Whether you realize it or not, you have an estate. As a matter of fact, everyone does. An estate includes everything a person owns. Real estate, vehicles, bank accounts, investments, life insurance, and personal possessions, are all part of your estate.
The point is, whether it’s large or small, you do have an estate. And you can’t take it with you. In order to be in control of how your estate is divided, you’ll need to leave clear instructions. This is where estate planning comes in.
Defining estate planning
Estate planning is the act of making a plan ahead of time to name the people and organizations that will receive your property when you pass away. It also includes taking the steps necessary now to ensure the ease of carrying out the plan.
There are, however, other considerations. Good estate planning should include the following:
- Instructions regarding your personal care, as well as financial affairs should you become incapacitated.
- Disability income insurance to replace your income in the event you are unable to work because of illness or injury.
- Long-term care insurance can help pay for your care if you are incapacitated from work due to an injury or long illness.
- Life insurance is available to cover your loved ones in case of your death.
- Naming a guardian to care for your minor children and inherit the estate.
- A plan to reduce taxes, court costs, and legal fees. This could include funding assets into living trusts, updating beneficiary designations or aligning assets with your estate plan.
Estate planning is not an event, but an ongoing process. As your financial and family circumstances change, you should revisit and update your estate plan.
Good estate planning is for everyone
While people tend to think about it more as they get older, estate planning isn’t just for retirees. Unfortunately, we cannot predict how long we’ll live, and illnesses and accidents can happen to anyone at any age.
Estate planning also isn’t just for the wealthy. Due to a loss of time and funds, poor estate planning can be more detrimental to families with less assets.
Many people don’t plan properly
There are many reasons people put off estate planning. Maybe they think they’re too young or don’t have enough assets to worry about it. Others just simply don’t know where to start, or don’t want to think about. Unfortunately, this leaves their families to figure it all out should something happen.
Wills and living trusts
Although a will gives instructions, it doesn’t avoid probate. The will does not direct how assets that are titled in your name, without beneficiary designations or other governing contracts, will be distributed.
Before assets can be distributed to your beneficiaries, they must first go through the probate court in your state. Multiple probates may be necessary if you have property, usually real estate, in other states.
Each probate will need to be governed by the laws of that state. It can be costly due to attorney’s fees and executor commissions as well as court costs. It can take from a few months up to two years, or even longer.
With a few exceptions, probate proceedings can be opened to the public. Your creditors and any excluded heirs will be notified about their rights to file. This could be for payment of a debt, or a portion of your estate. The court, and not your family, determines the timeline of your beneficiaries’ distributions.
However, not everything you own will go through probate. Your will does not control jointly-owned property or assets. Life insurance, IRAs and 401(k)s, which allow you to name a beneficiary, are usually transferred without probate.
These methods of estate planning can have many issues though, so it is important to avoid joint ownership. Preventing probate cannot be guaranteed. For instance, if a valid beneficiary isn’t named, assets will need to go through probate. They will then be distributed with the rest of your estate.
The court may also require guardianship if you name a minor beneficiary. This is usually required until the child reaches the age of majority in the state. It can often be between eighteen to twenty-one years old.
This is why many families and estate planners prefer a revocable trust, which can be combined with a pour-over will. A revocable trust is a way to avoid probate at your death, including multiple probates for property located in other states.
In addition, it prevents court control over assets should you become incapacitated during your lifetime. It brings together all of your assets, even those with beneficiary designations, and helps to increase privacy. Being that it is revocable, the instructions of the trust can be modified at any time.
Pour-over wills are a backup plan in case assets are not transferred into your trust during your lifetime. They also provide that assets should be transferred into your trust upon your death.
A trust can last long after your death, unlike a probate which ends at some point. Your assets can be kept in trust by the trustee you choose until your beneficiaries reach your chosen age. This is to protect them from creditors, spouses and irresponsible spending, or to provide for future generations.
A living trust and pour-over will are not necessarily more costly than an estate plan with only a will. However, it’s more likely that you will avoid paying fees later.
An estate plan will help organize your records
Should something happen to you, would your family be able to locate your financial records, titles, or insurance policies? Planning your estate now will help organize and locate your documents, and find and correct any errors.
People don’t pay much attention to what they write on beneficiary designations and titles. Despite your best intentions, an innocuous error could cause problems for your loved ones in the event of your death or incapacity.
Many beneficiary designations are out-of-date or invalid. The wrong beneficiary can have devastating tax consequences if they are named on your tax-deferred plans. Correcting beneficiary and title designations can save you time, money, and taxes later.
Consequences of not having an estate plan
Should you become disabled
If your name appears on the title of your assets, and you are unable to conduct business because you are mentally or physically incapacitated, only a court can sign your behalf. The court will oversee and eventually control the use of your assets for your care via a conservatorship or guardianship.
This can become costly and time-consuming. In addition, even if you were to recover, a conservatorship or guardianship can be difficult to end.
Without an estate plan, assets in your name without beneficiary designations or other governing contracts, will be divided according to the state’s intestacy laws. This is usually done through a court-supervised process.
If you’re married with children, your spouse will receive a portion of the estate. This applies regardless of whether your children are minors or from a previous marriage. This means that your spouse may only receive a small portion of your estate. It might not be enough for them to live comfortably.
If you have minor children, the courts would be responsible for managing their inheritance. If one was not named, they would also choose a guardian for your children should something happen to both parents.
Since you have the option, wouldn’t you prefer these matters to be handled privately by your loved ones, and not by the courts? Wouldn’t it be better to have control over who gets what and when? If you have young children, wouldn’t you rather have control over who raises them?
Estate planning doesn’t have to be expensive
You need to realize that attempting to do your estate planning yourself to save money may end up costing your family later. There could be unexpected consequences.
A skilled estate planning attorney can provide crucial guidance and ensure that your documents are properly prepared to achieve your goals.
Now is the time for an estate plan
Most of us don’t like to think about our mortality or the possibility that we will be unable to make our own decisions. Many families are caught unaware and unprepared for the unexpected.
Don’t wait. As we mentioned, estate planning can and should be a lifelong process. It is possible to put something in place and then change it later, should circumstances change. This is how estate planning should be done.
Give you and your family peace of mind
You and your family will feel secure knowing that you have a plan that has been properly prepared. It should include your instructions and protect your family.
Estate planning is one the most thoughtful and considerate acts you can make for your loved ones. Reach out to a local attorney today to begin the process.