A Beginner’s Guide to Estate Planning

Source: iStock

Source: iStock

Do you want to be able to provide for your family after you are gone? If so, you should begin estate planning now so you are sure you cover every single detail before you pass on. Whether you want to provide for your family after your death or you just want to ensure that the process is as easy as possible for your family that you leave behind, estate planning is the easiest way to accomplish your goals.

Why estate planning is important

Estate planning is simply the fancy legal term for deciding what to do with your stuff after you are gone. While most people don’t want to think about death and what happens when they die, it is still a good idea to begin planning for a time when you will no longer be around.

There are a few reasons why this is a good thing for you to do while you are still living and in good health both mentally and physically. First, planning how you divide up your assets before you pass on lets you decide what happens to your stuff instead of a relative, friend, or worse, the courts.

When you die, your friends and family will already have a tough time coping with your loss. Making it easy for them to handle your estate is a great gift to give them. Having everything planned will allow them time to grieve and reduce the stress of fairly dividing your assets.

Lastly, if your estate is subject to taxes, a proper plan can help reduce or even eliminate these taxes, allowing your family to keep most of your assets instead of handing them over to the government.

Wills and the probate process

Drafting a will ensures your assets are divided and distributed according to your wishe. Quite simply, a will spells out in detail how you want your assets distributed and who inherits them. Planning a will does not have to be cumbersome and difficult, although you do have to be sure you are thorough.

When creating a will, there are many different factors you must consider. A will must cover the money in your bank accounts and your possessions, but it must also cover other types of accounts. For example, if you have minor children, you must appoint a guardian for them until they reach adulthood. You may also want to establish a trust for them so they don’t receive a huge sum of money all at once, and you may even want to delay the release of some of the money until they reach adulthood. All of this must be included in your will on top of the standard inheritance allowances you bequeath to your family and friends.

If you have a retirement account that you specify for one relative, but the beneficiary information of that account lists another relative instead, the beneficiary named on the account will receive the money and not who you specified in your will.

When the time comes for your will to be executed, it must go through the probate process. Probate is simply the time that your will takes to be processed. This includes the reading of the will and the time it takes to disperse your assets to your heirs. Often this process can take anywhere from six months to a year depending on your assets. There are ways you can shorten this process, however.

Source: Thinkstock

Source: Thinkstock

Trusts

One of the easiest ways you can avoid the probate process is to establish a living trust. These trusts can contain more than just money. You can also include your assets. Instead of simply bequeathing your assets to friends or family, you can title many of your assets over to that trust to ensure your wishes are free from public scrutiny.

There are many different types of trusts you can create. You can create trusts naming an individual as a beneficiary or even set up charitable trusts to guarantee some of your estate is allocated for charity. The most important thing about each trust you create is to make sure that it meets your objectives. Good estate planning attorneys should be able to examine your objectives and recommend the best types of trusts for your needs.

Taxes

You cannot discuss estate planning without also talking about taxes. Estate taxes, like income taxes, are often subject to change at the whim of Congress, making it difficult to plan for the taxes owed on your estate. If your estate is subject to taxation, it is due nine months after you pass away. This can place your remaining family in a very precarious state resulting in a quick sale of your assets in order to meet this tax burden.

Sit down with your attorney and determine if taxes will be owed after you pass away. A good attorney will be able to help you shield more of your assets from the tax burden, reducing the amount you owe while also helping you allocate enough money or liquid assets in order to meet the tax demand so your family doesn’t feel pressure from the IRS because of your passing.

More from Personal Finance Cheat Sheet: