What is estate planning?
Lots of people overlook estate planning, or a plan in place for disposing of their assets after death—it can seem daunting, confusing, or like a depressing thing to think about. But estate planning basics aren’t too tough to understand, and making a plan for what will happen to your assets after your death will ease the pain of your passing for your loved ones, sparing them courtroom proceedings or an unnecessarily huge tax bill. Beyond the basics, people often work with an estate law attorney to craft the details of a thought-out plan.
I have a will, so that means I’m done with estate planning, right?
Drawing up your will is a big part of estate planning, but the process doesn’t end there. Estate planning also includes:
- Setting up trust accounts in the names of the beneficiaries you named in the will. Think about whether you want to place your assets in trust accounts before your death, which will limit the amount beneficiaries will pay in taxes. Placing the assets in trust also allows your heirs to skip the probate court process.
- Naming an executor of your estate. This person oversees the process of carrying out your will, including the probate process, pays off your creditors and any tax obligations, and represents you in potential estate tax audits or legal disputes among your heirs. You should pick a trusted, responsible person who is close to you.
- Naming beneficiaries for assets like 401(k)s, IRAs and life insurance policies. Special consideration is needed for these kinds of assets, because they’re generally subject to ordinary income tax, rather than the estate tax paid on cash or other inherited assets. If you want to determine how much each of your heirs will receive— for instance, if you’re trying to divide your assets equally among your children—remember that a beneficiary on a $50,000 401(k) won’t receive the same amount as a beneficiary on a $50,000 savings account. Generally you are asked to name a beneficiary when you first set up a 401(k), IRA or life insurance policy. Check who your beneficiaries are now, and periodically review them as a part of your estate planning.
- Setting up durable power of attorney. A durable power of attorney is separate from medical power of attorney. Durable power of attorney allows you to pick someone to act as your agent if you become incapacitated, letting them pay bills, make transfers, and interact with official agencies on your behalf. A medical power of attorney specifically relates to health care decisions. Both are important to a solid estate plan!
- Making funeral arrangements. Make an affidavit of burial/cremation to outline your wishes for your funeral arrangements. Without this document, nearly every state gives the responsibility of choosing your funeral arrangements, and the ability to authorize an autopsy, to your legal next-of-kin. While this may work for you, spelling out your wishes in advance can help your grieving relatives plan any memorial services and the disposal of your body in accordance with your wishes.
Estate planning corkboard from Shutterstock