What is estate planning? A strategy to safeguard your family and your finances, and ensure your plans for them get carried out as you wish

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Everyone, regardless of financial status or age, can benefit from having an estate plan – assuming they have assets to leave and people to leave them to.

  • Estate planning directs how your assets get distributed if you die or are incapacitated.
  • An estate plan checklist includes a will, powers of attorney, and account beneficiary designations.
  • Using an estate planning lawyer ensures your plan meets all legal requirements and stays updated.
  • Visit Business Insider’s Investing Reference library for more stories.

It’s easy to see why estate planning is so often neglected – even by people who are financially savvy in other ways. Thinking about life after your death can be uncomfortable. However, it’s one of the most important things you can do.

Estate planning isn’t just for the ultra-wealthy, either. If you have property, investments, anything of value, you need an estate plan. If you have family or dependents of any kind, you need an estate plan.

Yet, only 32% of American adults have a will or other estate planning documents, according to Caring.com’s 2020 Estate Planning and Wills Study, because they simply haven’t gotten around to it or believe they don’t have enough assets. That hesitation can cause problems down the road.

No matter how much or how little you have, estate planning determines the future of your belongings, your money, and your family after you die. It can also ensure you have a say in who makes decisions about your health and finances while you’re still alive.

Here are the estate planning basics you need to know.

What is estate planning?

“Estate” is simply a fancy word for your stuff. So an estate plan inventories everything you have, from car to home, from bank accounts to life insurance policies. And then it outlines in writing what you want done with them. It becomes your voice beyond the grave, letting you direct who handles your affairs and inherits your assets.

The major elements of an estate plan state, clearly and definitively: 

  • Who gets what when you die
  • Who should execute your wishes
  • Who will handle your affairs if you become incapacitated

Why is estate planning important?

Suppose you pass away without a will, the most basic (and some would say, most important) estate-planning document. In that case, your assets can get tied up in probate, a time consuming and potentially costly legal process in which the court ensures your final debts are paid, and assets are distributed according to state law. It can also cause disagreements among your heirs as they fight over who gets what.

Then there are federal and state estate and inheritance taxes. Although they often target ultra-high-net-worth individuals, they can impact six-figure estates too, especially on the state level. There are ways to avoid these “death taxes,” ensuring your property passes onto your heirs without the government taking a big slice of it first. But you need an estate plan to execute these moves well in advance of your demise.

What are the basic documents for estate planning?

Many people think estate planning is essentially drafting a will. It’s a good start, but it is just one aspect of a comprehensive estate plan. Here’s an overview of the basic documents you need.

  • Last will and testament. A will details where you want your assets to go after your death and names an executor who will ensure they get to the right people or charities. I can also specify whom you want to serve as guardian of your minor children.
  • Durable power of attorney. A durable power of attorney designated someone to act on your behalf, legally and financially, if you’re unable to handle your own legal and financial matters. If you don’t have a durable power of attorney, your family members may not have the authority to sign checks, file tax returns, collect your government benefits, manage your investments and handle other financial transactions if you become incapacitated. They’ll have to ask a judge to appoint someone to manage these tasks, which can be time consuming and expensive.
  • Health care power of attorney. A health care power of attorney appoints someone to make medical decisions on your behalf if you become incapacitated. This can include choosing which doctors treat you, deciding which tests to run, whether you should have surgery or certain medications or therapies.
  • Living will. A living will provides instructions on the medical treatment you do and don’t want if you can’t communicate these decisions on your own. It relieves your family members from having to make difficult decisions about your care if you are terminally ill, in the late stages of dementia, seriously injured, in a coma, or near the end of your life. It can address things like the lengths medical professionals should go through to keep you alive, pain management, and organ donation.
  • Beneficiary designations. When you purchase a life insurance policy or open a retirement account, you’re typically asked to complete a beneficiary designation form. This form names the person or persons who will inherit the proceeds when you die. Beneficiary designations override any instructions for these accounts set out in your will, so it’s important to review and update them regularly to ensure they’re distribution upon your death matches your intent.

Other important documents for an estate plan

Some other estate planning documents can come in handy, depending on your circumstances.

  • Living trust. A living trust can work as a tool for avoiding the probate process – that is, filing a will. You set up the trust, and place the assets you want to bequeath inside it. When you die, the trust distributes the assets as per your wishes. If you have a lot of assets, a trust can help you and your heirs avoid estate and inheritance taxes. 
  • Digital asset protection trust. What happens to your e-mail accounts, text messages, cloud-based storage accounts, websites, and social media accounts when you die? You can’t give them away in your will because these digital assets may not be solely owned by you but by a tech company. A digital asset protection trust can help you legally transfer domain names, social media accounts and other digital assets to your heirs upon your death.
  • Letter of intent. You may want to leave information or instructions that don’t belong in a will for your heirs. This is where a letter of intent comes in handy. You can leave funeral and burial instructions, details about financial accounts, contact information for your attorney and financial advisors, where your executor can find titles, deeds, tax returns, birth certificates, and other important records. A letter of intent doesn’t carry the legal weight of a will, but it can be helpful to your loved ones.

What are the main steps in estate planning?

OK, you have a sense of what an estate plan entails, paperwork-wise. How do you go about creating those documents, and going about estate planning in general? Here are the three fundamental steps to get you started creating an estate plan that addresses your needs and wishes.

1. Get help from an estate planning attorney

Creating an estate plan may seem like a daunting task, but you don’t have to handle it all on your own. In fact, estate planning should never be a DIY project.

But if you want it done properly, you need to call in a pro.

While you can find a lot of information and fill-in-the-blank estate planning forms online, trying to save a few hundred dollars in up-front costs can end up costing your heirs thousands later on. That’s because most states have very specific requirements that must be met for your will and other estate planning documents to be valid. If these requirements aren’t met, if the language isn’t correct or the wording is imprecise, your instructions could be thrown out and your affairs handled according to state law.

That’s why it’s important to work with a qualified attorney or financial planner to create your estate plan. If you don’t already have someone to help you, ask friends, family members, or other financial professionals you work with for a referral.

An estate planning attorney, also known as a trust and estates lawyer, also stays up to date with changes in tax laws and other legislation that could affect your assets and how you dispose of them. Working with other professionals, like accountants and money managers, they can help you develop estate-planning strategies. And also ensure your plan is reviewed regularly.

2. Identify guardians for minor children

If you have minor children, part of the estate planning process involves selecting one or more guardians for those children. If you don’t name a guardian, the court will decide who will raise your children, and you can’t assume the judge will automatically appoint the person you think would be the best choice.

When selecting guardians, many people get hung up on timing. For example, a grandparent might be a good guardian for their toddler right now but might not be the best option a decade later, when the child is a teenager. However, your guardian selection isn’t set in stone. Think about who would be the best person if something happens to you in the next two to three years. You can select new guardians at any time as circumstances change.

3. Take inventory of what you own and owe

Make a list of your assets and debts, including your financial institutions’ names, account numbers, and names of contacts there. Keep this list, along with copies of your will and other important estate planning documents in a secure location. You might also want to give a copy to the executor named in your will or make sure they know where to find them in case anything happens to you.

The financial takeaway

Estate planning is an important step in ensuring your legal and financial affairs will be handled when you die. It also makes life easier for your loved ones by drastically reducing the stress, expense, and red tape involved in handling your estate.

Drafting a will is just one component of an estate plan. If properly done, a comprehensive plan includes plenty of others, including powers of attorney, health directives, and beneficiary designations for your bank and brokerage accounts.

It might feel overwhelming to handle all of these tasks. You don’t have to handle estate planning on your own – in fact, you shouldn’t. With the help of a qualified estate planning lawyer, and other financial professionals, the process can be a lot more manageable. 

It probably won’t be the most pleasant project. Contemplating your own mortality never is. But a comprehensive estate plan can at least provide peace of mind.

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5 strategies for estate planning to get you started protecting your family and funds

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Many parts of a good estate plan can and should be set up sooner rather than later, to ensure the smooth transfer of your money and property to your heirs after your death.

  • An estate plan is important for everyone, regardless of income, to ensure your assets are distributed smoothly, fairly, and tax-efficiently to heirs.
  • Two immediate estate-planning strategies to do include naming beneficiaries for retirement accounts and powers-of-attorney if you’re incapacitated and unable to make decisions.
  • Other estate-planning strategies include establishing trusts and lifetime gifts to avoid or diminish estate taxes.
  • Visit Business Insider’s Investing Reference library for more stories.

You may think estate planning is just for the wealthy. Affluent people have more assets, true. But they aren’t the only ones who benefit from thinking about what they will pass on to their loved ones and how to make that transfer as smooth as possible.

Without an estate plan, it can be more difficult, time-consuming, and expensive for heirs to handle your financial accounts, property, and other assets, making sure everything is distributed in the way you wanted it. 

Making a will is a good first step. But an “estate plan” – really just a fancy term for getting your affairs in order – goes beyond that. It not only communicates your wishes, it organizes your finances to ensure that your estate – essentially, everything of value that you own – is handled as fairly and tax-efficiently as possible. 

Estate planning doesn’t just involve what happens after death, either. It can also cover a situation in which you are severely incapacitated, either physically or mentally, and unable to make decisions.

Here are five estate-planning strategies and key moves to keep in mind for your funds and your family. 

1. Select key players to carry out your estate plan

If you’ve drawn up a will, you’ve named an executor to it. But an important part of your estate planning process is deciding who will help you fulfill your wishes potentially while you are still living, as well as after death. These roles include appointing a:

  • Durable power of attorney (POA). This person steps in to make financial decisions on your behalf if you are temporarily or permanently unable to make those decisions independently. 

  • Health care power of attorney. This person steps in to make medical decisions on your behalf if you are temporarily or permanently unable to make those decisions yourself. It can be the same individual as the regular POA, or a different person.

  • Guardian. If you have minor children when you pass away, the guardian will raise your children and make decisions about where they live, go to school, and other activities.

Carefully consider who you want in each role and discuss it with them to ensure they are willing and able to step into the role when needed. Then have a document officially naming them drafted, signed, and notarized. 

2. Select or review the beneficiaries on your retirement accounts

The bulk of many people’s holdings are in retirement accounts, like 401(k) plans and IRAs. A beneficiary is a person (or persons) who inherits the money in the account after your death. 

Naming a beneficiary might seem like a formality. It’s not. 

It’s a legal designation that directs the account’s custodian/administrator (the financial firm holding or managing it) how to release the funds. Part of the contract between you and the custodian, your beneficiary designation trumps anything or anyone named in your will. So selecting your beneficiary is important.

You may well have named a beneficiary when you established your account – it’s usually part of the paperwork. But it pays to review it, and update any time you have a major life event, such as a marriage, divorce, or death in the family. If you leave as a beneficiary a now-ex-spouse, your heirs will have a major battle to stop the funds from going to them, and they’ll still probably lose.

If you don’t have any living beneficiaries named when you die, your retirement account can wind up in probate court, and the court will decide how to distribute it – a messy, time-consuming procedure. 

3. Familiarize yourself with the federal and state “death taxes”

The federal estate tax impacts a very small (and wealthy) segment of the population, but it’s still a good idea to familiarize yourself with it – especially since the regulations are changing in the not-too-distant future.

When someone dies, the federal government imposes a tax on their estate’s value. In the eyes of the IRS, the estate includes all the cash, real estate, investments, business interests, and other assets owned by the deceased person when they passed away. The tax applies to, and is paid by, the estate – not those who inherit it.

The estate tax only kicks in for estates of a certain size – above a certain exemption amount, in IRS-speak.

For 2021, the federal estate tax exemption is $11.7 million per individual estate ($23.4 million for a married couple’s, if they die together). However, the current exemption expires on Jan. 1, 2026. At that point, it will revert to its pre-2018 level of $5 million for individual estates ($10 million for married couples), adjusted for inflation. 

It still sounds like a lot, but bear in mind that an estate encompasses all your assets. If you’ve a business to bequeath, a six-figure life insurance policy, or property that’s appreciated a lot, your taxable estate could well hit that $5 million.

In addition to the federal estate tax, 12 states and the District of Columbia impose an estate tax.

Six states also impose an inheritance tax, which directly taxes heirs rather than the estate. So it’s a good idea to familiarize yourself with the estate or inheritance tax laws and exemptions in any state where you live or own property.

4. Take advantage of the annual gift tax exemption

One way to avoid the estate tax when you die is to give away money while you’re living.

The annual gift tax exclusion allows you to give up to $15,000 per person per year free of  – no need to report the gift. Married couples can give $15,000 each, meaning together they can give a total of $30,000 per person per year.

If you give more than that amount, you don’t necessarily have to pay taxes on those gifts, but you do have to file a federal gift tax return. Also, those gifts count toward your lifetime estate exemption limit. For example, if you give someone a $30,000 gift, your lifetime exemption amount would be $15,000 lower because that’s how much of your gift exceeds the annual exclusion. 

If you want to make a bigger gift, you can contribute up to $75,000 to a 529 college savings plan in one year and elect to treat it as if you made it over five years.

Other ways you can give money to loved ones without triggering the gift tax include:

  • Gifts to your spouse (capped at $159,000 in 2021 if your spouse is not a US citizen)
  • Tuition payments made directly to the educational institution
  • Medical expenses paid directly to the medical facility

5. Establish a trust

Another way to pass wealth smoothly to your heirs and bypass taxes is to establish a trust. Tailored to meet different estate planning needs or goals, the major types of trusts include:

  • Revocable trust: A revocable trust, aka a living trust, can be altered or canceled at any time. When you put your assets in a revocable trust, you get to keep any income they earn, and control over them. After your death, assets transfer directly to the beneficiaries you name in the trust – they won’t have to go through probate, as they would if bequeathed in a will. They will count as part of your taxable estate, however.
  • Irrevocable trust: An irrevocable trust works the same as a revocable one, but it can’t be modified or terminated without the permission of your beneficiaries. After transferring assets into the trust, they are no longer part of your estate, so they won’t be subject to estate tax.
  • Grantor retained annuity trust (GRAT): If you own stock that you expect to increase in value, you can put it in a grantor retained annuity trust. This gives you the right to receive an annuity over the trust’s term, typically two to five years. After that, the stocks in the trust are distributed tax-free to your beneficiaries. However, if you die during the GRAT term, the assets are still included in your estate.
  • Irrevocable life insurance trust (ILIT): You fund an ILIT with a life insurance policy, and the trust is both the owner and beneficiary of the policy. When you die, the trust collects the policy’s death benefit and pays it out to your beneficiaries. Life insurance benefits are always free of income tax; putting them in a trust also effectively frees them from counting towards estate taxes as well.
  • Charitable remainder trust (CRT): A charitable remainder trust allows you to get a partial tax deduction for contributions to the trust. While you’re living, you can receive income from the trust. At the end of the trust’s term, any remaining trust assets are distributed to one or more charities or non-profit organizations that you name.

The financial takeaway

Some estate-planning strategies are simple to execute. Others, such as establishing trusts, need to be done carefully and precisely – with the help of a trusts-and-estate attorney or another financial professional.

The important thing is to get started now. And remember: Estate planning isn’t a one-and-done proposition. The decisions you make this year may not meet your situation five years from now. 

Even if your life or finances haven’t federal and state laws and exemption amounts do. That’s why it’s important to review your estate plan regularly. 

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Read the original article on Business Insider