Estate plans aren’t just for the private jet and Cristal set. In fact, estate planning can benefit anyone who intends to leave assets to family, friends, or a favorite charity after their death. From preventing family feuds to protecting your privacy and avoiding probate, an estate plan can help your heirs for years after you’re gone, no mansion required.
What is an Estate Plan?
An estate plan typically includes documents such as a will, power of attorney authorization, a living will, or a trust. These documents outline how you want your assets distributed after your death, who can make financial or medical decisions for you if you become incapacitated, and who will be appointed guardian of your children if they are younger than 18 or 21, depending on your state.
Why Do I Need an Estate Plan
1. Make sure your assets go where they should
A will outlines who will get what after you pass away, but what happens if you die without one? If you die without a will (the official term is “intestate”), the courts will usually divide your assets among your family members. Unfortunately, probate courts are infamous for dragging their feet on decisions, igniting family squabbles, and ignoring the informal wishes of the deceased. After all, no one is better than you at distributing what you own. A probate judge doesn’t know that your oldest child has a gambling problem and shouldn’t be given access to your savings account, or that your youngest has a knack for money management.
2. Protect your beneficiaries–and your privacy
An estate plan helps you protect adult beneficiaries from overbearing or divorcing spouses, poor money management, and IRS penalties. For minor beneficiaries, estate plans can also ensure they get the guardian they deserve. In all 50 states, a guardian or conservator must be appointed to care for minors until they become a legal adult. If you do not designate a guardian in your will, the court will choose one.
If privacy is important, you’ll also want to keep in mind that court records are accessible to the public. That means that potentially embarrassing requests, family treasures, and the exact value of your holdings will become a matter of public record. Creditors and family members can also use probate court records to challenge your will.
3. Reduce estate taxes
If your assets are large enough to be subject to federal or state estate taxes and you are married, a trust established in your will or as part of a revocable living trust can reduce or eliminate the taxes you owe. Other, more advanced estate planning moves, like the establishment of an irrevocable trust or a spousal lifetime access trust (SLAT), can do even more to help couples and individuals protect their assets from onerous inheritance taxes. However, these more complex techniques should be carried out with the assistance of financial and legal professionals.
4. Plan for business succession
As Benjamin Franklin once remarked: “Nothing is certain but death and taxes.” And if you are a business owner, you need to plan for both. With an estate plan, you can prepare for business succession, creating a structure that allows your business and its assets to transfer to members of your family.
5. Give to charity
If you have a philanthropic streak, an estate plan will allow you to give to your favorite charity after you’re gone. You can designate charities as primary or contingent beneficiaries of retirement accounts such as IRA’s and 401(k)s, in your trust, or in your will.
You can also use more complex trusts, like a charitable remainder trust or a charitable lead trust, to strike a balance between giving to charity and providing for your loved ones. With a charitable remainder trust, beneficiaries receive an income stream while you are alive, with the remainder going to your desired charity after your death. Charitable lead trusts do the opposite, funding the charity during your lifetime, and your beneficiaries once you pass on.
6. “Stretch” your assets
Do you have an IRA or Roth IRA? With the right planning, you can “stretch” the distributions from these accounts so that they last for the lifetime of your beneficiaries. As a result, more money stays in the account longer, creating tax-deferred and tax-free growth for years to come. This can be especially important if your beneficiaries are significantly younger than you, as in the case of a child or grandchild.
Sara McKinney
saractag@gmail.com
As Cowen Tax Advisory Group’s Digital Content Marketing Specialist, Sara provides in-house copywriting and manages the company’s electronic records system, email marketing, and blog.
