to be handled. The will names an executor, who will act on behalf of the deceased during the probate proceedings.
Include in the will all assets with a named beneficiary. Certain accounts, such as retirement plans, life insurance policies, checking accounts, savings accounts, and brokerage accounts, allow you to name a beneficiary who will receive the value of those assets after you pass. Beneficiaries do not need to go through probate.
Set Up a Revocable Living Trust.
For assets, such as a house or a car, that do not have beneficiaries named, consider setting up a revocable living trust. In a revocable living trust, the asset’s ownership transfers to the “trust,” and those who are named as beneficiaries are “trustees.” When the person who created the trust dies, the asset passes to the trustees. Revocable living trusts do not need to go through probate.
Set Up Power of Attorney.
There are two important Power of Attorneys (or POAs) to set up when creating your estate plans. The first, the financial POA, can make financial decisions for you if you are incapacitated. For example, a financial POA can pay your bills and manage your investments for you.
The second, the medical POA, represents your medical wishes. With a living will, you can direct your medical POA on your wishes in specific circumstances. Your financial and medical POAs represent your wishes, so choose them wisely.
Tax Burden in Estate Planning.
It is wise to consult with a tax attorney when creating an estate plan. Estates over $5.45 million will incur federal estate taxes. State tax thresholds differ by state. If your assets are that valuable, you will want to set up your estate to minimize your heirs’ tax burden. Working with a tax attorney will allow you to set up a plan that maximizes what you are able to pass to those you love.
Estate planning can be challenging, but working with a professional and recording your intentions helps those you leave behind. Using these tips, you’ll be well on your way to creating a plan that follows your wishes.