How to Secure Your Legacy: Estate Planning 101
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When it comes to managing your personal finances, many people focus on the here and now. After all, if you’re living paycheck-to-paycheck or trying to pay down credit card debt aggressively, it’s only natural to be focused on more short-term needs. However, one longer-term topic that becomes increasingly important to consider as you age is estate planning.
In a nutshell, estate planning involves organizing, protecting, and managing your finances so that if something were to happen to you your financial wishes are in order and easy to act upon. This can come into play after you pass away or in your current life, such as in a life-altering accident that impacts your decision-making ability.
While it can be a bit morbid to consider, coming up with an estate plan can actually provide you with peace of mind. This is because it lets you live your life knowing that your assets will be appropriately distributed and managed if you pass. Estate planning can get incredibly complicated depending on your personal situation, but the following blog distills the topics into its most essential concepts. If you’re not sure where to start when it comes to formulating your own estate plan, here’s a great place to begin.
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The basics of estate planning
What is an estate anyway? While the word “estate” may sound like it just refers to your home, your estate actually encompasses everything you own. The foundation of a good estate plan will cover everything from your house and any vehicles you own to your investments, bank accounts, personal belongings, life insurance policies, and more. Listing your accounts and major assets can be a good first step in making your estate plan. After all, if you don’t have a full understanding of the scope of your assets, you won’t be able to ensure that they’re properly managed.
A common misconception is that estate planning is only necessary if you are wealthy. However, in actuality, everyone can benefit from estate planning. Put simply, if you have belongings or financial assets and you have a family, an estate plan can be a valuable tool. Estate planning can quickly get complex, but focusing on each element one by one can help you make it more manageable.
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Key parts of an estate plan
Estate planning is frequently thought of as just writing a will. While a will is certainly a major component of estate planning, it is just one of many elements you may want to consider as you create a plan for managing your financial affairs. Here are the four areas you should consider as you consider what your estate plan will contain, including your will.
Wills
You may consider two types of wills as you create your estate plan. The first, the last will, is a detailed accounting of your belongings and assets and what should be done with them upon your passing. This often involves splitting up your bank accounts and real estate amongst various family members or your surviving spouse. You may also discuss guardianship of any minor children should you pass away before they reach legal adulthood.
The other type of will you may want to consider writing is a living will. A living will is a legal document that is more concerned with future health care decisions, should you ever become incapacitated, you cannot decide upon healthcare for yourself. This document can be addressed to loved ones or doctors, and it communicates your wishes and preferences regarding certain kinds of care — and the associated costs.
Trusts
Beyond writing up a will, it may also make sense to consider establishing a trust. Trusts are a flexible tool to leverage when managing your finances in life and after you’ve passed. Some trusts protect your assets, while others are earmarked for family members, non-profit organizations, and charities. Here are the five most common kinds of trusts that you may be interested in utilizing in your estate plan:
- Revocable living trust: This kind of trust avoids probate (which can be time-consuming) by allowing you to have control of your assets in life while simultaneously ensuring a smooth transfer when you die.
- Irrevocable trust: Unlike a revocable trust, this kind of trust can generally not be changed without approval from its beneficiaries. This can often help manage life insurance policies, as it also comes with certain tax benefits and other protections.
- Charitable remainder trust: This type of trust helps you support charitable causes while you’re alive without preventing you from earning interest or receiving income from your assets.
- Testamentary trust: A testamentary trust would be included with your will, as these are only formed once you pass away. Many times, testamentary trusts are meant to provide for children or other specific individual needs.
- Special needs trust: If one of your loved ones has a disability, a special needs trust can help provide for their well-being without disqualifying them from government aid.
As you can see from the various types of trusts listed above, some people will and others won’t need certain kinds of trusts. This ultimately comes down to your situation and desires, so it’s a good idea to understand at least the basics of the options available to you.
Beneficiary designations
Designating beneficiaries is a major component of coming up with your estate plan. This is one aspect of estate planning that does require some regular maintenance. Families joke about taking members out of the will for various small indiscretions. However, there are certainly times when you may need to alter beneficiary designations, such as the birth of another child or the death of a spouse.
One thing to note about your beneficiaries is that they should also stay up-to-date with your employer on life insurance policies, 401k retirement accounts, or other retirement plans. This is because discrepancies between your written will and what you designated with the institutions managing these assets can cause major issues with sticking to the plan.
Powers of attorney
Giving someone power of attorney over your estate is a serious commitment. That’s because someone who has power of attorney is able and expected to act on your behalf should you become incapacitated. This includes both financial and medical matters, so it is necessary to share your wishes with them to avoid being taken advantage of. When you give someone power of attorney, you can choose whether it is temporary or enduring. You also can decide how focused or broad the power of attorney is.
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How to protect your assets
One thing you may want to consider as you work on your estate plan is how to protect your assets. If you aren’t careful, you may find that estate taxes can eat up some of your finances, which ultimately minimizes the impact your financial plan has on your loved ones. Working with a financial advisor can help you explore ways to reduce the impact of the federal estate tax or any other state laws that may affect you and your finances.
A common strategy to minimize your tax liability as part of your tax planning is to utilize trusts and gifting. Many states have lifetime annual gift exemptions, so distributing wealth via gifts can help reduce the income taxes your guarantors face. An irrevocable life insurance trust can also remove the tax implications of your death benefits. Depending on how large your life insurance policy is, placing your payout in this kind of trust can be a big win for reducing taxes owed upon your passing.
Beyond using trusts and strategically avoiding the gift tax, one final way to protect the value of your assets is to donate to charities. Charitable giving can reduce the amount of your estate taxed while simultaneously giving you a mechanism to support the causes that matter to you.
How to choose your executor and trustees
When it comes to choosing your executor, there are many factors to consider. Many people default to giving this important duty to a close family member; however, due to the private and potentially contentious nature of who gets what when you pass, there may be reasons to pick a close family friend instead.
What does the executor do?
As far as the role of the executor is concerned, the biggest responsibility is to manage your estate. This will be done per your will and any other written instructions you may provide and includes tasks like gathering all financial records of your existing assets and debts. An executor may also initiate the probate process to legally validate your will and ensure that the distribution process is properly handled in a timely manner.
Beyond getting the ball rolling with your will, there are a few other tasks that an executor is responsible for. They will need to notify your beneficiaries and creditors of your death, and they’ll also be the person to file your final tax return. Since an executor has a fiduciary duty to execute your will and distribute your tax assets, it is a role that should be taken seriously.
Professional or family trustees
When it comes to trusts, you may decide to choose a professional trustee, or you may pick a family trustee to manage your assets and trust. If you pick a family member, you often pick someone who fully understands your values and ethics. This can be helpful if you want your trust to support certain causes.
On the other hand, a professional trustee has expertise and experience in trust administration. If you think that your family dynamics may muddle or overcomplicate how your assets are managed, having an objective professional handle these financial matters could ultimately be the smoothest choice.
When should you be reviewing your estate plan?
It’s important to review your estate plan regularly to keep it in accordance with your values, wishes, and changing financial circumstances. Here are some of the most common events and reasons that may cause you to review and revise your estate plan.
- Life changes: If you are married, have a child, get divorced, or face the death of a loved one previously named in your will, you’ll want to make amends to your estate plan.
- Legal changes: Sometimes, laws around certain exemptions or the probate process change, which may mean that altering an aspect of your will is in your best financial interest.
- Asset changes: If you sell a home or buy another home or piece of major property, you’ll need to update your list of assets.
- Health changes: A new diagnosis may change how you want your medical care managed in the future, triggering a need to update your estate plan.
Once you’ve created an estate plan, it’s easier to think about the sorts of life events that would cause you to need to make an update. This is yet another reason that getting started early when it comes to estate planning is in your best interest overall.
Making updates to your estate plan
When you need to update your estate plan, an attorney who specializes in estate planning can help. Working with a knowledgeable attorney ensures that you stay up-to-date with all current laws while still being tailored to your needs. An attorney will also enable you to navigate any new complexities that weren’t present the first time, giving you the peace of mind that everything is being handled appropriately.
Talking about your estate plan
Some people think that discussing their estate plans is inappropriate, so they stay tight-lipped to maintain privacy. While it’s understandable to want to keep some financial matters private, it’s important to communicate with your family and loved ones about your estate plan to ensure that your wishes are understood.
For starters, talking about your estate plan with your family allows for there to be open communication and clarity around your wishes and assets. You don’t necessarily need to speak about dollar amounts, but it is a good idea to let your family members know what your desires are so that they’re both involved and informed.
Another reason you should talk about your estate plan is that it will be important for your executor and other family members to have access to your financial documents and passwords after your death. It’s a good idea to include the contact information of other individuals who may know your estate plan and assets. These include attorneys, accountants, and financial advisors who know about your investment and brokerage accounts.
Finally, when it comes to discussing your estate plan with your heirs, it’s a good idea to focus on the nuts and bolts of personal finance as well as your own desires for how your assets should be used. This starts with simple concepts around financial literacy and the tax implications of inheritance. It continues with focusing on your values and how you want your legacy to be continued. By talking openly about these concepts, your heirs will be positively impacted by your estate plan.
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The bottom line
Estate planning can be daunting for a variety of reasons. Many people are uncomfortable thinking about death, which makes planning for something inevitable but frightening difficult to begin. Even though it can be difficult to think about, making a clear estate plan can ensure that your assets are properly organized, managed, and distributed following your death. By breaking down your estate plan into manageable chunks, you’ll be able to create a plan that honors your values, protects your assets, and ultimately provides for your loved ones.
Even though estate planning can be complicated, it doesn’t have to be. Utilizing wills and trusts to your advantage can provide a strong foundation for your estate plan. You may also want to consider powers of attorney and other tax advantages, such as maximizing your use of gifts in order to make the biggest impact after your passing. Discussing your estate plan with loved ones is also an important task to complete, as it offers you the chance to impart your values and lessons in financial literacy to your heirs.
While complex, planning for managing and distributing your assets doesn’t need to be overly stressful. Enlisting attorneys and family members you trust — and starting early — can help simplify the planning process for your estate. By learning about the basic ins and outs of estate planning, you’ll be better equipped to plan for your future and your family’s.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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