(SmartAsset) - An estate plan is important for anyone who wants their wishes to be carried out after they are gone. Without a legally enforceable estate plan in place, you run the risk of having a judge interpret state laws to decide matters such as how your possessions, property and assets will be distributed and who will raise your minor children.
In addition to allowing you to direct the wrap-up of your affairs after you are gone, having an estate plan can also reduce taxes, speed up the process of settling your estate and reduce conflict among your survivors.
A financial advisor can help you with your estate plan.
Estate Planning Basics
Planning your estate consists of making arrangements to see that your wishes are carried out after your death. Though some believe estate planning is only for those with a plethora of assets, this isn’t true; even those with modest assets can benefit from having a defined estate plan. The estate planning process isn’t about how much you have; it’s about making sure what you do have ends up where you want it. It may also decide who will be responsible for raising any minor children who survive you. An estate plan can impact taxes, the length of time it takes to settle your estate, your end-of-life medical care and how likely it is that your survivors will come into conflict over your estate.
Deciding who gets what is the focus of many estate plans. Your estate consists of the assets, property and personal belongings you own at the time of your death. This generally includes homes and other real estate, bank accounts, life insurance policies, stocks and investment accounts, retirement accounts and personal property such as vehicles and jewelry.
If your wishes for distributing these valuables are to be followed, the estate plan must be written down in a set of legally enforceable documents. Documents included in many estate plans include a last will and testament, living will, financial and medical powers of attorney and documents establishing various kinds of trusts.
Creating an estate plan can start as soon as you reach legal adulthood and continue throughout life with periodic updates to accommodate such as marriages and births. Steps in the process often include reviewing your property and wishes, drafting a will, naming an executor, assigning healthcare and financial proxies and perhaps settling other matters, such as funeral arrangements, with a letter. Signing, notarizing and safely filing documents completes the process until the next update.
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Importance of Estate Planning
The main reason to plan your estate is to make sure that your wishes are followed after you are gone.
Selecting beneficiaries, executors, guardians
An estate plan lets you decide who will handle your will or trust (or both) as executor or administrator. Absent an estate plan, a judge may use the laws of your state to decide how your assets are to be distributed, including who will be beneficiaries and, possibly, what institutions will receive something from your estate. The court may also decide who will raise your minor children or adult children who will need lifelong care.
Saving Time
Estate planning can also greatly reduce the time and cost associated with settling your estate. Without an estate plan, your estate may have to go through probate, which can take years and involve hefty legal and professional fees.
Promoting Family harmony
The potential for conflict among surviving family members is much higher without effective estate planning. Without you around to make your wishes known, and without clearly written enforceable documents describing your preferences, family members will have to come to agreement about what to do with your estate. This may take much time and energy and lead to dissent, damaged relationships and even court cases and associated costs and delays.
Minimizing Taxes
Reducing the tax your estate will pay is another potential benefit of estate planning. The federal government levies an inheritance tax of up to 40% on beneficiaries who receive distributions of estate assets in excess of an annually adjusted amount, set for 2023 at $12.92 million. Six states also impose their own estate taxes. Tax planning by, for instance, gifting part of an estate to a charity to reduce its size below the federal level, can reduce or eliminate estate taxes.
The Bottom Line
Estate planning is designed to ensure that after you are gone your wishes will still be followed. Estate planning can affect who gets assets from your estate, who will be assigned to raise minor children, how long it will take to settle your estate, the amount of taxes and legal and other fees that will have to be paid and how likely it is that family members will come into conflict over setting the estate. Without careful estate planning, these matters and others may be decided by courts applying state laws without any consideration to your preferences.
Estate Planning Tips
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A financial advisor can help you with every aspect of estate planning, from deciding what you want to do to creating the plan documents that will ensure your wishes are carried out. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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While it’s a good idea for everyone, estate planning is even more important for people who have large, valuable estates. Without adequate estate planning, high-net-worth individuals may be exposed to inheritance taxes. They may have the ability and inclination to make impactful contributions to charity through their estate plans. Gifting to family members and other beneficiaries also assumes greater importance.
By Mark Henricks
