Estate planning—also commonly referred to as legacy planning—is one of the most important elements of your financial plan. As important as it is, it can also be one of the most overlooked elements.
One reason why some people neglect estate planning is because they believe it’s an unnecessary component of their financial plan. The assumption is that estate planning is a tool used to limit (or avoid having to pay) estate taxes. For those who don’t have estates large enough to be eligible for federal or state estate taxes, an estate plan may be forgotten.
The truth is that the usefulness of an estate plan is nearly universal. Estate planning is simply the act of creating a plan that allows you to dictate how your assets are transferred after your death in the most efficient manner possible. Regardless of how many assets there are in your estate, if there’s something left after you die, having an estate plan in place can benefit both you and your heirs.
You Stay in Control
Taking the time to create a personalized estate plan provides you the ability to distribute your entire estate precisely as you see fit. If you die without a will, a court will assume the role of allocating your estate. This is known as intestate succession and the final outcome will depend on the intestacy laws in your state.
If your estate is subject to intestacy, your assets will likely still be distributed to a spouse or to your immediate family. If, however, you had specific plans for how your estate should be handled after you pass or wanted to donate a portion of your estate to charity, those wishes may not be fulfilled through intestacy.
If you currently have minor children, they will receive any assets left to them at either age 18 or 21, depending on the state. Setting up a trust within your estate plan can help you dictate when your young children can receive the bulk of their inheritance and for what expenses the money can be used.
Your Heirs Can Save Time and Money
Lacking an estate plan means that not only will it take longer to administer your estate, but taxes and fees could erode the size of your estate, likely reducing what you’re able to leave behind to your heirs.
The main culprit to a longer and more expensive settlement of your estate is probate—the legal process of distributing your assets after you die. The fees from probate are deducted from your estate, leaving less for your heirs than you otherwise intended.
The best way to avoid probate is by creating a revocable trust. Assets in a revocable trust don’t pass through probate, allowing you greater control over how your heirs receive their inheritance while reducing the amount of fees your estate may incur.
Trusts can be quite expensive to set up; whether you need one largely depends on the types of assets you own. If you have lots of assets that are covered by beneficiary designations, including retirement accounts, you’ll have less need for a trust since those assets aren’t subject to probate. On the other hand, if you own a large number of assets that would be subject to probate, including precious metals and real estate, you’re more likely to benefit from a trust.
No one wants to become a burden to their loved ones, yet ignoring your estate plan could make administering your estate a long, arduous and expensive process. Working with a financial advisor or estate planning attorney can help you identify the best strategies to ensure your wishes are met while helping to maximize the legacy you’ll leave behind.
JD, CFP®, Series 7 Securities Registration,1 Series 66 Advisory Registration,† Life and Health Insurance License Kate has been a financial planner at Wealth Enhancement Group since 2007. Previously, she assisted in the management of trusts and portfolios for high-net-worth clients. As a Senior Financial Planner, she is involved with the Roundtable™ and provides her expertise to help walk clients through the best way to organize their estates to ensure...Read More