Estate planning isn’t something most people want to do. It’s not quite as fun as jet skiing or traveling to Paris. Nevertheless, designating who will receive your assets upon death is extremely important. One goal is to ensure your benefactors receive the assets that minimize estate taxes, gift taxes, income taxes, and other taxes. Estate planning can help establish a strategy that can be flexibly fine-tuned as personal and financial situations change. The main concept to consider is how you want your assets distributed after passing.
Take Inventory of Your Assets
There are plenty of assets both tangible and intangible to consider when estate planning.
The tangible assets in an estate may include:
- Homes, land, or other real estate
- Vehicles including cars, motorcycles, or boats
- Collectibles such as coins, art, antiques, or trading cards
- Other personal possessions
The intangible assets in an estate may include:
- Checking accounts, savings accounts, and certificates of deposits
- Stocks, bonds, and mutual funds
- Life insurance policies
- Retirement plans such as 401(k) plans and individual retirement accounts
- Health savings accounts
- Ownership in a business
Once you create your inventory listing, an estimation of value is required. For some assets, outside valuation such as appraisals of your home and statements from financial accounts are required. If you do not have an outside valuation, estimate a value based on how you expect your heirs will value them. This can help ensure your possessions are distributed equitably among your dependents.
Account for Family Needs
After establishing what is involved in your estate, its time to think about how to protect those assets and your family.
- Do you have enough life insurance? This is important if you’re married and have monthly mortgage payments that require dual incomes. Life insurance can be even more important if you have a child with special needs or college tuitions bills.
- Name a guardian for your children when you write your will. This can help avoid costly family court fights that could drain your estate’s assets.
- Document proper planning for your children’s care.
Establish Your Directives
A complete estate plan includes strategic legal directives.
- Trusts - With a living trust, you can designate portions of your estate to go toward certain events while you’re alive. If you become ill or incapacitated, the selected trustee can take control of the trust. Upon death, the assets within the trust transfer to your designated beneficiaries.
- Medical Care Directive -This is also known as a living will, which clarifies your wishes for medical care if you become unable to make those decisions yourself. You can also give a trusted person medical power of attorney for your health care if you’re unable to make the decision yourself. The combination of these two documents can be rolled into one known as an advance health care directive.
- Durable Financial Power of Attorney -This allows someone else to manage your financials affairs if you’re medically unable to do so. The designated agent can act on your behalf in legal and financial situations. For example, your power of attorney can sign the documents on your behalf at the closing of a home sale or to sell stock.
- A Limited Power of Attorney - If the idea of giving complete control to a designated agent concerns you, a limited power of attorney imposes limits on powers of your named representative.
- Choosing the correct Power of Attorney - Your power of attorney will have the responsibility of all your financial well-being and your life. You might want to assign medical and financial representation to different people as well as a backup for each in case your primary choice becomes unavailable.
- Note - At death, a power of attorney contract terminates.
Review Your Beneficiaries
- Check your retirement and insurance accounts. These usually have beneficiary designations that you need to keep track of and update as needed.
- Correctly document beneficiary policy holders. People sometimes forget the beneficiaries they named on policies or accounts established many years ago.
- Don’t leave any beneficiary sections blank. When an account goes through probate, assets can be distributed according to the state’s rules for who receives the property.
- Name contingent beneficiaries. These backup beneficiaries are critical if the primary beneficiary dies before you do.
Note Your State’s Estate Tax Laws
Estate planning is often a way to minimize estate and inheritance taxes. Texas residents do not need to worry about a Texas estate or inheritance tax.
- At the federal level, only exceptionally large estates are subject to estate taxes. For 2021, up to $11.7 million of an estate is exempt from federal taxes.
- Some states have estate taxes. The government may levy estate tax on estates valued below the federal government’s exemption amount.
- Some states have inheritance taxes. This means that the people who inherit your money may need to pay taxes on it.
Seek Professional Help
Whether you should hire an attorney or estate tax professional to help create your estate plan depends on your situation.
- If your estate is small and needs are low, an online or packaged will-writing program may be sufficient for your needs. These programs typically account for IRS and state-specific requirements.
- If you have doubts with the process, it might be worthwhile to seek professional consultation from attorneys or tax advisors. They can help determine a proper estate strategy, especially if you live in a state with its own estate or inheritance taxes.
- For larger and complex estate that may include special childcare concerns, business issues, or nonfamilial heirs, an estate attorney or tax advisor can help navigate complicated implications.
Life continues to change and so should estate planning.
- Revisit your estate plan when major circumstance change. This can include marriage or divorce, birth of a child, loss of a loved one, receiving a new job or being terminated.
- Revisit your estate plan periodically even if there isn’t a change in circumstances. The law can change even if your situation stays the same.