Estate Planning 101 Your Complete Guide
As you work through this thing called life, you’re likely to accumulate some amount of assets, wealth, or even just family treasures.
Have you thought about what will happen to those things in the unfortunate event that you become incapacitated or, worse, die?
Enter estate planning!
An estate plan is a comprehensive strategy that allows you to legally stipulate your wishes and how you want them to be fulfilled when you die or are incapacitated from illness, an accident, or another situation that leaves you incapable of making decisions for yourself.
Improper or no estate planning can lead to assets getting into the wrong hands, family disputes, lengthy court litigation, and excess money paid in estate taxes – things that will make you turn in your grave!
Do I Need an Estate Plan?
Well, do you own anything?
If your answer is yes, then you have an estate and you’ll benefit from estate planning.
Irrespective of how tiny or massive your estate is, you’re not going to take it with you after you die.
The good news is that you don’t need to be filthy rich, married, or retired to start estate planning. Estate planning can give any adult who has things or people they want to protect control over their legacy.
A little thought and preparation now can save your loved ones a lot of financial woes, stress, and conflict in the future.
When you’re ready to work with a financial advisor and an estate attorney to write your estate plan, there are some fundamental steps in the estate planning process you must follow:
1. Understand What Estate Planning Is
Estate planning is a lot like getting fit. We all know we should do it, but most of us would rather count 1 to 1,000 backward than step in a gym.
The excuses for neglecting estate planning are varied – not owning enough assets, not being old enough to think of estate planning, not knowing where to ask for help.
But perhaps the most common reason is our uneasiness with death. Most people tend to avoid thinking and talking about some of the emotional topics estate planning entails.
But estate planning involves much more than arranging your funeral or choosing who gets what when you pass on.
It involves developing a strategy on how to best manage or distribute your assets upon your passing and how your family should approach your medical decisions if you’re incapacitated.
Estate planning is a multi-disciplinary exercise that will typically require the coordinated participation of you, your financial planning, legal and accounting advisers.
Setting up an estate plan will help protect your privacy, minimize probate costs, and find ways to save on taxes. The goal is to keep the household functioning efficiently.
2. Your Estate Planning Objectives
After understanding what estate planning is, the next step is to identify what you hope to achieve.
One of the key purposes of estate planning is to determine how your assets will be divided when you die or become incapacitated. This allows you to protect and provide for your family or people/ charities important to you.
We all have different goals in life, and the same is true when it comes to estate planning.
Your objectives can include:
Providing for your spouse, kids, or a member with special needs
Paying college tuition for your kids or grandkids
Leaving specific property, heirlooms, or financial gifts to certain relatives or friends
Avoiding the need for a court to dispense out your assets
Maintaining family business or generation wealth
Minimizing or eliminating the taxes on your estate
Donating to your local church, shelter, or other charitable organization
While your objectives are personal, you should discuss them with your spouse, adult children, or other family members as appropriate.
3. Identifying Your Assets
You can’t create a plan for distributing your assets after you die if you have no idea what those assets are. Creating a list of your tangible and intangible assets will help you track your net worth.
Get organize and compile a comprehensive list of all your personal assets and those in your broader estate, such as:
Bank accounts – checking, savings, CDs
Retirement plans (IRAs, workplace 401ks)
Stocks, bonds, and mutual funds
Life insurance policies
Business interests
Land, homes, or other real estate
Cars, boats, RVs
Art and collectibles
Oil and mineral rights
Monies owed to you
You should specify whether your assets are jointly or separately owned, their original cost, and current fair market value.
Your “estate” refers to your total assets minus any debts you owe. Dying doesn’t relieve you of all the debts owed when you were alive.
When your debts are bigger than your estate, your beneficiaries will get nothing. Fortunately, they’ll be protected from your creditors.
Keep your list of assets in a secure central location. You will provide a copy of the summary to the executor of your Will. This list could be a digital file or a piece of paper.
4. Write a Will
Establishing a Will isn’t the most exciting of tasks – but it is essential. If you die intestate (without a will), your state law will decide how your assets are distributed.
A Will is a legal record specifying the distribution of your assets to inheritors after you die.
Contrary to popular misconception, writing a Will requires thoughtful planning and thinking beyond the obvious. A Will doesn’t just deal with property, money in the bank, or other tangible assets.
A Will may include the gifting of items of significance such as family jewelry or heirlooms, appointing a guardian for minors or family pets, and powers of the executor (the person in charge of managing the estate, adhering to legal requirements and liquidating its assets).
A Will must be in writing and be witnessed. A DIY homemade Will may suffice for modest estates where not many valuable assets and heirs are involved.
But be careful; one missing or wrong word can change the entire meaning of the Will or invalidate the entire estate plan. Also, failure to observe the appropriate formalities when signing your estate planning documents can nullify them.
Finding and hiring a qualified estate planning attorney is a foolproof way to ensure that your Will will work when it’s needed.
5. Consider Other Estate Planning Tools to Achieve Your Goals
Although a will is an essential part of a solid estate plan, it’s far from being the only estate planning tool you might require.
The components of your complete estate plan will hinge on your personal circumstances, and they might include:
Gifts - Gifts are irrevocable transfers of property to others. They’re referred to as intervivos transfers since they happen while the giftor is alive. Gifts that do not count as a deduction from the lifetime exemption include gifts between married people, charitable gifts, gifts under $16,000 per person (this is the 2022 amount and subject to change) per year.
Life Insurance - Life insurance has potential roles in estate planning, including relative assurance of payment, liquidity, and tax savings. Finding the balance between need and cost is key.
Power of Attorney – This legal document lets someone act on your behalf.
Trusts - These are separate legal entities whereby a third party (trustee) manages property for the benefit of another person. There are 4 types of trusts – living, testamentary, revocable and irrevocable. Trust are versatile addition to a Will.
Letter of Instruction – This is a supplement to a Will. It helps people understand your thinking and gives direction for matters to be accomplished. A letter of instruction can indicate where the Will and other vital documents are stored as well as the contacts of advisors and maybe an evaluation of them.
An estate planning attorney can help you determine which tools are right for your circumstances and goals.
6. Evaluate Obstacles and How to Overcome Them
Obstacles are barriers to the estate planning process. They may be legal such as probate, but most stem from human variables, for instance, lack of know-how or discomfort in decision making.
The two common obstacles are:
Probate – Probate is the process after your death when a court oversees the review procedures to ensure fair allocation of your assets. This can be a ponderous process and it opens up your private affairs to public scrutiny. You can avoid the probate process by setting up a living trust and transferring all assets into it.
Conflict – Differing opinions between spouses can bring conflict in estate planning matters. Common conflicts include division of assets, executors and guardians, and the age of inheritance. Due to the personal nature of these conflicts, overcoming them can be tricky. However, consultations with people who made similar decisions or lawyers specializing in these issues can help.
7. Familiarize Yourself with All Types of Relevant Taxes
You need to be familiar with federal transfer taxes (Estate Tax, Generation-Skipping Transfer (GST) Tax, and Gift Tax) as they could significantly impact how much you pass to your heirs when you die.
The good news is that most Americans don’t have to fret about Federal Estate Tax. For deaths in 2022, the federal government will only impose estate tax at your death if your taxable estate is very large (worth over $12.06 million in 2022).
Suppose your estate surpasses the federal tax exemption limits. In that case, you may want to consider a GRAT - Grantor Retained Annuity Trust, which is a type of irrevocable trust that can help decrease the amount of taxes your heirs pay.
Federal Gift Tax is levied when you make gifts in your lifetime that exceed the exemption amount.
Generation-skipping tax (GST Tax) may be due—on top of the gift or estate or gift tax—at the highest federal estate tax rate (40 percent in 2022) when you transfer assets to an individual two or more generations from you.
If you’ve ascertained that your estate won’t owe any federal taxes, you may very well owe state estate and/or inheritance taxes. Most inheritance and state estate tax exemptions are lesser than the federal exemption.
8. Determine Existing Financial-Planning Strategies
There are various financial planning strategies you can use to plan your estate, and most have the potential to save tax dollars.
They can include:
Bypass trust – a document that’s created while the grantor is alive or is provided for in the Will
Gifting vs Bequests – both strategy has valid pros and cons
Placing finances in joint name in smaller estates
Integrating estate and income tax
Gifting fast-growing assets
Designating younger people as heirs
Step-up in basis
Paying particular attention to IRAs and other qualified plans
The strategies you choose will depend on your individual circumstances.
9. Account for Estate Risks
This step involves identifying potential risks you wish to address. Estate risks can include early death or loss of mental capacity.
Disability planning is often given less attention than planning for what happens in the event of death.
Without a disability plan in place, your assets may end up in conservatorship or court-supervised guardianship. The result is your loved ones losing control of your property.
Luckily, there are legal documents that can help reduce risks..
They include:
Health-Related Trusts – The good thing about trusts is that they can be set up for any reason. In the case of incapacity, an irrevocable living trust can provide the funding to administer your care under the supervision of a trustee.
Last Will and Testament– This legal document sets forth your wishes regarding asset distribution and beneficiaries after you pass away.
Pour-Over Will - A Pour-Over Will is a type of Will that allows for assets to be automatically transferred to a previously set-up Living Trust.
Durable Power of Attorney for Financial Matters – If you become senile, a durable power of attorney for financial matters generally removes the need for the court to appoint a guardian or conservator. If a power of attorney isn’t worded as durable, it becomes legally invalid when you become incapacitated. The durable power, on the other hand, terminates upon your death.
Durable Power of Attorney for Health Care – A general durable power of attorney isn’t recognized in medical matters. Also called a medical power of attorney, a durable power of attorney for healthcare allows another person to make medical decisions when you’re incapable of doing so yourself.
Living Will - A living will is a written, legal document that lets you state your wishes for end-of-life medical care. It details medical treatments and procedures you would and wouldn’t want to be used to keep you alive if you’re unable to make decisions or communicate.
10. Consider Establishing Separate Estate Planning for Minors
A primary goal for most estate plans is protecting and providing for loved ones and their future needs.
If your estate plan doesn’t include provisions for any minors, it should. Children are treated separately since they are considered incapable of handling their own affairs.
Start with naming a guardian for children under 18 years and providing for minors from a previous marriage. Otherwise, if there’s no surviving parent, a judge will decide who steps into that role.
And while the court may choose a close family member, that person may not be the one you’d choose to raise your kids.
Children cannot own property until they’re 18, so remember to name a guardian to manage the children’s assets till then. Your children’s financial guardian may or may not be the same individual you’ve named as their personal guardian.
Further, if they are not mature, children receiving a lump sum at 18 may be a curse rather than a blessing.
An advisor can help in planning annuitize payments or incentives to avoid destroying their lives.
11. Evaluate Anticipated Resources
We established the amount of assets you accumulated in step 3.
This step involves making projections on what resources will be available for estate planning.
This figure will be an estimate since no one knows their date of death.
The total amount predicted as available will help you ascertain the tools and strategies used.
12. Finalize the Estate Plan
This step combines estate planning tools and strategies with the original objectives (personal wishes about who gets what).
Select tools and strategies that favor your circumstance. Again, an estate planning professional can help you determine which tools are right for your circumstances and goals.
13. Implement the Plan
Implementation encompasses drawing up the legal documents by the estate attorney and the steps that the grantor must follow.
For instance, if you set up a living trust, the assets that will be part of it must be transferred in.
If, on the flip side, the estate plan necessitates more equal separation of spousal assets, then transfer from one spouse to the other must occur.
14. Review Occasionally
Once you’ve completed steps 1-13, you may feel that you have done it all when it comes to estate planning, but this isn’t the case.
Estate planning isn’t a one-shot deal; rather, it’s a lifelong process.
Things that will directly impact your estate plan are bound to happen.
The estate plan you create today is perfect for you and your family at this given point in your lives.
But come tomorrow, next month or even next year, you will undergo many experiences that will make today’s “perfect” estate plan not so perfect tomorrow.
For instance, you could win a lottery, get divorced, adopt a kid, lose your spouse. All of these stages and events will directly impact your estate plan, so it pays to review it periodically (every 2-5 years) to reflect your wishes and needs.
Now is the Time to Plan!
While estate planning may not be a priority to you right now, we recommend it to everyone.
We especially encourage conversations if you have older parents!
Whether you’re just starting out your career or have accumulated wealth over a lifetime, estate planning helps you reduce the impact of unforeseen events on you and your loved ones by preserving, protecting and managing your assets. It’s one of the most precious gifts you can give yourself and your loved ones.
Remember, life changes, and so should your estate plan.
