Why Estate Planning Is Easier Than You Think

Estate planning ensures financial security for your loved ones if something should happen to you by protecting your hard-earned assets (e.g., your investments or house). It’s a necessary tool that allows you to protect, maintain, and manage your property if you become ill or pass away. But more than that, it can also help people with making sure their minor children are protected in the event of an emergency or minimize taxes paid on assets by beneficiaries, for example.

With proper planning, probate can even be avoided so that your beneficiaries receive your assets in a way that’s controlled by you and not by attorneys, the government or tax agencies. So why do so many hard-working people fail to take the extra time and effort to build an estate plan and preserve their hard-earned assets? (For related reading, see: 4 Mistakes to Avoid With Your Retirement Plan.)

Dealing With the Misconceptions

To begin with, a misconception that most people have is that estate planning is for those who are older or possess substantial wealth. Many people also assume that the process will be complex, time intensive, and pricey. But the process does not have to be complicated whatsoever. Some steps you can do to begin thinking about your estate plan are:

  • Gather important documents and make sure that key family members know where they are.
  • Gather a list of all the things you own, noting any liabilities (like your mortgage) as well. Record the value of each asset (properties, collectibles, jewelry, etc.). Print copies of your most recent statements from your relevant accounts. Note the values and benefits from insurance policies.
  • Consider and write down your objectives for your estate plan. Who should get which assets? Who should they go to if something should happen to your beneficiaries? Do you have minors who need care if something were to happen right now? Who should handle your assets if you become unable to make decisions about them? And so forth.
  • Review your will if you have one in place.
  • Review and update the beneficiaries of your retirement accounts or insurance policies.
  • Review and update powers of attorney for matters of healthcare or other affairs.
  • Consider if you want to establish a trust, and prepare to talk to a financial professional about it. (For related reading, see: Annuities: An Income Solution for Baby Boomer Retirees?)

What to Do Next 

Next, it's essential to meet with a financial planner who specializes in estate planning. Estate planning is the process of legally ensuring that you will not only protect the things you worked hard to achieve, but that you will have the final say about those assets taking care of the people you love when you no longer can. That means not leaving such decisions to attorneys, the government, or tax agencies. 

It may be as simple as meeting with an attorney and preparing your documents (will, powers of attorney, etc.). However, you may require assistance from a financial planner who can talk to you about the tools and more advanced strategies like lifetime giving (like the gift tax), business succession planning, or trusts (living trusts, multi-generation tax-savings trusts, children’s trusts) to achieve your financial objectives. The estate planning attorney would then make sure what you decide to do is complete to the full extent of the law and that you aren't missing any important documents, so that everything will go through to the best of your wishes.

A living trust is a powerful and beneficial tool. Essentially, it legally transfers ownership of your assets to the trust for a specified beneficiary, which can help your beneficiary avoid taxes and fees usually levied on the assets. You can still control, keep, or sell your assets while they’re in the trust, you just no longer legally own the assets. Some trust strategies even allow two spouses to benefit from the same arrangement, protecting more assets from federal estate taxes.

The best part of a trust is that it can help your heirs avoid probate when asset distribution occurs. Probate is the process of legitimizing your will and ensuring that proper procedures are conducted during your asset distribution under the appropriate representative, all decided through a series of legal proceedings and intermediation if conflict arises among heirs. The problem is that the probate process can be lengthy (months to years), it can delay your heirs from receiving their inheritances, it can have a lot of associated fees and costs (sometimes 5% to 10% of your estate), and the proceedings are public record, which gives little privacy to families regarding community members who can more easily find out how much was earned. (For related reading, see: 6 Life Events That Call for Professional Financial Advice.)

Avoiding taxes is another key benefit to a living trust. The federal government will require payment for your estate tax bill in cash within nine months of something happening to you. It will not accept a percentage of your estate. Rarely can people accomplish this Herculean task, which sometimes requires beneficiaries to undergo complicated processes in paying the estate tax bill. For instance, they may need to borrow the cash which will require repayment with interest. Or they may need to liquidate assets (at a fraction of their original value) or pay with life insurance dollars.

Keeping Your Estate Plan Current 

Once finished, you should review and update your estate plan after every birth, death, marriage, or divorce involving the members of your plan. You should also review your plan every time a significant increase or decrease in your finances occurs or if any laws change that are directly related to your estate plan.

While it may feel a tab morbid to plan ahead for something that hasn't happened to you yet, remember that you do not want attorneys, the government, or tax agencies to make decisions about the care of your loved ones and the assets you worked hard to obtain. Go through the additional (and minimal) time and effort to have the peace of mind that you and your family deserve. (For more, see: Why It's So Important to Update Your Estate Plan.)