Many people may think they are not wealthy enough to worry about estate planning. However, it's important to realize almost everyone has an estate, regardless of net worth. Estate planning also accounts for more than your assets: It can be a way to ensure quality of life in your final years.
Alternatively, some may consider estate planning to be depressing or morbid. In reality, this process affords the opportunity to focus on what you most love in your life – from your greatest professional accomplishments to the people you hold most dearly. Through estate planning, you can ensure your assets, your business and your family will continue to be taken care of in your absence.
Establishing your beneficiaries
The first step to estate planning is to draft a will. However, creating your will does not mean you are making the final decisions for your estate. In fact, a will is a living document and can be updated throughout the course of your life. For example, you may update your will to accommodate for additional legatees such as children or grandchildren born after the document was first drafted.
"A will is a living document and can be updated throughout the course of your life."
When someone dies without a will in place, the estate goes into intestacy. In this event, your state government will administer what remains of your estate after accounting for enforceable debts and funeral expenses. If you die intestate, or without a will, there is no legal record of your final wishes.
With the exception of assets that name a beneficiary, such as life insurance policies, applicable state laws will determine who inherits your property. If your beneficiaries have to contest the state's decisions in probate court, attorney fees and other administrative costs may reduce their inheritance. State laws also vary, so without a will in place, your assets may not go to the people you would have chosen. For example, while some states have community property rights that ensure spouses inherit at least half of the estate, this is not guaranteed across the country.
Drafting your will allows you to establish who will serve as executor of your estate and for your assets to be distributed to whomever you choose.
How estate planning comes into effect before your death
While many think a estate planning does not become relevant until after the property holder's death, your estate plan may also specify the management of your estate during your lifetime and assure your end-of-life wishes will be carried out.
Through a living will, you can provide health care directives for your loved ones if you are no longer able to make these decisions yourself. A living will establishes what medical care you do or do not wish to receive, including transfusions of blood, palliative care, diagnostic tests or respirator use. This document may also include a do-not-resuscitate order or establish a durable power of attorney for health care, which names the person who will make medical decisions on your behalf. By drafting a durable power of attorney (POA) you can also give a trusted person authority to handle your finances and property if you become incapacitated and unable to handle your own affairs.
"A living will establishes what medical care you do or do not wish to receive."
Additionally, your will can also be used to establish a trust, which allows you to transfer legal title of your property to another person during your lifetime. Through a trust, you can gain more control over how your assets are managed or invested during your life, in addition to passing on assets while skipping the probate process. Trusts can also establish specific restrictions on how your assets will be inherited. For example, you may establish a trustee who oversees your children's inheritance until they reach legal age. You may also set limits on how your children can spend their inheritance, such as by setting aside fixed amounts for education or philanthropy.
For more information on estate planning, please contact a LaPorte tax services professional. Check back soon for a second blog detailing how to optimize estate planning for tax protections.