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MJ Estate Planning, LinkedIn banner, 10-26-2020

What to Know About Estate Planning

What to Know About Estate Planning

In this month's Monthly Financial Jargon series, we address an important financial planning term that is often incorrectly written off as a component exclusively reserved for the one-percenters: estate planning.

What is Estate Planning?

Before you abandon reading this because you see “estate planning” and either think: 1. I don’t have enough assets to qualify for such a need, or 2. I don’t need to worry about an estate plan yet; let me grab your attention. If you have any assets to your name, you need some semblance of an estate plan. Life is unpredictable, and you don’t want your wealth to be unfairly or incorrectly distributed if something happens to you.

That being said, put simply, estate planning represents the determining of how an individual’s assets will be managed and distributed after passing or in the event that he or she becomes incapacitated. When we use the word “assets” in estate planning, we are referring to anything that comprises your net worth, including your house, additional real estate, cars, jewelry, artwork, stocks, investments, insurance policies, pensions, and any outstanding debts, to name a few. The term “estate planning” encompasses a large umbrella of important financial components like writing your will, establishing trusts, selecting an executor of your will, and designating beneficiaries. Estate planning not only involves dictating intentions for your assets after death but also includes detailing your wishes in the event you become incapacitated.

Why Should I Create an Estate Plan?

There are various ways an estate plan can fit into your financial life, regardless of your net worth or assets. Individuals leverage estate planning for a variety of intentions, many of which involve the following: providing for a partner and children, preserving and passing on family wealth, ensuring guardianship for dependents and minors, funding children’s and/or grandchildren’s educations, and leaving a philanthropic legacy.

Benefits of Estate Planning

Four of the main benefits of having an estate plan include:

  1. Taking care of minors and dependents. It’s difficult to fathom passing and leaving minors and dependents behind, which is why planning for such an event is of the utmost importance. To ensure your dependents are cared for according to your wishes, you must use a will to name guardians. Without a will that specifies guardians, the courts will assume authority and decide who will raise your minors and care for your dependents.
  2. Protecting your beneficiaries. Designating heirs for your assets is the main component of estate planning. In the absence of an estate plan, the courts will step in and decide who gets your assets, and such a process can be timely and costly for your loved ones. If you’ve had more than one spouse and/or have children from more than one family, this is especially important, as you want to make sure your assets fall into the right hands.
  3. Eliminating arguments. Family disputes over wealth and finances are common all too often. Without a plan for your assets, the debates over who gets what can grow ugly and end up in court with costly repercussions and long-lasting – and unnecessary – family bickering.
  4. Avoiding unnecessary taxes. Having an estate plan helps you ensure as much as your wealth as possible passes on to your descendants and not the Internal Revenue Service (IRS). You want to transfer your assets to your heirs with the smallest tax burden possible. By planning ahead, you can reduce much or even all of the federal and state estate taxes and state inheritance taxes your beneficiaries will face. There are also strategies that decrease the income taxes your recipients may have to pay.

What Does Estate Planning Comprise?

The most important part of estate planning involves writing your will or last testament, the legal document that serves to provide specific instructions regarding how a person’s assets are to be handled when he or she has passed or is deemed no longer able to have the capacity to manage the assets and make sound decisions. You will also elect an executor of your will who you trust to carry out your final intentions. In a will, you may also dictate whether you would like a trust to be created upon your passing. A trust can either take effect during your lifetime, known as a living trust, or upon your passing, known as a testamentary trust. A testamentary trust involves probate, meaning the will that created the trust must be probated or validated before the trust can be created and funded, while a living trust avoids probate because it was already created during the owner’s lifetime.

In addition to will curation, estate planning may involve:

  • Establishing a guardian for minor children and living dependents,
  • Electing and updating beneficiaries for all insurance policies and investment accounts (IRAs, 401(k)s, etc.),
  • Setting up annual charitable gifting to reduce your taxable estate,
  • Cutting estate taxes via the creation and leveraging of trusts,
  • Expressing funerial desires and setting aside funds to cover associated costs,
  • Selecting a power of attorney (POA) for use in the event the you become incapacitated or are unable to be present for the signing of important legal documents, and
  • Naming and executor of your estate to properly manage and carry out your will.

Protecting Your Loved Ones

As I’ve emphasized earlier, estate planning is not an exclusive part of financial planning reserved for the wealthy. If you have assets to your name that you want to ensure are properly passed on to your family and loved ones, you need to leverage estate planning strategies to make sure your intentions are fulfilled. Put simply: If you want to have a say in who will inherit your wealth and possessions when you are no longer able to do so, you need an estate plan. Without such a plan, settling your affairs after your passing can be a lengthy and costly endeavor for your loved ones that could result in devastating consequences like your assets being passed into the wrong hands.

Final Points

An estate plan allows you to establish your legacy and ensure that your final intentions are properly observed and followed in the event of your death or an unexpected occurrence that leaves you incapacitated. If you pass or are suddenly incapacitated and do not have an estate plan with a will, the courts will decide who gets your assets and how your assets are distributed. With all the uncertainties in this world, estate planning provides you with the invaluable opportunity to retain direction of your assets when you are no longer physically able to do so. Doing so also allows you to feel comfort in knowing that your desired heirs and recipients will receive exactly what you intend for them to inherit without the need for a complicated and stressful process that necessitates the courts and triggers potential lawsuits. 

Monthly Financial Jargon: The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our “monthly jargon” articles that focus on debunking financial terms that are often used sans explanation. 

Questions and/or interested in how this applies to your financial life?

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