Four Little Known Reasons Why Estate Planning Is Important for Families
For many people, estate planning sounds like a chore. It could also cause you to think about topics you'd rather not think about, like illness and death. However, estate planning can be helpful for you and your family in many ways.
When tragedy strikes, you want to have a plan in place. Who should make decisions about your health care if you're unable to do so? Who will take care of your minor children if something happens to you? Who can distribute your property and other assets when you die? Who should receive specific items? These issues and more can be addressed in a comprehensive estate plan.
What Is Estate Planning?
Estate planning is the process of making decisions about what happens in the event of death or incapacity and creating legal documents that contain your wishes. There are many different types of documents to include in your estate plan. A comprehensive estate plan may include:
- Last will and testament
- Living will (also called a medical directive)
- Financial power of attorney
- Health care power of attorney
If you die or become mentally incapacitated and you do not have an estate plan, then someone you don't know could end up making some of the most important decisions of your life for you. For example, you may know who you'd want to care for your minor children if something happened to you. If that's the case, you wouldn't want a court deciding on a guardian for your children or placing them in foster care. Perhaps you have strong ideas about being put on life support. You could make things easier for your loved ones if you already have your wishes stated in a legal document.
Why Is Estate Planning Important for Families?
If you die or become unable to make decisions about your health care or finances, your family could have difficulty figuring out what should be done and who should do it. The burden on your family will be even heavier if they must go through a long and expensive process with the courts. For the following reasons, estate planning is vital for families.
1. Estate Planning Can Help Reduce Taxes
Inheritance tax and estate tax are two types of taxes that could apply to your estate. Your estate is all of the property that you'd leave behind when you pass away. Death taxes, as they are sometimes called, can apply at the federal and state level.
When it comes to inheritance taxes, only a few states have them, and there is no federal inheritance tax. In the states in which an inheritance tax applies, there are typically exemptions for close relatives. There are federal and state estate taxes. Only a few states still have estate taxes, which are calculated from the estate's net value. The federal estate tax only applies to estates valued at more than $11,700,000, so this tax won't apply in many cases.
When an inheritance tax or estate tax does apply, that money comes out of the estate or the amount a beneficiary receives from the estate. With the right estate plan, you can reduce these taxes.
One way to reduce estate taxes is to transfer some of the property out of your estate. You could accomplish this by making gifts or by creating a trust. There are several different types of trusts. Revocable living trusts can become irrevocable when the person who created the trust dies.
2. Estate Planning Protects Your Children
Whether you have minor children or adult children, there are steps that you can take to make sure that your wishes for them are carried out when you die. If you die without an estate plan, then a court might end up making decisions that affect your children.
Parents of minor children might wish to choose who would care for their children if both parents died. In a will, you'd be able to identify the person you'd want to care for your children in the event of your death. You could also pick an alternate guardian, in case the first person you chose is unable to perform the duties of a guardian. If you don't have a plan in place, a court may appoint a guardian for your children or place them in a home.
Estate planning could still benefit your family if your children are eighteen years of age or older. You could use either a will or a trust to leave property to your children. Depending on the circumstances, you might prefer to use a trust. You have many options for distribution if you choose to leave money for your children in a trust. If you're concerned about their ability to manage a large sum of money, you could instruct a trustee on distributing the money. Another option would be only to allow distribution when the adult child reaches a certain age.
In addition to the options that you have with a trust, there are two other main advantages that you have with a trust. One of the advantages is avoiding the probate process with assets that you put in a trust. Another advantage is that assets that you put in a trust usually can't be reached by creditors.
Setting up a revocable living trust can be much more expensive than drafting a will. Weigh your options carefully as you decide which estate planning documents are best for you.
3. Estate Planning Can Help Your Beneficiaries
Careful estate planning can help you make sure that your property goes to the intended beneficiaries. A beneficiary is someone who receives your assets. The term "beneficiary" is often used to refer to the person who gets an inheritance through a will. However, the term also applies to someone who receives benefits under a life insurance policy. Both wills and life insurance policies can be used as estate planning tools.
You can designate beneficiaries in your last will and testament. Consider the following as you think about who you would want to name as a beneficiary:
Be sure to identify individuals with their full legal name and specify which charities or other organizations (if any) you wish to receive assets from your estate — being clear about who should have what can help your beneficiaries avoid unnecessary fights.
If you die without a will, then your assets may not be distributed in the way you would've wanted. There are laws of intestacy which apply if you die intestate (without a will). Courts follow these intestacy laws to determine how to distribute someone's estate if they did not leave behind a valid will. A court may also appoint someone to handle the distribution of your estate.
If you have a will, though, you can name the person you would like to administer your estate. The person who handles the distribution of your estate is called an executor. An executor may also play a massive role in the probate process. If you name an executor in your will, then your family can take comfort in having someone that you chose handling your affairs rather than someone who the court appointed.
It's important to note that you can leave assets to minor children, as well. Since minor children can't claim the property, you could have their guardian serve as trustee and hold the property for them until they can own it outright.
4. Estate Planning Could Make Things Easier for Your Family Members
You can do simple things to make things easier for your loved ones when you die. Consider taking these steps to make the burden on your family just a little bit lighter:
- Make a solid estate plan.
- Update estate planning documents as necessary.
- Store documents in a safe place.
The first step is to assess your situation and determine what documents you'll need to make a challenging situation easier for your family. How can you make sure that your children, spouse, pets, and others who you care about are taken care of in the future? Don't forget that estate planning is for people from all walks of life. Even if you feel that you don't have much wealth, what you have can be vitally important to you and your family. The last thing you'd want is for your family members to have a legal battle over estate assets. Such a battle could be avoided through sound estate planning.
In addition to planning for your family's financial future when you die, don't forget to have a plan for what happens if you're incapacitated. There are two types of powers of attorney: financial power of attorney and health care power of attorney. A financial power of attorney grants someone authority to make financial decisions for you. A health care power of attorney gives someone authority to make decisions about your health care.
Finally, a living will, or medical directive, contains your wishes on the type of medical treatment you'd like to receive if you're unable to communicate your wishes. It's helpful to families to have guidance on your wishes during such a difficult time.
Thinking About Estate Planning? Contact an Attorney Today
No one wants to think about difficult times, but planning for your family's financial future can bring you peace of mind. You can save your family from the bitter family fights and costly legal battles that often occur when there's no plan in place. Don't hesitate to consult an experienced attorney about your estate plans.
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