Did you know that you have estate? Everyone does. It consists of everything you own, including life insurance policies. It doesn’t matter how much or how little you have, everyone has estate and everyone should be concerned with what happens to it when they die.
Our own mortality isn’t something many people like to talk or think about. Unfortunately, two things in life are certain – death and taxes. When the first occurs, you most likely want to pass your assets on to your heirs (whether they be people or organizations) exactly when and how to wish to while having your estate incur the least amount of taxes as possible.
That is where estate planning comes into play. You should be thinking about estate planning much earlier than you suspect. As early as your 40s is a good time to sit down with a financial advisor and an attorney to talk about estate planning. The items below are all documents and planning that go into your complete estate plan.
Most people are familiar with wills. In a nutshell, they say who will get what when you die. You can also stipulate guardians for your minor children. However, when you transfer wealth via a will, your estate will be settled in probate and can be tied up for a lengthy period of time. It also costs your estate money by going through probate. The percentage depends on the state but it is to your advantage to have your wealth transfer through a trust.
Also, when your estate goes through probate it becomes a matter of public record. This can create undesirable scrutiny and attention from other members of your family that may want a piece of your estate pie. While wills are important, they are really just one part of estate planning.
Assignment of Power of Attorney
A Power of Attorney gives you the ability to name someone as your agent in the event you become incapacitated or seriously ill. Your agent will be able to pay bills, deposit your checks and make other financial decisions on your behalf. There are two types of Power of Attorneys.
The first type is a Springing Power of Attorney. This becomes effective based on when you specify, typically when you become incapacitated. In this event, your agent needs to prove you have become incapacitated and you can no longer make sound financial decisions on your own. Usually, this is done with a doctor’s letter and a court determining that you are, in fact, incapacitated.
The other is Durable Power of Attorney. This type of Power of Attorney is effective immediately and your agent does not need to prove anything. If you become incapacitated without a Power of Attorney, the court will step in and appoint a guardian. This can take time and is sometime costly. Also, the person the court appoints may not have been the person you would have chosen for yourself.
Living Will and Healthcare Proxy
A living will gives directives as to how you would like your care to be handled should you become permanently unconscious or terminally ill. It gives directions for life support and more. A living will allows you to appoint an agent as healthcare proxy, thereby making medical decisions on your behalf. Clearly, it is of the utmost importance that you choose someone you trust and that you have made aware of your wishes.
A trust is a document that sets up very specific rules about how property and assets in the trust are to be distributed and managed. Setting up a trust is not sufficient – you must fund the trust as well. This simply means that things need placed in your trust to make it useful. For example, life insurance policies, retirement accounts, property, and more should be in your trust. They must be transferred into the trust’s name to make the trust document useful after your passing.
The benefits of having a trust include efficient and private wealth transfer, reducing estate taxes for couples who are married, greater control over your assets after death, ensuring that your retirement is preserved and distributed as you had intended and keeping your wealth within your family.
Two types of trusts are relevant to families and their children.
You draft and fund a living trust while you are still alive. It can be recovable or irrevocable. However, in order for you to manage the assets within the trust properly, a living trust is most often revocable. This allows you to make changes, add or transfer assets or terminate the Trust altogether. An irrevocable trust does not allow for such flexibility.
A testamentary trust is created through a will or trust that only becomes effective after death. Testamentary trusts typically are created when and if minor children or people with disabilities become heirs and are not capable of making their own financial decisions. These trusts remain effective until they expire, which will be outlined in the trust. Common terms include when the heir marries, reaches 30 years of age or graduates from college.
It’s important to choose someone as trustee that you trust to make the best decisions for your children or other heirs. Once the trust expires, the funds pass on to your heirs.
Guardian for Your Children
Your estate planning should include determining and stipulating who you would like to be guardian of your children in the event that you die prior to them turning 18. You can clearly outline this in your estate plan and your trust can be set up to fund the costs incurred by the individuals you have chosen to raise your children.
Estate planning is one of the most important things you can do to preserve the wealth you have worked hard to create. Call an attorney and a financial professional today to determine the best plan for you. Every situation is unique and they can help create an estate plan that is just as unique as you are.
Updated: March 25, 2014