With regards to finances, the future is a big part of many people’s financial planning efforts. Be it the kids’ college tuition or the day when retirement finally arrives, financial planning is all about the future.
Although college and retirement funds garner the most attention, it’s also important to make time for estate planning. Estate planning is the process of arranging for the disposal of an estate and is done to help minimize uncertainty upon an individual’s death. This planning also reduces taxes and additional expenses that might arise if a person passes away without having left a will or other means of disposing of his or her estate. Regardless of the size of an individual’s estate, there’s no reason not to have an estate plan in place. The following are some of the basics of estate planning, which should be a priority for everyone, young and old.
More than just a will
An estate plan is more than just a will. Though an up-to-date and specific will is an important element of a good estate plan, there are other elements as well. In addition to a will, an estate plan should assign power of attorney, which gives a person of an individual’s choosing the right to manage that individual’s financial affairs if they are unable to do so themselves. Power of attorney should be assigned in the case of a person’s death, but also if an unforeseen medical issue arises and a person is no longer capable of managing his or her affairs.
There are two types of power of attorney that are essential to know when estate planning. Springing power of attorney goes into effect when circumstances that the individual specified, such as incapacitation, occur. In order for this to go into effect, the agent designated must typically produce proof of an individual’s incapacitation. Durable power of attorney goes into effect immediately and the agent does not need to prove incapacitation. When choosing an agent to assume power of attorney, individuals need to make this decision wisely, choosing someone they trust who can competently manage their affairs.
Assessing your assets
Assets include a host of things, from investment accounts to real estate to retirement savings. Individuals must take careful inventory of all of their assets and determine to whom these assets should go if they die or who should gain control of them if individuals become incapacitated. This means leaving no stone unturned. If there are any questions about specific assets, then legal wrangling or even government taxation upon these assets is likely to take place.
Many people hear the word “trust” associated with financial dealings and immediately assume it only applies to the wealthy. Nothing could be further from the truth. A trust enables people to put conditions on the distribution of their assets upon their death, including when and how these assets will be distributed. In addition, a trust might just protect these assets from creditors or lawsuits and help any heirs avoid probate court, which can be a costly and tedious process. Though trusts aren’t necessarily for everyone, they also aren’t exclusive to the very wealthy.
Allocation of assets
Many people make the mistake of leaving all of their assets to their spouses upon their deaths. While this is well-intentioned, it doesn’t always work out best for those with children. An individual can leave an unlimited amount of money to a spouse upon his or her death, and that money cannot be taxed. However, when the surviving spouse dies, if he or she leaves that money to their surviving children, then they are likely going to pay significantly more in estate tax. In addition, when deciding to simply leave all assets to a surviving spouse, this is, in a sense, leaving the difficult decision of asset allocation to the surviving spouse. What’s more, should both husband and wife pass away at the same time (for example, in an accident) and all assets were left to a spouse, this can make it very difficult, contentious and costly for surviving family members to divide up any assets left behind.
Estate planning is something few people will embrace with open arms. But as morbid as estate planning might seem, it’s a necessary step for adults who want to secure their own futures should they become incapacitated or the futures of their loved ones when individuals pass away.