Editor’s Note: This story comes from Wealthramp.
Death is not something we really want to think about. However, if something unexpected happens, you want to ensure that those you leave behind are taken care of and that your assets and expenses are dealt with accordingly.
Estate plans aren’t just for the wealthy. People of all ages and income levels can benefit from having an estate plan in place.
Having an estate plan can provide a roadmap of how your assets will be distributed as well as how you will pay for your debts, final arrangements, and even your medical care if you become incapacitated.
With everything laid out in an estate plan, your loved ones can work through their grief after your passing rather than fight with each other about who gets what.
What Is an Estate Plan?
An estate plan lays out your wishes on how assets like your home, car, bank accounts, investments, life insurance, and valuables will be distributed to your beneficiaries after you die.
Most of this information is included in your will. In your will, you’d also designate the executor of your estate, a guardian for your children, and even someone to take care of your pets when you are gone.
Many people often confuse an estate plan with a will. However, a will is just a part of a well-rounded estate plan. There is much more involved in an estate plan than just who gets what after you die.
An estate plan can also include your wishes if you are medically unable to manage your own affairs. Your plan can designate your durable power of attorney (DPA), who can make medical and financial decisions on your behalf, as well as medical directives on what medical procedures you do or don’t want to prolong your life.
Why Should You Have an Estate Plan?
There are several reasons why having an estate plan in place is a wise decision. One of the best reasons is that having an estate plan can help avoid probate and prevent your loved ones from ending up in court to access the assets you’ve left behind for them.
Another big reason to have an estate plan is to help reduce any estate or inheritance taxes levied when your assets are transferred to your beneficiaries. Federal estate taxes typically only apply to the very wealthy because of the threshold where assets are subject to taxes.
In 2022, that threshold, or estate tax exemption, is $12.06 million. Unless your assets are valued at over $12.06 million, you are exempt from federal estate taxes.
Although you may be exempt from federal-level estate taxes, the state you live in may impose its own estate taxes. Some states also levy inheritance taxes on beneficiaries who receive assets from your estate.
A living will is another essential part of an estate plan. Unlike a will, which outlines how your estate should be divided after your death, a living will is a medical directive on what level of care you want to receive near the end of your life.
Your living will can include decisions on medications, life support, and other measures a medical team may take to prolong your life. By having a living will that outlines what medical care you do and don’t want to receive, you save your loved ones from having to make those difficult decisions.
Who Should Have an Estate Plan?
The misconception that estate plans are only for wealthy individuals often prevents people from putting a plan in place. But having an estate plan is beneficial for anyone.
We all have assets that need to go to someone when we die. Without an estate plan, the decision as to who gets your assets is left to the government.
You don’t have to wait until you’re older to put an estate plan in place. Estate planning can benefit you at any age. No one can predict the future, and if the unfortunate happens and you die unexpectedly at a young age, an estate plan can designate who will get guardianship of your children or the pets you leave behind.
What Are the Steps to Put an Estate Plan in Place?
Hiring an estate planning professional who can write up the necessary legal documents may be wise when you decide to put together an estate plan. You can also take steps to put your estate plan in place.
- Take inventory of your assets — Make a list of all your tangible and intangible assets and their estimated value. Tangible assets include your home or other real estate holdings, vehicles, fine jewelry, and collectibles. Intangible assets include your bank account, life insurance policies, retirement accounts, investments (stocks, bonds, and mutual funds), and businesses you own.
- Review your beneficiaries — You’ll need to ensure that your retirement account and life insurance policy have designated beneficiaries and that the information is up to date. You should also regularly review and update who you’ve selected as your child’s guardian, medical power of attorney, and financial power of attorney.
- Check the estate tax and inheritance tax laws in your state — Eleven states in the U.S. have their own estate tax laws, and six states levy inheritance taxes on beneficiaries. It’s a good idea to find out if you’ll have these tax implications where you live.
- Reassess your estate plan regularly — Circumstances in your life may change, so you should reassess your estate plan when these changes happen. For example, you may not want your husband listed as your medical power of attorney if you divorce. Life events such as marriage, divorce, having a child, losing a loved one, or getting a new job are all good times to take another look at your estate plan.
What Are the Consequences of Not Having an Estate Plan?
Not having an estate plan can cause a lot of headaches for the loved ones you leave behind. Families have been torn apart in disputes over the division of assets after a loved one dies.
If you don’t have a will or trust, your estate goes into “intestate succession,” and the division of your assets then falls in the hands of the courts to distribute them according to state law. You have no control over who gets what.
If you have a will but no estate plan, your estate may have to go through probate for the division of your assets and debts. Probate can be a long and expensive process that can eat away at what you have left to your family.
Without an estate plan, you also don’t have any control over the medical care you should receive if you are incapacitated. Worse yet, difficult decisions for your medical care, like if you should be taken off life support, are left to your grieving family members.
If you have young children, not having an estate plan would put the decision of who will raise them after you’re gone in the hands of the courts.
Life is full of unknowns, so whether you’re a young parent or a senior in your golden years, having an estate plan in place to carry out your wishes after you die will lessen the burden on those you love and give them time to grieve.