Estate planning is important for many reasons, one of which is to ensure that your assets are distributed according to your wishes upon your death. Without proper estate planning, the distribution of your assets may be determined by the laws of your state, which may not align with your intentions. Additionally, estate planning can help reduce taxes, avoid probate and ensure that your heirs are provided for in the way that you desire. Therefore, it is crucial for your heirs that you have a plan in place for the distribution of your assets.
There are several steps that can be taken as part of an estate plan to ensure that your assets are distributed according to your wishes and that your heirs are provided for:
Write a will:
Writing a will is an important step in estate planning as it outlines how you want your assets to be distributed after your death. A will can include instructions for the distribution of your property, such as real estate, personal property, and financial assets. It can also name a guardian for your minor children, if applicable.
There are a few key elements to include when writing a will:
- Appointment of an executor: This is the person you choose to carry out the instructions in your will and manage the distribution of your assets.
- Beneficiary designations: This is where you specify who will inherit your assets and in what proportion.
- Specific bequests: This is where you can leave specific items, such as jewelry or artwork, to named individuals.
- Contingency provisions: This is where you can provide for contingencies, such as if a named beneficiary predeceases you or is unable to inherit for some other reason.
- Signature and witnesses: A will must be signed by the person making it, also known as the testator and must be witnessed by at least two people who are not beneficiaries or executors.
Creating trusts is another important step in estate planning as it can be used to protect assets, reduce taxes, and provide for your heirs in a specific way. A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries.
There are several types of trusts that can be used in estate planning, including:
- Revocable Living Trust: This type of trust allows you to transfer ownership of your assets to the trust while you are still alive. You can also change or revoke the trust at any time. This type of trust can help avoid probate and provide for your beneficiaries in case you become incapacitated.
- Irrevocable Trust: This type of trust is not changeable after it is created. This type of trust can be used for asset protection, and tax reduction, but also can be used for specific purposes such as providing for a child with special needs or providing for a beneficiary who is too young to manage their own assets.
- Charitable Trust: This type of trust allows you to make a charitable donation while also receiving tax benefits and providing for your beneficiaries.
- Generation-Skipping Trust: This type of trust allows you to leave assets to grandchildren or other future generations while avoiding estate taxes.
Naming beneficiaries is an important step in estate planning as it ensures that your assets will be distributed according to your wishes after your death. Many financial accounts, such as life insurance policies, retirement accounts, and investment accounts, have designated beneficiary forms that allow you to name the person or persons you want to receive the assets from those accounts upon your death.
When naming beneficiaries, it’s important to consider the following:
- Review your accounts: Make sure to review all of your financial accounts and make sure that the beneficiary designations are up to date and reflect your current wishes.
- Consider your beneficiaries: Think about who you want to receive your assets and how much they should receive. You can name multiple beneficiaries and specify the percentage of the assets they should receive.
- Update your beneficiaries: Make sure to update your beneficiaries when there are changes in your life, such as the birth of a child, marriage, divorce or death of a beneficiary.
- Review your beneficiaries regularly: Review your beneficiaries regularly, at least once a year, to make sure that they are still your preferred choice and that the distribution percentages are still accurate
- Check the laws of your state: Beneficiary designations can be overridden by state laws, it’s important to check the laws of your state to make sure that your beneficiaries will receive the assets you intended for them.
Review and update your plan:
Reviewing and updating your estate plan is crucial to ensure that it still aligns with your current goals and wishes. Here are some important points to consider when reviewing and updating your estate plan:
- Review your beneficiaries: Make sure that the people you want to receive your assets are still your preferred choice.
- Review your assets: Make sure that your plan takes into account all of your current assets and any changes in their value.
- Review your goals: Make sure that your plan still aligns with your current goals, such as providing for your family or making a charitable donation.
- Review your state laws: Make sure that your plan complies with the laws of your state and that it takes into account any recent changes in the law.
- Review your life situation: Make sure that your plan takes into account any changes in your life such as marriage, divorce, birth of children or grand-children, or significant changes in your assets.
Prepare a power of attorney:
A power of attorney is a legal document that allows you to name someone to handle your financial and legal affairs if you become incapacitated. This document gives the person you choose, known as your “agent” or “attorney-in-fact”, the authority to make decisions on your behalf.
There are two types of power of attorney:
- Durable Power of Attorney: This type of power of attorney remains in effect if you become incapacitated.
- Springing Power of Attorney: This type of power of attorney only takes effect upon the occurrence of a specific event, such as incapacitation.
Consider long-term care planning:
As you age, planning for long-term care becomes increasingly important. Long-term care refers to the ongoing assistance and support needed by people who are unable to care for themselves due to chronic illness, disability, or cognitive impairment. The cost of long-term care can be significant and can quickly deplete savings and assets.
There are several options to consider when planning for long-term care, including:
- Long-term care insurance: This type of insurance can help cover the cost of long-term care services, such as in-home care or nursing home care.
- Medicaid: Medicaid is a government program that can help cover the cost of long-term care for people with limited income and assets.
- Medicaid Trust: A Medicaid trust is a type of irrevocable trust that can be used to protect assets from Medicaid spend-down requirements while still allowing the individual to qualify for Medicaid coverage of long-term care.
- Reverse mortgage: A reverse mortgage can provide a source of income for people who own their home, but it may not be suitable for everyone and it’s important to consider the pros and cons before making a decision.
- Veterans Benefits: Veterans and their spouses may be eligible for benefits through the Veterans Affairs (VA) to help pay for long-term care services.
Consult with an attorney:
Consulting with an attorney who specializes in estate planning is an important step in the estate planning process. An attorney can help you navigate the legal and tax implications of your plan and ensure that your plan is tailored to your specific needs and goals.
An attorney can assist you in:
- Drafting legal documents: An attorney can draft legal documents such as a will, trust, power of attorney, and other documents that are necessary for your estate plan.
- Advising on tax implications: An attorney can advise you on the tax implications of your estate plan and help you structure your plan in a tax-efficient manner.
- Helping you understand state laws: An attorney can help you understand the laws of your state and how they apply to your estate plan.
- Reviewing and updating your plan: An attorney can review your current estate plan and update it as needed to ensure that it still aligns with your current goals and wishes.
- Representation during probate: An attorney can represent you during the probate process, which is the legal process of settling a deceased person’s estate.
It’s important to note that estate planning can be complex and that laws and regulations may change over time. It’s always best to consult with an attorney who specializes in estate planning to ensure that your plan is legally valid and complies with all necessary requirements.