Why More People Should Consider Estate Plans
While many people put a lot of thought into financial planning for their retirement, they often neglect one of the most important things when considering the future, estate planning.
Nobody wants to think about topics like "What happens to my assets and my loved ones when I die?" So it comes as no big surprise to learn that almost half of Americans don't have a will, and even less have an estate plan.
So what exactly is an estate plan? How does it differ from a will?
A will is a legal document that sets forth your wishes regarding the distribution of your property and the care of any minor children. An estate plan goes much further than a will. Not only does it deal with the distribution of assets, but it may help you and your heirs pay substantially less in taxes, fees, and court costs during an already difficult time.
Anyone with assets or a family should have a will. The decision to have an estate plan is a personal one and depends on more than the potential size of an estate. Consider the following questions:
- Are there children involved?
- Is privacy important?
- If you own a business, have you thought about succession planning?
- Are there special circumstances (e.g., blended families or disabilities)?
- Do you have substantial assets approaching five million dollars in total value?
Let's go through these considerations one by one.
An especially significant life event for a married couple is the birth or adoption of a child. How would the child be provided for if either or both parents were to pass away?
A will provides the opportunity to name a guardian to take care of a child, but naming a guardian is just the first step of many. In addition to a guardian, who will assume the responsibility for the care and custody of the minor child, a proper estate plan will allow you to form a trust, either with a specific trust document or through your will. This will also allow you to name a trustee who can manage any assets the minor child may inherit until that child reaches a certain age which you designate. A guardian and a trustee are often two different individuals.
As long as the owner of the estate has documented their wishes and named the beneficiaries ahead of time, some assets can be distributed by the banks or brokerage firms that hold them. This usually allows assets to pass directly to the beneficiary without going through probate and supersedes anything in the will. For assets that do not allow for the naming of beneficiaries (such as some bank accounts and real estate), the will is what designates who will receive such assets.
Privacy and Probate
Another good reason to have an estate plan is to minimize the probate process and its unnecessary expenses. What is probate and what should be your major concerns?
Probate is a legal process that takes place after someone passes away and usually includes:
- Providing proof in that the will is valid
- Identifying and inventorying the deceased person's property
- Having property appraised
- Paying debts and taxes
- Distributing the remaining property as the will (or state law, if there's no will) directs
At times, probate may involve extensive paperwork and court appearances. There are also fees associated with certain probate assets which can usually be reduced or eliminated with proper planning. While it is nearly impossible to eliminate probate entirely, especially if you own real property, there are a number of options available to you to keep this process as inexpensive and easy as possible.
Here are just a couple of items to know about the probate process:
- Loss of privacy: Most information from the probate court is considered public information. However, with a proper estate plan, you can limit the amount of public information which will become available through your estate.
- Expense: In some states, probate fees can potentially be quite expensive, Court costs, which are really just a probate tax, are only 0.4% in North Carolina. Although this number is comparatively small, through your estate plan, this cost can also be greatly reduced.
If you own a business, it's important how to plan for what will happen to it once you have passed away. If you wish to keep the business (that you've worked so hard to build) in the family, consider creating a structure that makes it easier to transfer the business' assets to other family members.
There are many options such as a family limited partnership or a family limited liability company. Your attorney can help you make the appropriate choice that best fits your specific needs.
Two of the most common circumstances that may affect estate planning decisions are blended families (a family that includes children from a previous marriage of the wife, husband, or both parents) and concerns about disabilities. There may also be many other needs that affect a particular situation, but let's concentrate on these two circumstances.
Blended families can easily make estate planning more complicated. For example, a parent may want to leave a different inheritance to biological children than to stepchildren, or the parent may want to protect his or her biological family's inheritance in the event a spouse remarries. With the help of an attorney, a solid estate plan can help prepare for these and other scenarios.
Regarding disabilities, there are specific trusts that can be set up for the benefit of a disabled beneficiary that are structured in a way that allows the beneficiary to continue to qualify for public assistance, such as Social Security Disability Insurance. Again, your attorney can help establish a trust that will meet your specific situation.
Substantial Asset Value
The United States Congress has made numerous changes to the Federal Inheritance and Estate Tax over the last few years, but the law has recently been clarified. There is now only a Federal Estate Tax on estates with asset values larger than 5.45 million dollars for anyone that passes away after January 1, 2016. Therefore, if you and your spouse have a combined estate approaching five million dollars in total value, you should definitely seek special assistance with your estate plan.
Be sure to do your homework and organize your thoughts and plans so that you can make the most of your time when meeting with an attorney that specializes in estate planning. Estate planning can quickly become complicated, but with the help of an expert, it can result in a situation that places your mind at ease when it comes to your family and their future.