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What Is Estate Planning – Basics & Checklist for Costs, Tools, Probates & Taxes


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Have you considered what will happen to your money after you’re gone? Plenty of people focus most of their energy on making more money now, and for good reason. Estate planning tends to take a backseat to seemingly more pressing matters of the here and now.

But you can’t live forever, so you need to make some vital financial and personal decisions now. There’s no better time than right now to begin developing your estate plan. You can even get started in as little as 10 minutes with a company like Trust & Will.

What Is Estate Planning?

Estate planning broadly refers to the process of preparing for the legal, financial, and personal realities of death. An estate plan is a collection of legally enforceable tools in which individuals dictate what happens to their property and financial assets after death.

Through estate planning, you create a collection of carefully documented arrangements specifically designed to address these kinds of issues.

Estate plans vary in complexity, with some only requiring a basic will, while others require a wide range of directives concerning health, family, and finances. No matter how many specific documents your plan includes, creating a plan allows you to exercise control over your estate after you die, assuming you’ve made your plan in a legal manner.

Estate planning involves multiple aspects of your financial and personal life. Individual circumstances can change frequently, as can outside circumstances related to the economy and the law. As such, your estate plan must adapt to changes and allow for contingencies.

Estate plans aren’t reserved for the wealthy or elderly. Regardless of age or personal circumstances, creating an estate plan is an essential task for every adult.

The cost of creating an estate plan varies. At the low end of the spectrum, a do-it-yourself will or estate plan with only one or two essential components, such as a will and power of attorney, may cost you in the neighborhood of $100 or so.

Hiring an attorney to draft a will or medical directive on your behalf can cost from $300 to $1,200 or more, according to legal publishing company Nolo. The more complex your estate planning needs, the higher your expenses will be. An estate planning attorney may charge a flat fee or an hourly rate, both of which have their benefits.

Online estate planners like Trust & Will tend to provide an excellent middle ground. You’re going to receive a professional plan without spending the kind of money a lawyer would charge.

When evaluating the potential cost of a DIY estate plan versus one completed by an attorney, remember that you get what you pay for. As the American Bar Association notes, the true test of how effective your estate plan is occurs after your death.

But if you don’t clearly outline your wishes for your estate after you’re gone, you could be leaving a substantial legal and financial mess for your surviving loved ones to handle.

Wills, advance directives, estate taxes, and insurance are aspects of your estate plan you need to think about. Some of us may become incapacitated, and all of us will eventually die. With multiple complicated legal matters to consider, the higher cost of an attorney-created estate plan is worth it in many situations.

But how do you decide what’s right for you? The first step is understanding the key terms associated with estate planning, and then you can complete your estate planning checklist.


What’s Involved in Estate Planning?

Many people dismiss the idea of estate planning because of an outdated assumption that “estate” only refers to palatial homes or massive inheritances. But estate planning is essential for every adult, regardless of the relative size of their actual estate. You just need to understand some key fundamentals of the process so you know where to begin.

Estates

Legally, an estate is simply the money, property, and other assets a person possesses. Estate values range widely. Every person, no matter who they are, how much they own, or where they live, leaves behind an estate.

Probate

Individual states have adopted laws that determine what happens to everything we leave behind. These laws aim to provide efficient and uniform transfer of estate property to new owners.

These are known as probate laws or the probate code. Probate laws protect your right to make decisions about what you want to happen to your estate. But they also require you to make such choices through specifically recognized methods, such as by making a last will and testament that complies with all applicable requirements.

Intestacy

Unfortunately, many U.S. adults haven’t created a will, leaving loved ones vulnerable to legal headaches after their death. According to a May 2021 Gallup poll, just 46% of all adults in the U.S. have drawn up a will. Although the percentage is highest for those aged 65 and up (76%), the numbers are dismal.

The term for someone who dies without a will is “intestate.” Due to the high number of people each year who die without legal documentation of their wishes, states have adopted laws that predetermine what happens to these estates. These laws are known as laws of intestacy or intestate succession.

Neglecting to make crucial estate planning decisions means your state’s laws will dictate what happens to everything you’ve worked so hard for. Neither you nor your loved ones have control over what these laws choose for you unless you override them with an estate plan of your own.


Estate Planning Tools

Perhaps the most crucial and obvious issue estate plans address is the matter of inheritances. Crafting an estate plan gives you the power to decide who inherits your property after you die, so consider your beneficiary designations carefully.

Perhaps you want to bequeath money to your siblings or parents. If you’re married, your surviving spouse might be the sole beneficiary. Maybe you’ll split your property among a combination of your spouse, children, grandchildren, and charitable organizations.

However you decide to allocate each part of your estate, a bit of education about the available estate planning tools can help you make these financial decisions.

The Last Will and Testament

The last will and testament, often simply called a will, is probably the most well-known estate planning tool. Chances are you already know what a will is and understand that by creating one, you can choose how to distribute your inheritance upon your death.

But making a will is a lot more complicated than just writing your wishes down on a piece of paper. Different states employ their own rules for how to make a will. Unfortunately, failure to abide by your individual state’s guidelines could render your will useless. These requirements typically include:

  • Being the age of majority (at least 18 years old)
  • Having legal capacity or being of sound mind
  • Voluntary intent (no one coerced the person into any part of the will)
  • Listing named property
  • Designating beneficiaries
  • Spousal provisions — state laws protect spouses from disinheritance
  • Provisions for minor children
  • Making your will in writing (typed and signed is appropriate)
  • Signing the document
  • Having the document signed by two competent adult witnesses

However, meeting the basic legal requirements isn’t always enough to ensure your will does what you want it to do. Take care to add other crucial documents as necessary to meet state requirements while meeting your unique needs and desires.

Trusts

Trusts are another popular estate planning tool that most people have heard of but few understand. As the IRS defines it, a trust is “a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.”

Trusts are either revocable or irrevocable. You, the grantor, can change a revocable trust, while you can’t change irrevocable trusts without the beneficiary’s consent.

You can include numerous types of trusts within an estate plan to fit specific needs.

  • Living Trust: assigns a trustee who manages your assets during your lifetime (vital for long-term care, end-of-life decisions, and the possibility of incapacity)
  • Testamentary Trust: created to appoint a trustee to manage assets before the beneficiary receives them (commonly used by those with young children to distribute assets as the children reach certain milestones)
  • Irrevocable Life Insurance Trust: a trust for ownership of a life insurance policy that can help your beneficiary avoid estate tax bills
  • Charitable Remainder Trust: an irrevocable trust that provides an income source to the beneficiary for a period, with the remainder of the estate going to a charitable organization
  • Qualified Domestic Trust: defers federal estate tax when a U.S. citizen dies and leaves the estate to a non-U.S. citizen spouse
  • Special Needs Trust: provides funds to care for a loved one with additional physical or mental needs
  • Educational Trusts: to provide funds for loved ones’ educational expenses

One of the most significant benefits of trusts over wills as an inheritance vehicle is that the beneficiaries may not have to go through the probate process. For example, a revocable living trust (also known as an inter vivos trust or just a living trust) allows you to make inheritance choices without submitting those choices to a probate court.

The probate process is open to public inspection and is often expensive and time-consuming, which is why revocable living trusts can be so useful.

Transfer-on-Death Assets

Transfer-on-death assets are sometimes known as payable-on-death assets. A transfer-on-death asset is one, such as a life insurance policy or non-retirement account, that your chosen beneficiary automatically inherits following your death.

You don’t need to make a will or trust to choose who inherits transfer-on-death assets. Simply select your beneficiary according to the asset’s rules. For example, if you have a bank account that allows you to name a transfer-on-death beneficiary, that beneficiary will inherit the money in the account upon your death.


Planning for Incapacitation

Estate plans can provide for more than your asset distribution after death. They can also prepare for health circumstances you may face while alive.

No one wants to imagine a scenario in which they can no longer mentally manage their finances or make decisions for themselves. Although it’s painful to consider, you can’t ignore the possibility.

According to the Centers for Disease Control and Prevention, 6.2 million Americans aged 65 and older have Alzheimer’s disease. That and other forms of dementia can render you incapable of managing your life. As painful as that loss of independence must be, the consequences of not preparing for the possibility may be even worse.

Powers of Attorney and Medical Directives

It’s essential to protect yourself in case you lose capacity. Different types of power of attorney and medical directives can offer peace of mind regarding the unknown aspects of your future.

A power of attorney is a legal tool allowing you (the “principal”) to bestow authority on another person (the “agent”). You might name an agent with general power of attorney or limited power of attorney to make specific decisions on your behalf and in your best interest.

Financial Powers of Attorney

With a financial power of attorney, you name someone to take charge of your finances if you can’t do so. These powers are sometimes called springing powers because they only give your agent decision-making abilities if and when you become incapacitated.

An agent with financial power of attorney might:

When selecting someone to serve in this role, don’t focus on financial ability but rather the person’s integrity and ability to put your best interests first.

Medical Powers of Attorney

Unlike financial powers, when you assign medical powers of attorney to an agent you trust, that person has the legal obligation to make decisions about your health care on your behalf. Someone with the medical power of attorney may also be called a health care proxy.

This person can discuss your medical history and treatment options with physicians, accept or refuse medical care on your behalf, or seek opinions from other health care providers. Again, trustworthiness is essential.

Durable and Nondurable Powers of Attorney

A durable power of attorney allows your agent to continue to represent you even after you become incapacitated. Durable powers are important for incapacity plans, but they are not the only type of powers available.

Nondurable powers of attorney automatically terminate if you lose capacity. An example of how people use this is when hiring a real estate agent or stockbroker. They would not retain power of attorney should the principal become incapacitated.

Advance Medical Directives

Medical powers of attorney are sometimes referred to as advance medical directives, though many types of advance directives are available. An advance medical directive is a document that contains or lists your medical wishes.

Should you lose your ability to make choices or communicate your wishes to your health care providers, your advance medical directives will serve as your voice.

You create these directives in advance of certain events and may include such documents as:

  • A Living Will. A document that states which kinds of health care treatments you wish to refuse or accept. Examples include the use of a ventilator, artificial feeding or hydration, and comfort care at the end of life.
  • A Health Care Proxy. Another term for a health care power of attorney, it’s a document that states who has the power to make medical choices for you should you become incapacitated.
  • A Do-Not-Resuscitate Order (DNR). This document tells your health care providers you do not wish to receive resuscitative treatments, such as cardiopulmonary resuscitation (CPR), in the event your heart or lungs cease functioning.

Probate Planning and Probate Avoidance

It might come as no surprise that probate laws can be complicated, cumbersome, and potentially expensive. Once you die and leave behind an estate, your inheritors cannot receive their inheritances until this probate process is complete.

Probate is a multistep process. For example, if you leave behind any debts, your creditors must have the opportunity to file a claim with the estate. Once filed, the administrator of your estate must use estate funds to pay off those debts before distribution of any inheritances.

Many contemporary estate plans focus on taking probate out of the picture as much as possible. There are many ways to do so. For example, people who properly create and fund a living trust can effectively make all (or almost all) their major inheritance transfers completely outside of the probate process.

Certain assets are not subject to probate, such as accounts with named beneficiaries (individual retirement accounts, defined contribution plans such as 401(k)s, and transfer-on-death accounts). Also in this category are life insurance policies, trusts, and assets like jointly owned properties for which the living owner has the right of survivorship (the surviving owner receives the deceased individual’s ownership rights in the property).


Tax and Financial Planning

You might think of death and taxes as the only two certainties in life, as Benjamin Franklin was said to have noted in a letter near the end of his own life. Unfortunately, the two go hand in hand if estate or inheritance taxes apply after someone’s death.

A good financial and estate plan can reduce the potential tax burden your estate might one day face. In some situations, the right strategy can allow you to avoid estate and inheritance taxes completely, allowing you to distribute your wealth as you wish.

But as with any discussion of tax issues, it’s critical to note that tax laws can and likely will change in the future. That’s one of the many reasons talking to an estate planning expert is always better than trying to craft a plan on your own.

Estate Taxes

Estate taxes, often referred to as the death tax, are widely misunderstood by the general population. When you die and leave behind an estate, that estate is worth a specific dollar amount. An estate tax is simply a tax applied to that value.

The estate tax is a tax you will never have to pay because it only applies after you die. Furthermore, your family or inheritors will not have to pay (not directly, anyway) because your estate is responsible for paying it before distributing property as inheritances.

But note that if an estate is asset-rich but cash-poor, paying the estate tax may require the liquidation of some assets. For example, if an estate holds valuable properties but very little cash, selling the family home might be necessary to cover the estate tax. Further, estate tax reduces potential inheritances.

The federal government imposes an estate tax based on the fair market value of assets, including cash and securities, real estate, insurance, trusts, and annuities. For 2021, the IRS requires estate taxes be filed if combined gross assets and prior taxable gifts in an estate exceed $11,700,000 for an individual or $23.4 million for married couples.

According to the AARP, eleven states plus the District of Columbia impose estate taxes but not inheritance taxes. The states are:

  • Connecticut
  • Hawaii
  • Illinois
  • Maine
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington state

Only Maryland has both estate taxes and inheritance taxes.

Crafting an estate plan that reduces or eliminates any potential state estate tax assessment can be vital if you want to preserve as many of your assets as possible for your heirs.

Inheritance Taxes

Leaving behind property is one thing, but what if you’re on the other side of the transaction and receiving an inheritance? Some states impose an inheritance tax, which is a tax on what a beneficiary receives.

Like estate taxes, inheritance taxes can apply at both the state and federal levels. But luckily, there is no federal inheritance tax, and only a small number of states currently have them on the books.

While Maryland imposes both taxes, as of 2021, the five states that impose an inheritance tax only are:

  • Iowa
  • Kentucky
  • Nebraska
  • New Jersey
  • Pennsylvania

Rates of inheritance tax range up to 18% of the value of the inheritance. Check your state for the current rates, and be aware that they may change.

Asset Protection

Asset protection is the process of structuring your property to protect it from those who might try to take it. Essentially, it means shielding your money from potential lawsuits or creditors who might seek to seize your assets to satisfy any debts you owe.

One of the simplest asset protection strategies is maximizing your annual IRA contribution. If you get sued and lose, the creditor cannot take the funds you have in the IRA account because such funds are exempt from collections by law.

Certain types of trusts also fall under the umbrella of asset protection. Another strategy is using a Medicaid plan to protect your assets from the often exorbitant expenses associated with nursing homes or assisted living facilities.

Final Arrangements

Your wishes regarding your death and burial should be separate from your will, as that document may not be read promptly enough to be of use. Most states allow you to write your wishes about burial or cremation arrangements and other such matters in your health care directive or a separate document for your executor.

It’s helpful to talk about these issues with loved ones while you’re able to clarify your expectations. Don’t assume your loved ones know your wishes.

Some of the final arrangements to discuss and write down might include:

  • Wishes about burial or cremation
  • Mortuary to handle burial or cremation
  • Type of memorial service or funeral you prefer
  • Details about the memorial service or ceremony

Overcoming Estate Planning Hurdles

Once you understand what an estate plan can do for you and your family, it should be clear why creating a plan of your own is essential. But knowing and doing are two separate things, especially when it comes to estate planning.

But you can overcome the hurdles keeping you from checking this essential box on your life list. Some of the reasons people put off estate planning include:

  • Procrastination. Many people procrastinate regarding unpleasant tasks. Since estate planning requires us to think about our mortality and complete quite a bit of paperwork, it’s no wonder we put it off.
  • Fear. You also may be afraid to dig into your estate. Perhaps you worry about how your family will react or feel embarrassed you don’t have a larger net worth. Or even more irrationally, you fear that creating a will makes you likely to die sooner.
  • Unrealistic Optimism. Another hurdle that may trip you up is the belief that your loved ones can take care of your estate. Maybe you assume your survivors will get along beautifully after your death rather than fighting over your assets.

Each of these hurdles can hold you back from starting your estate plan. A strategy to overcome them is to focus your attention away from yourself (and your death) and think of your loved ones instead. Consider the following:

  • What would happen to your family members and loved ones if you became sick or died?
  • Who will care for your young children if you no longer can?
  • What will happen to your pets?
  • Do your family members know what you want if something happens to you?

If you decide estate planning is something you need to do, you can take several steps to get started:

  1. List Your Possessions. First, you can make a list of all your possessions, including both your assets and liabilities.
  2. Discuss It With Your Family. Be open with your family and loved ones. Understanding what each family member wants or expects of your estate can prevent conflicts later.
  3. Talk to an Estate Planning Attorney. Because estate planning laws differ so significantly and are so complicated, speaking to an experienced attorney is often the best option. If an attorney seems out of your budget’s reach, you can ask about pricing and fees before scheduling an appointment. If after speaking to a local lawyer, you decide the process would still be too costly, you can craft a plan of your own with do-it-yourself resources available online, such as Rocket Lawyer, or through various companies.

Designing an estate plan can be complicated and confusing. Without prior experience or knowledge of estate planning issues, you risk missing key elements of your plan. Getting expert help requires an upfront investment, but skimping on this matter could cost you or your family a lot more money later.


Storage of Estate Planning Documents

After all the difficult and emotional work of estate planning and document completion, the last thing you want to do is let that work go to waste. Store legal documents like your will, power of attorney, insurance policies, and anything else detailing your financial affairs in a secure place.

Options for storage of vital estate planning documents include:

  • Fireproof, waterproof safe at home
  • Bank safe deposit box
  • Attorney’s office
  • Document management software
  • Cloud-based platform such as Dropbox or Google Drive

Another choice is an app like Everplans, which helps guide you through the estate planning process, then stores and shares the essential documents with your designated family members or others who need access. For an annual fee of $75 (after a 60-day free trial), Everplans’ digital vault provides high-quality security for the sensitive information stored in your estate plan.

Whatever storage option you choose, create a way for your beneficiaries to access vital information like bank accounts and estate planning documents. Encrypt anything digital and share passwords with your named executor to streamline the process of wrapping up your estate after you’re gone.


Final Word

Considering how much effort you put into earning money, it stands to reason you’d put the same care into ensuring the best use of your legacy. That applies no matter your age, though there may be some special considerations for younger estate planners like millennials.

At a minimum, going through an estate planning checklist clarifies your wishes to your loved ones. Instead of leaving them to question or debate what you would have chosen, you can create legal documentation of your wishes. When viewed from this perspective, many people quickly realize how essential it is to develop a comprehensive estate plan.

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