What is estate planning, and why is it important?

Summary

What is estate planning?

Estate planning is deciding which individuals or organizations will inherit your assets after your passing. It also includes your instructions for the management of your assets and care should you become unable to make medical or financial decisions.

The assets in your estate plan may include:

Why is estate planning important?

Proper estate planning will make sure that your assets end up where you want them when you’re gone. It also allows you to put instructions in place to take care of your loved ones. This can include the way you provide for them financially, as well as deciding who should take care of them, especially in the case of minor children.

If you are incapable of caring for yourself or making important financial, medical, or other major life decisions, you can nominate one or more persons to steward your finances and make decisions on your behalf.

Legal estate plan documents are needed to carry out your wishes. 

Without the right estate planning documents, some of your assets might have to go through probate. This means that a court will decide on the way your assets will be distributed, which can be a lengthy and expensive process, and it may be contrary to your wishes.

Estate planning can also reduce state, federal, and inheritance taxes. 

Additionally, the death or incapacitation of a loved one is a highly stressful event, and having an estate plan in place can prevent unnecessary conflict and confusion.

What is the role of an executor in an estate plan?

An executor of an estate is the person responsible for the administration of a person’s estate after their passing. 

The first duty of an executor is to locate the deceased person’s latest will and estate planning documentation. They must identify, collect, value, and safeguard the estate’s assets until it’s time to distribute them to the beneficiaries.

Executors must also settle the estate’s debts and liabilities and file tax returns for the estate and the deceased. The final task is distributing the deceased’s assets to the beneficiaries. 

Who needs estate planning?

Estate planning is not reserved only for the rich. 

It is beneficial for everyone who has assets (including a simple bank account) and loved ones, especially minor children, depending on them. 

If you do not have an estate plan, the government will decide what happens to your assets and dependents.

What is the difference between wills and estate planning?

Wills and estate planning differ. 

A will is a list of instructions for the distribution of your assets. 

An estate plan is a far broader action plan for your assets and dependents that could apply during your lifetime as well as after your passing.

A will is usually the least expensive option for deciding what happens to your assets. This makes it suitable for those who may have little in the way of finances, property, or investments. People with dependents should make a will to ensure their loved ones receive what is due to them. 

Once you acquire measurable assets or start a family, you should create an estate plan. 

When do you need to start estate planning?

Knowing when to start estate planning is crucial, and most financial advisors recommend that you do so as soon as you turn 18. 

As a legal adult, you are responsible for your finances, power of attorney, and healthcare. But you can start the process at any age. 

You should also update your wills and estate planning every three to five years and at every significant change in your life, such as:

What documents are needed for estate planning?

Use the following estate planning checklist to ensure you have all the correct documentation.

1. Last will and testament

2. Revocable living trust

3. Guardian designations

4. Advance healthcare directive: Living will and medical power of attorney

5. Financial power of attorney

6. Insurance policies

7. Property and title deeds

It’s also wise to create another document for your executor or nominated family member with instructions on accessing safe deposit boxes, bank accounts, investments, digital currency, passwords, and your Social Security number.

How much does estate planning cost?

Creating your estate plan can take several weeks or more. Its price varies because each person has unique requirements. 

Some attorneys ask for a flat fee for drafting the plan, while others use an hourly rate. It might be as low as $150 - $200 for a straightforward will. In contrast, an attorney may charge you $300+ per hour for a more complicated plan. 

Is estate planning tax deductible?

Certain taxes apply when a person passes away, but they may also come with exemptions. 

The exemption limit on estate tax is $13.6 million for a single person and twice that for a married couple.

Gift tax is payable when you give a financial gift to a beneficiary, but there is an exclusion limit of $18,000 per person per year, and married couples can gift $36,000 per person.

Some states levy inheritance taxes on will beneficiaries. Some may exempt children and spouses, and others may have a financial threshold before the tax kicks in.

Smart estate planning can mitigate these taxes. You could give assets to your heirs while you’re still living, make charitable donations, transfer assets to an irrevocable trust, or establish a qualified personal residence trust (QPRT).

How are survivorship life insurance policies helpful in estate planning?

Survivorship life insurance policies cover two people and will only pay out the death benefit when both of them have died. 

Married couples often choose this option to leave money to their offspring or fund the lifetime care of a family member. These insurance policies may have tax advantages.

Policyholders can cite a trust or their estate as the policy beneficiary, allowing it to pay any debts, taxes, and other expenses. This helps preserve the estate’s value, ensuring that your beneficiaries don’t have to pay those expenses from their inheritance.

Get expert financial advice

If you have assets and dependents, estate planning is the responsible thing to do. It wraps up all your intentions for your assets and heirs into a watertight legal package, allowing you to provide for your loved ones upon your death and care for yourself upon incapacitation. 

Let Unbiased match you with a financial advisor who can give you expert advice on planning your estate and managing your money.