Estate Planning: Things to Consider

Estate planning is more than just drafting a will—it’s a crucial step in securing your financial legacy and ensuring your wishes are honored. However, without proper guidance, the complexities of estate planning can lead to costly errors and emotional stress for your loved ones.

To help you navigate this critical process, we’re here to discuss the essentials of estate planning—from understanding key documents like wills and powers of attorney to managing assets and avoiding common pitfalls.

Whether you’re just starting to think about estate planning or looking to refine an existing plan, these tips and considerations can help ensure your financial future is well-prepared.

What Is Estate Planning?

Estate planning is the process of arranging and managing your assets to ensure there’s a plan in place for after you pass. This process is practical for anyone who wants to safeguard their assets (regardless of size) and ensure they’re distributed according to their wishes. It encompasses everything from your real estate and bank accounts to personal items.

The Importance of Estate Planning

Many people delay estate planning, thinking it’s only for older adults or the affluent. However, it’s crucial for everyone, regardless of age or wealth. Life is unpredictable; estate planning provides financial security and peace of mind for you and your family. It ensures that your assets are allocated as you wish without leaving your loved ones to handle complex legal matters or settle personal disputes.

Effective estate planning can also help avoid probate—a public and often lengthy legal process that can be stressful for your family. By having a clear plan in place, you make things easier for your loved ones during a challenging time. Plus, it gives you control over your financial legacy and helps ensure that your final wishes are respected and followed.

Estate Planning Basics

Estate planning can often seem like a complex web of paperwork and legalities—but understanding its basic principles can help. By grasping the essentials and putting in the work, you can ensure that your assets are protected and distributed according to your wishes, providing peace of mind for you and your loved ones.

Here are some basics you’ll need to know:

Understanding Key Estate Planning Documents

At the core of estate planning are several key documents, each serving a distinct and crucial function:

1. Wills: Your will is the foundational legal document of your estate plan, dictating how your assets should be distributed and who will take care of your minor children.
2. Powers of Attorney (POA): This encompasses various forms, including the Durable Power of Attorney for financial decisions and the Medical Power of Attorney for health care decisions. Arranging for both can ensure your affairs are managed according to your wishes, even if you become incapacitated.
3. Beneficiary Designations: Often associated with retirement accounts and life insurance, beneficiary designations are critical for ensuring various accounts get disbursed according to your wishes. Sometimes, they can even supersede your will in determining who receives certain assets.

The Role of Estate Planning in Asset Management

Beyond the paperwork, estate planning is deeply intertwined with the effective management of your assets. This includes strategically handling real estate, bank accounts, and retirement plans. Proper planning clarifies the future of these assets and involves strategies to manage and protect your wealth, potentially reducing taxes and avoiding probate complications.

Here are some of the vital roles estate planning can play in the management of your assets:

• Real Estate: For many, real estate is a significant part of their estate. Estate planning can help determine the future of these properties, whether they are to be sold, passed down, or managed in other ways.
• Bank Accounts and Other Assets: Estate planning ensures that your bank accounts, stocks, bonds, and other assets are allocated as you wish. This process can involve setting up trusts, making gifts, or other strategies to manage and protect your assets.
• Retirement Plans: Retirement accounts require careful consideration in estate planning. Designating beneficiaries and understanding how these accounts will be handled can be crucial to your financial plan.

Trusts and Probate in Estate Planning

When it comes to estate planning, trusts and probate play significant roles in how your assets are handled after you’re gone.

Think of trusts as a tool for managing your assets exactly how you want and probate as the legal process that makes sure your will is followed correctly. Understanding these concepts can make a huge difference in ensuring things go smoothly for your loved ones later.

So, let’s look at how trusts and probate fit into estate planning:

The Role of Trusts in Estate Planning

Trusts are powerful tools in estate planning, offering flexibility and control over your assets following your passing. Here are some basics on trusts and their benefits:

Common Types of Trusts:

Revocable Living Trusts: These trusts allow you to retain control over your assets while you’re alive. You can alter or revoke them as your life changes, making them adaptable to unforeseen circumstances.

Irrevocable Trusts: Unlike revocable trusts, once an irrevocable trust is set up, it generally cannot be altered, amended, or revoked. This type of trust can be beneficial for tax purposes, asset protection, and Medicaid planning.

Testamentary Trusts: These are created as part of a will and only come into effect after the death of the trust’s creator. They can be used to manage and distribute assets to beneficiaries according to specific terms set out in the will.

Charitable Trusts: These are set up to benefit a particular charity or the public. There are two main types: Charitable Remainder Trusts, which provide income to the donor or other individuals for a period before the remaining assets go to the charity, and Charitable Lead Trusts, where the charity receives income for a period before the remaining assets go to the donor’s beneficiaries.

Other Trusts: There are many types of trusts, including Special Needs Trusts, Spendthrift Trusts, Life Insurance Trusts, and more. Consider consulting with a financial advisor for help navigating trusts and other relevant financial estate planning advice.

Benefits of Trusts:

• Bypassing Probate: Assets in a trust don’t go through probate, facilitating a quicker, more private transfer to your beneficiaries, away from public scrutiny and potential legal complexities.
• Handling Incapacity: If you become unable to manage your affairs, a successor trustee can step in, ensuring continuous management of your assets without the need for court intervention.
• Tax Planning: While revocable trusts don’t directly reduce estate taxes, they can be structured to optimize your tax situation, especially when part of a broader estate planning strategy.

Navigating Probate

Probate can be a complex and often misunderstood part of estate settlement.

Probate is the legal process that administers and validates your will, ensuring debts are paid and assets are distributed according to your wishes under court supervision.

Probate generally applies to assets solely in your name without a beneficiary designation. This includes properties, certain bank accounts, and personal belongings.

The probate court process can be lengthy, sometimes spanning years, and is a public procedure, potentially exposing your estate to public claims and complications. It can also incur various fees, diminishing the estate’s value for your heirs.

Professional Assistance and Legal Considerations

When it comes to estate planning, navigating the legal landscape can be complex and often requires professional assistance. An estate planning attorney is crucial, offering expertise and guidance to ensure your wishes are legally sound and effectively implemented.

The Role of Estate Planning Attorneys

Estate planning attorneys are specialists who understand the legal requirements and strategies for effective estate management and distribution. When choosing an estate planning attorney, consider their experience, expertise in your specific needs, and ability to communicate complex legal concepts understandably. Consider asking for recommendations from trusted sources and schedule consultations to find the right fit.

Estate planning attorneys can provide the following:

• Expertise in Legal Matters: Estate planning attorneys are well-versed in the laws governing estates, trusts, wills, and probate proceedings. They can advise on complex issues such as tax implications, asset protection, and beneficiary designations.
• Customized Estate Plans: Every individual’s financial situation and family dynamics are unique. An attorney can tailor an estate plan that specifically addresses your personal circumstances, ensuring your wishes are accurately accounted for.
• Avoiding Common Pitfalls: An experienced attorney can help you avoid common mistakes that could lead to legal disputes or challenges to your estate plan.

Adapting Estate Plans to Life Changes

Estate planning isn’t a one-time task. As life unfolds, your circumstances change, and so should your estate plan. It’s essential to adapt and update your plan to reflect significant life events and ensure it remains aligned with your current wishes and circumstances.

Some of the major life events that can necessitate changes in your estate plan include:

• Marriage or Divorce: These events can significantly alter your priorities and beneficiaries. For instance, you may want to include a new spouse in your plan or remove an ex-spouse from beneficiary designations.
• Birth or Adoption of Children: Adding a new family member means updating your plan to include them as beneficiaries. This could also be a time to consider setting up trusts for their future needs.
• Death of a Beneficiary: If a beneficiary predeceases you, adjusting your estate plan to address the distribution of their intended share is essential.
• Significant Financial Changes: Changes in your financial situation, such as receiving a large inheritance, experiencing a substantial increase or decrease in assets, or even starting a business, can all impact how you want your estate managed and distributed.
• Changes in Laws: Tax laws and estate planning regulations can change, potentially impacting the effectiveness of your current estate plan.

Perform Regular Reviews and Updates

An estate plan should be a living document that evolves with you through life changes.

Here are some best practices for keeping your estate plan current:

• Conduct Regular Reviews: It’s a good idea to perform regular financial checkups. This should include a periodic review of your estate plan, even if major life events haven’t occurred. A good rule of thumb is to review your plan every three to five years.
• Consult with Professionals: Regular check-ins with your estate planning attorney and financial advisor can help ensure that your plan is current with any legal changes and continues to align with your financial situation and goals.
• Communicate Changes to Family Members: Keep your family informed of any significant changes in your estate plan. This transparency can prevent misunderstandings and conflicts after you’re gone.
• Update Beneficiary Designations: Ensure beneficiary designations on retirement accounts, life insurance policies, and other assets are current. These designations often override your will or trust.
• Revise Powers of Attorney: Regularly review and, if necessary, update your powers of attorney to ensure that the appointed individuals are still the best choice for their roles.

Estate Planning Tips and Common Pitfalls to Avoid

Estate planning can be fraught with potential missteps. Understanding some practical tips and being aware of common pitfalls can help you navigate the process more effectively, ensuring your wishes are fulfilled.

Here are some key tips to consider for effective estate planning:

• Create a Comprehensive List of Assets: Document all your assets, including real estate, bank accounts, retirement plans, life insurance policies, and personal belongings. This makes it easier to manage and distribute them according to your wishes.
• Clearly Define Your Beneficiaries: Specify who gets what. Remember to include contingent beneficiaries who will inherit assets if the primary beneficiary can’t or won’t accept them.
• Keep Your Documents Accessible: Store your estate planning documents in a safe yet accessible place. Inform a trusted family member or attorney about where these documents are kept.
• Include End-of-Life and Medical Care Wishes: Your estate plan should include instructions for your medical care in case you become incapacitated. This can be addressed in a medical power of attorney or a living will.
• Use Trusts Wisely: Trusts can be an effective tool for managing your assets both during your life and after your passing. They can help avoid probate and ensure privacy, but they must be set up correctly to be effective.

Avoiding Common Mistakes in Estate Planning

Estate planning errors can have long-lasting consequences. Here are some of the most common mistakes to avoid:

• Not Updating Your Plan: One of the biggest mistakes is failing to update your estate plan after life changes. Regular reviews and updates are crucial.
• Overlooking Digital Assets: In today’s digital age, it’s important to include digital assets like social media accounts, digital currencies, and online banking in your estate plan.
• Forgetting to Name a Guardian for Minor Children: If you have minor children, it’s essential to designate a guardian for them in your will. This decision should be made with careful consideration.
• Ignoring Tax Implications: Be aware of potential tax implications, especially for large estates. Proper planning can help minimize the tax burden on your beneficiaries.
• Trying to DIY Complex Aspects: While some aspects of estate planning can be handled independently, more complex situations typically require professional guidance. Don’t hesitate to consult an estate planning attorney for advice and assistance.

Further Considerations for Estate Planning in 2023

As you navigate the journey of estate planning, it’s essential to stay informed about the latest developments and changes that could impact your strategy. Here are some key considerations to keep in mind:

Adjusting to Inflation

Inflation has a direct impact on estate planning, particularly regarding tax figures. The Tax Cuts and Jobs Act (TCJA) continues to shape estate planning strategies, especially with its increased exemption amounts. These exemptions are significant but temporary, set to revert in 2026. Reviewing your estate plans in light of these adjustments is crucial to ensure they align with your current financial goals and the evolving tax landscape.

Revisiting Formula Bequests

Many estate plans include formula clauses, particularly in marital and credit shelter trusts. With the current high federal exemption amounts ($12.92 million in 2023), it’s important to revisit these clauses. They might inadvertently lead to unintended distributions, especially considering the potential decrease in exemption amounts in the future.

Balancing Income Tax and Estate Planning

A critical aspect of estate planning is balancing the benefits of lifetime gifting against the advantages of holding onto assets until death, primarily due to the step-up in income tax basis. This balance requires careful consideration of your asset base, future income expectations, and overall wealth.

Adapting to the Secure Act

The Secure Act, specifically its 10-year payout rule for IRAs and qualified retirement benefits, is another critical factor to consider in your estate planning. Understanding how these rules apply to your retirement assets can significantly affect your planning approach.