No matter what your current financial situation may be, using the right estate planning tools makes a huge difference in making sure your final wishes are met. A solid plan can also make life (and taxes) much easier for the people you care most about. In this article, learn all of the reasons why estate planning is important not just for you and your assets, but for those loved ones you leave behind when you die.
Estate Planning Protects Beneficiaries
Estate planning is the process of organizing your personal and financial affairs to deal with the possibility of future mental incapacity or death. One of the key elements of estate planning is leaving your heirs with easy access to the assets you wish to pass on to them. There are a number of estate planning tools and resources you can use depending on your financial situation. A life insurance policy, for instance, quickly provides your beneficiary with a death benefit after you pass away (and they file a claim). The proceeds of a policy can help cover things like final expenses, mortgage payments, and future college tuition for kids or grandkids.
Prioritizing a Guardian for Minor Children
Creating a strong estate plan includes naming a guardian for children who are under 18 years old. If you have children and don’t complete this task, the court will be in charge of choosing a guardian for your kids. In the short term, your child may not have someone you know to stay with. “The minor child might be with Child Protective Services in a temporary foster care situation and they may stay there until a more permanent guardian is found,” said Meredith Hill, owner and principal attorney at The Hill Law Group in Bethesda, Maryland. In this case, a circuit court judge within the state in which the child lives then appoints a guardian for the child. According to Hill, it’s better to name a guardian to be in control of your child’s future, even if you’re not entirely sure whom to choose.
Estate Planning Protects Your Assets
Without a will and other estate planning resources in place, your assets will be distributed based on the law of the state where you live. Each state has its own set of laws. Generally, though, the recipients of your assets are your spouse and your bloodline, but things can quickly become complicated. In Virginia, for instance, the first priority of distribution gives one-third of an individual’s assets to their surviving spouse, and the remaining two-thirds is divided evenly among any children and the children’s descendants. But if you want all of your assets to go to your spouse so they can comfortably retire, you would need to clarify those wishes in a will.
Going Through Probate
When planning your estate, consider the probate process, especially if you want your beneficiaries to quickly access your assets. Not all states require probate, and it can be a very complicated process. The state of New York, for instance, does not require any accounts with named beneficiaries to go through the probate process, including life insurance and retirement accounts. The probate process can also be very costly, especially if it takes a long time to settle the estate. It includes appraisal costs, executor’s fees, legal and accounting fees, and more, often totaling anywhere from 4% to 7% of the total estate value. And if someone contests the will, there could be thousands of dollars of litigation costs.
An Estate Plan Can Provide Tax Relief
The federal government charges an estate tax once your estate is valued at a certain amount. In 2022, you are required to file an estate tax if the estate exceeds $12.06 million. If your assets will likely be above that limit, you might consider some advanced estate planning strategies to reduce the impact of taxes. An irrevocable trust—a special trust that serves as both owner and beneficiary of one or more life insurance policies—for instance, is not subject to estate taxes. You can’t change the contents or the beneficiary once it’s finalized, but you can ensure that the trust is excluded when your estate is calculated. You can also make lifetime gifts as part of your estate planning, which are not included as part of your taxable estate. In 2022, each individual may make an annual gift to another person of up to $16,000 without paying any taxes. This could be an effective way to spend down your assets later in life by making annual gifts to children, siblings, or friends.
Estate Plans Simplify Things for Your Family
Without a will and other directives in place when you die, you may inadvertently stir up hard conversations between family members. And it’s not always about money. “There are a lot of emotions involved,” Hill said of the estate planning process. “Families may fight over small items and can go to court over it, even common items with sentimental value.” Hill advises individuals to write down specific handling of assets to avoid unnecessary drama after they pass away. This is especially important with blended families, which may include ex-spouses, new spouses, biological children, and stepchildren. Since each state has its own process for determining heirs, not having a will may cause you to unwittingly exclude someone you care about who isn’t a blood relative or include relatives you don’t actually want to inherit anything. The same holds true if you have a life partner but are not married. If that person is not listed as your beneficiary, your assets are likely to be distributed to your closest relation instead. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
