Estate Planning: A Comprehensive Guide for the Future

You do plenty of financial planning throughout your life. You save to buy a home. You work hard to pay off your student loans. You build an emergency fund so that you don’t have to charge unexpected expenses on your credit card. You even save for retirement, hopefully building that nest egg from the first days you enter the workforce.

That’s a lot of planning. But there’s one more financial task you need to complete: estate planning.

What Is Estate Planning?

Like other types of financial planning, estate planning helps you plan for the future. It's also a way to remove much of the burden from your children and spouse, partner or other loved ones after your death.

That's because estate planning spells out who receives your assets after you die or are incapacitated. Estate planning also outlines who will handle your responsibilities after your death.

What could happen if you don't plan out your estate? There could be disagreements or division among your survivors. If you don't spell out what happens to your home after your death, for instance, your children might fight over it, with one child wanting to sell the home and the others wanting to hold onto it.

Estate planning is also a way to make sure that you can pass on your assets to your beneficiaries in a way that minimizes the amount of estate taxes, gift taxes and income taxes these survivors must pay.

Planning what happens to your estate after your death, then, is an important step. It might not be pleasant to think of your own death. But putting off estate planning can cause plenty of problems for your loved ones.

How Does Estate Planning Work?

It's easy to confuse an estate plan with a will. A will is a document that outlines how you want your property distributed. It might also include instructions about who will care for your children if you die. It's usually a fairly simple document.

An estate plan is far more complex. It, too, outlines how you want your assets distributed. But it also focuses heavily on costs, including strategies to make sure you and your heirs pay less in taxes, court costs and fees.

How, then, does an estate plan work? First, you need to create an inventory of your assets, both intangible and tangible. This could include your home or land; cars, motorcycles, boat or other vehicles; any collectibles such as rare coins, art or antiques; the money in your checking and savings accounts; the dollars you've invested in stocks, bonds and mutual funds; your life insurance policies; and the money in your retirement accounts. Your assets might also include any businesses you own.

Your estate plan should include a directive on how these assets should be passed on. You might state that you want your savings and investments passed on equally to your children. You might leave your house to your spouse. Or you might specify that your home should be sold and the proceeds split up among your beneficiaries.

Of course, these are all complex documents. It's important to work with an attorney or an estate planning professional to draw them up.

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Benefits Of Estate Planning

It's true that estate planning requires plenty of research and thought. But this hard work brings several important benefits.

Ensuring Your Wishes Are Fulfilled

Putting your wishes in writing will ensure that your assets are distributed to the right people or organizations after you die. Not only will your assets be covered, so will your other plans. Maybe you make regular donations to a charity. You can spell out in your estate plan that you want to continue these donations.

Providing Clear Instructions For Loved Ones

Creating an estate plan is a gift to your heirs and surviving loved ones. Why? It spares them the challenges of figuring out how to divide your estate among family members and friends after your death. Say you have a vacation home. After you die, your loved ones will have to determine whether to keep the home or sell it. They’ll also have to figure out how to divide the proceeds if they do sell. If you instead indicate in your estate plan that you’d like this vacation home to be sold and the assets split evenly among your children, you’ll help avoid any future disagreements or hurt feelings.

Maybe you want to leave a certain amount of money to your spouse and differing amounts to your children. If don’t specify this in your estate plan, your survivors might harm their relationships by arguing over this money.

Simplifying Probate

The probate process kicks in after you die. During this process, a probate court will use the funds in your estate to pay your final bills and taxes. The court will also determine the value of your assets, including any real estate you leave behind. During the probate process, the court will supervise the distribution of your assets to your beneficiaries.

Creating a will and a plan for your estate and a will make the probate process a far smoother one. You can help erase any uncertainty during probate by spelling out exactly how you want your assets distributed.

Important Elements Of Estate Planning

You’re ready to plan your own estate. How do you do this? Here are some steps involved in the process. Remember, though: It’s best to work with your attorney or an estate planner while going through this list. You don’t want to skip an important step.

Create A Will Or Living Trust 

If you have young children, you should draw up a will that states who will become the legal guardian of them if you should die. If you’re married, the will should state who will care for your children if both you and your spouse die.

Make sure your estate plan also clearly indicates any specific wishes you have for the care of your children. If you want your children to attend a certain school, state this. If you want them to live with a certain relative, spell this out.

Your estate plan might also include a living trust, a document stating where your assets go while you're living. If you become incapacitated, your trustee – the person you trust to administer your living trust in such cases – will run the trust, making sure your assets and money are used properly. If you die, the assets in your trust transfer to your beneficiaries. This allows you to bypass the probate system, the court process by which your assets and property would otherwise be distributed. A trust gives you far more control.

Naming The Executor Of The Estate

You should also name an executor of your estate. This is the person responsible for carrying out the wishes you include in your will.

This is a big job: This person will handle any unfinished tasks after you die. This might include closing your bank accounts and using your assets to pay off any debts you might owe.

You'll name your executor in your will. If you don't create a will listing an executor, probate court will appoint an executor on your behalf, a person known as an administrator. The assets of your estate will then be distributed according to your state's laws. This is why it's so important to spell out how you want your assets distributed – and whom you want overseeing this process – in your will.

Naming A Power Of Attorney

You should also name a financial power of attorney. This document gives someone else the power to manage your finances if you’re no longer fit to make money decisions. This person can pay your bills and manage your assets on your behalf. 

Draft A Medical Care Directive

A medical care directive, sometimes called a living will, is important, too. It lists your wishes for medical care if you can no longer make care decisions on your own. You can also give someone you trust medical power of attorney. If you can no longer make healthcare decisions, this person can do it for you. 

Naming Beneficiaries For Non-Tangible Assets

Through estate planning, you can specify the beneficiaries of physical assets such as real estate, your cars, antiques or rare art. But you can also pass on intangible assets to specific beneficiaries. Some of these assets include life insurance policies, retirement accounts such as an IRA or a 401(k), and stock investments.

Creating Funeral Arrangements 

Do you have specific wishes for your funeral arrangements? Maybe you want to be cremated or perhaps you want to be buried in a specific cemetery. You can make these wishes clear when planning your estate.

Tips For Solidifying Your Estate Plan

Now that you know the benefits of estate planning, here are some suggestions for making sure your plan is in the best possible shape.

Keep Details Regularly Updated

Don’t get lazy with estate planning. If something major in your life changes, be sure to update your estate plan with the new information. Maybe you’ve purchased an expensive new boat or car. Update your estate plan to specify which beneficiaries get these vehicles or whether you want to sell them and split the profits among several beneficiaries. Maybe you’ve gone through a divorce. Make sure your estate plan includes your new marital status and any changes you want to make in your asset distribution because of this change. If your net worth increases significantly, you might want to update your estate plan.

Understand Your Estate Taxes

Transferring property to your heirs can come with a significant tax hit if your estate is particularly large. Most estates, though, aren't large enough to worry about estate taxes.

The IRS says that the federal estate tax is a tax on your right to transfer property at your death. Only the most valuable estates, though, pay this tax. For 2020, you'll only have to pay the federal estate tax if your assets exceed $11.58 million at the time of your death.

You might have to pay state estate taxes depending on where you live. As of 2020, 12 states and the District of Columbia charge state estate taxes. Again, though, your estate must be a hefty one to worry about these taxes. For instance, in Illinois, you only must pay state estate taxes if your estate is valued at more than $4 million. In Maryland, this figure is $5 million. In Massachusetts, though, you'll have to pay state estate taxes if your estate is worth more than $1 million.

To determine the federal estate tax you might owe after you die, you'll need to calculate the total value of everything you own or have an interest in. You'll use the fair market value of these items, not the price you paid for them or the values they had when you acquired them.

The total of these items is known as your gross estate. The items making up this estate can include the homes you own, insurance, trusts, cash, annuities and business interests.

The IRS does allow you to take certain deductions to lower the total value of your gross estate, leaving you with an amount known as your taxable estate. These deductions can include your mortgages, debts, estate administration expenses, property that you plan to pass onto your surviving spouse and money that goes toward qualified charities.

Understand Your Debt 

Your debts don’t just disappear after you die. That’s the bad news. The good news? Your children aren’t responsible for paying them.

If you have debt when you die, funds from your estate are used to pay them off. Your children or spouse aren’t responsible for paying these debts unless the debts are also in their name. For instance, if you owe money on your mortgage and your spouse’s name is also on the mortgage, your spouse is now responsible for making those payments. However, if you die with credit card debt that is in your name only, your children are not responsible for paying it off.

Dying with debt, though, could reduce the amount of money or assets you leave to your beneficiaries. You might want to leave the family home to your children. But if you owe too much money, your estate might have to sell off the home to raise enough to pay off your debts.

What Happens To Your Assets Without An Estate Plan?

If you don’t create an estate plan, you’ll have far less control over how your assets are distributed after you die. In such cases, probate court will handle this distribution based on state probate laws. This means that your assets might not be distributed in the way you wanted.

The Bottom Line

Planning your estate can take time and plenty of thought. But skipping this step comes with serious consequences: Your family members might fight among themselves over assets. The charitable contributions you made might suddenly stop, even if you wanted them to continue after your debt. The family home might be sold even if you wanted it to host birthdays, holidays and family reunions for years to come.

The bottom line? Plan out your estate and create a will. Doing this will help ensure that your wishes are carried out after you die.

Interested in learning more about money matters? Be sure to check out more Personal Finance articles on the Rocket HQ^SM blog.

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