Estate Planning Is Not Only for the Ultra-Rich

Many people believe that estate planning is reserved for the ultra-wealthy who have vast sums of money to leave to their heirs. With the rise in estate tax limits in recent years, some think they don’t have to consider estate planning at all.


The reality is that estate planning is about safeguarding your ability to ensure that decisions are made for you and your family members in accordance with your wishes if the need should arise. A good estate plan will identify a guardian for minor or special needs children and appoint someone to oversee financial implications. It will also help you minimize estate taxes, so you will have more to pass on to the people you care about.


In this post, we highlight why estate planning is essential and how it plays a role in everybody’s lives, no matter the size of your estate.


What Does Estate Planning Mean?


Estate planning is the process of creating a plan around who will receive your assets and how financial matters will be handled in the event of death or incapacitation. It’s a heavy subject to think about but establishing an estate plan is a critical part of your overall financial plan. An estate plan helps you to continue to care for your family the way you would if you were still present. Without an estate plan, you lose control over your assets, and the courts will play a role in determining who gets what and potentially also who cares for your children.


Your estate includes your home, investment accounts, bank accounts, business interests, and any other assets that you own. The essential pieces of your estate plan would outline the person(s) who can make financial and healthcare decisions if you were to become incapacitated. This is known as a Financial Power of Attorney and Medical Power of Attorney (POA). Another foundational piece is a Will, which outlines your desired asset and property distributions and gives instruction for guardianship of any minor or special needs adult children or other dependents.


Since the general goal is to leave as much as you can to your heirs, figuring out how to reduce estate taxes is a vital part of estate planning. Shifting assets from your estate into an irrevocable trust, taking advantage of annual exclusion gifts, and using the federal lifetime estate tax exemption of $12.06 million are a few tactics, but they must be done carefully.


It’s a good idea to have the guidance of an estate planning attorney and a financial advisor to ensure that these strategies are completed correctly and that they align with the rest of your financial plan. Leaving them to heirs is an effective tax strategy for those who have appreciated stock positions. The cost basis they receive will be the cost when the shares are inherited rather than when they were purchased. This can potentially lower capital gains taxes.


A financial advisor can help create a lifetime gifting plan that helps maximize the amounts given and minimizes the overall taxes. Tax planning is a significant part of estate planning and must be done strategically over several years to see the most benefits, which can be done regardless of the size of your estate.


What Estate Planning Looks Like in Practice


Getting the estate planning process started can feel overwhelming, but there are a few key areas to address. Before you get into the documents and planning, it’s essential to take inventory of your assets and understand where you’re at financially. List out what you own (bank accounts, investments, property, etc.) and what you owe (debt, mortgages), so you can begin to plan how to protect your assets.


To ensure that your wishes for your care are heeded if you are incapacitated, you’ll need to create a power of attorney for financial and healthcare decisions. Having these documents in place will help protect your assets and ensure that fundamental financial and health decisions are aligned with your wishes.


If you have minor children or special needs adult children, you’ll need a will to name a guardian for them, and you’ll have to name an executor who will be responsible for the financial side of things. The choice of a guardian for your children is critical. You’ll need to have crucial conversations in advance to ensure that the person (or persons) you name is comfortable taking on the responsibility.


The beneficiaries on various types of accounts—such as retirement accounts and insurance policies—need to be up-to-date and checked regularly for accuracy. Failure to do so can result in assets being given to outdated beneficiaries, such as an ex-spouse. It’s also recommended to have a transfer-on-death (TOD) designation established on bank accounts and taxable investment accounts to ensure a smooth transfer.


Lastly, it’s generally recommended to have a life insurance policy in place to help your family cover expenses, repay any debts, and maintain their current way of life.


“What happens if you don’t have estate documents in place and you pass away?”


If you were to pass away without estate documents in place, the state would determine how to distribute your assets. Depending on your state, there may be an exemption level for estates under a certain dollar amount that would exclude them from being subject to probate.


To make an already difficult time easier on family members and keep financial matters private, anyone with assets in their name should have the basics of an estate plan established. For the benefits it provides, the cost of creating an estate plan is minimal in most situations.


Also read: How are my assets distributed upon my death?


The Takeaway


The idea that estate planning is only for the ultra-rich is a myth. Some strategies are more effective for those with large estates, but the truth is that it’s for everyone. Creating an estate plan can help you minimize taxes, specify care of a minor or special needs child, create a privacy shield for your family, and significantly reduce the amount of time it takes to settle your estate. The estate planning process can be complex, and working with a trusted advisor and attorney can help ensure that the appropriate steps are taken and that your assets are distributed according to your wishes.

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