Estate Planning: It’s Not Just for the Rich and Famous
We have all seen the headlines of celebrities passing away without an estate plan. A Google search of “dead celebrities without a will” brings up a laundry list of people that never got around to getting their affairs in order. Estate planning is often a neglected part of financial planning. It’s easy to delay answering uncomfortable questions such as “What happens to my assets and my loved ones when I die?” It’s no surprise that many Americans don’t have a will, and even fewer have an estate plan.
Who Needs an Estate Plan?
You may hear the word “estate” and think mansions and sprawling grounds, but you don’t have to be wealthy to need estate planning. Anyone with assets or a family needs an estate plan, no matter their wealth. Not only does this plan help carry out your wishes after your passing, but it can also provide benefits while you’re living.
The good news is everyone already has an estate plan in place, the catch is it’s not your plan since your assets will be distributed according to the laws of your state. With no formal estate plan, your survivors may not be able to access your assets until a personal administrator or guardian is appointed and the distribution plan is approved by the probate court. This process can last more than a year in some states. This could mean that the people most important to you, or those most in need, will not receive what you would have wished.
Conversely, an estate plan benefits you, your family, and friends by allowing you to do the following:
· Provide financial support for your friends or family members, such as a relative with special needs
· Mitigate or avoid disputes among family members
· Quickly settle issues related to your estate, therefore minimizing expenses
· Direct money to your favorite charity or religious organization
· Reduce taxes owed after your death
It is advisable to consult with a qualified attorney about your specific situation and unique goals. Estate planning, however, does not have to be complicated or expensive.
What is an Estate Plan?
It is a common misconception that an estate plan only means a will, but it can incorporate several additional elements. Another misconception is that it needs to be done to prepare for what happens when you pass away. However, a critical component of estate planning includes preparing in the event you become incapacitated. Here are five common components of an estate plan:
1. The last will and testament is a blueprint that directs who will receive your property upon your death and the specific circumstances in which they will receive it. Your will only governs property that flows through probate. For example, financial assets with beneficiaries other than your estate, jointly owned property with rights of survivorship, or assets in a trust funded during life are not distributed under the terms of your will.
2. A power of attorney (POA) authorizes someone, often called an agent, to handle your financial or medical affairs if you were to become incapacitated. Without a POA, your family members would have to institute legal proceedings and request a probate court to appoint a guardian to fulfill these responsibilities.
3. A trust is a formal arrangement allowing the trustee to hold assets. The trustee distributes assets to your beneficiaries at the time that you direct in the trust document. There are two basic types of trusts: a living trust and a testamentary trust. A living trust is funded during your lifetime and may receive your estate assets after probate is complete. It is often called a revocable trust because you retain the right to make changes or remove property during your lifetime. A testamentary trust is created after your passing and your will is approved by the probate courts.
4. A living will/advanced medical directive is a written, legal document regarding your choices for medical care if you are unable to make decisions for yourself. Advance directives guide choices for doctors and caregivers if you’re terminally ill, seriously injured, in a coma, in the late stages of dementia or near the end of life. Advance directives aren’t just for older adults. Unexpected end-of-life situations can happen at any age, so it’s important for all adults to prepare these documents.
5. If you have children, the designation of standby guardian form allows parents to designate a standby guardian. If a parent becomes unable to care for their child(ren) due to illness (specifically because of COVID-19) or an adverse immigration action, the standby guardian shall have temporary authority to act and shall assume the rights, powers, duties, and obligations existing under law between a legal custodian and a child.
Avoid these 10 common estate planning mistakes
While creating your estate plan is the first step, creating one that avoids common pitfalls and mistakes is essential! You don’t want to go through all the time it takes to create a plan to protect your loved ones, just to have it riddled with errors that end up causing them stress and headaches in the end. Make sure you are aware of these common mistakes, so you are more likely to avoid making them yourself:
1. Not discussing with family and friends — Set aside time in advance to discuss your estate plan with your spouse or anyone you’ve named executor or trustee. Also, think about notifying specific people you name in your will or trust.
2. Not updating beneficiary designations — Remember that what your will says doesn’t affect who inherits certain assets such as retirement accounts, annuities, and life insurance. These assets have separate beneficiary designation forms, and that determines who receives the account upon your death. Failure to update beneficiary designations means an asset might go to your parents or siblings, because that’s what you put on the form years ago when you first opened the account. Sometimes the asset goes to an ex-spouse, the estate of a deceased person, or other unintended beneficiaries. Other times someone is inadvertently excluded, because they were born or married into the family after you completed the form. Review your beneficiary designations every couple of years and after every major life change in your family.
3. Forgetting about final arrangements — Your loved ones will be grieving after you pass away, so planning what you would like to have happen for your funeral or burial can be a blessing for those you leave behind. Another key component to this is making sure your wishes for end-of-life care are known (i.e., hospice, assisted living, etc.).
4. Forgetting about your digital assets — Be sure to include a digital estate plan that lays out how you would like all your digital assets to be handled after you pass away. This could be anything from social media accounts, online bank or investment accounts, email accounts, and more.
5. Not funding your revocable trust — If you have created a revocable trust, it’s key to make sure your assets are in the name of the trust. This means changing the registration and/or beneficiaries on any financial accounts, the title on your home, your car, etc.
6. Forgetting about taxes — Most often, estate tax liability isn’t going to be a huge problem. Unless you have a large estate ($12.06 million per person or $24.2 million per couple), your estate will not be taxed at the federal level. Keep in mind though, unless an extension is put into place, in not too many years, the law will revert to the former $5 million exemption limit. Additionally, you should be aware if the state you and your beneficiaries live in has a state estate tax and understand what the limits are before you write your will or trust.
7. Not updating your plan — Estate Planning is not a set-it-and-forget it deal. You need to keep it current, and make sure it reflects all your life changes as they come, which could include a marriage, divorce, birth of a child, death of a family member or beneficiary, or a move to a new state. Of course, a change in your goals or in the law also means an update is in order.
How Much Will Estate Planning Cost?
The answer is, it depends. Costs will vary from state to state and by the size of your potential estate. There are many steps you can take yourself, without an attorney, such as adding beneficiaries to financial accounts. Many people, however, will need several legal documents, such as a will and/or trust, and a POA for their estate plan. Although free and online resources for these documents are available, they may not be right for your specific needs.
It’s always in your best interest to discuss your situation and goals with a knowledgeable attorney. Ask about fees and the cost of an estate plan in your first meeting. Many attorneys charge a flat fee for simple estate plans. When the estate is significant and tax planning is required, it is common for an attorney to charge hourly. If this is the case, remember that you can save a significant amount of time by organizing your documents, creating a net worth statement, and thinking ahead about your goals and potential heirs.
If you decide to use “fill in the blank” legal documents, be aware of what is required in your state for it to be valid. Many attorneys will answer questions about the legal documents you intend to use for a reasonable consultation fee.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.