Estate planning is putting together a clear plan of how you wish your estate managed and distributed upon your death or any other incapacitation. Some estate planning tasks include preparing a will, naming an executor, making charitable donations to minimize estate taxes, naming beneficiaries, setting up trusts, and making funeral arrangements. Estate planning can be complex, but this guide breaks it down into understandable steps.
What assets can you plan for?
The first step in estate planning involves reviewing all your assets. All the property you own makes up your estate, including houses, cars, retirement accounts, savings, jewelry, land, life insurance, stocks, artwork, clothes, debt
You can begin estate planning with a clear idea of all your assets, and an attorney experienced in estate law can help you set up an estate plan. The principle behind estate planning is that if you don’t prepare an outline of what should happen in the future while you are capable and sound, you may not be able to control how your estate is managed when that time comes.
A well-prepared estate plan details your wishes precisely so there won’t be any misunderstandings, questions, or misconceptions about how you want your estate managed.
Estate planning basics
Different legal documents may make up your estate plan to create a powerful representation of your wishes. They include:
- A will that expresses your last wishes regarding the distribution of property and other assets.
- Trust- this refers to a legal three-party fiduciary document that gives the first party (Trustor) the power to grant the second party (trustee) the rights to hold assets on behalf of and for the interests of the third party (beneficiary).
- Guardianship- this details who will take care of your children and dependents after your death or incapacitation. It is mostly included in a section of the will.
- Financial power of attorney gives an attorney the power to handle your financial affairs.
- A durable power of attorney grants one the right to handle your non-health affairs, and it remains active if you become incapacitated.
- Advance healthcare directive states what medical action should be taken should you become incapacitated and unsound to make your decisions.
How taxes impact estate planning
You have to prepare an estate plan with taxes in mind. The goal here is to leave the most assets you can to your heirs by planning to reduce the assets lost to taxes. An attorney can help you determine the tools you can utilize to mitigate hefty taxes in the distribution of your assets. The potential taxes in estate planning include:
- Estate taxes are imposed on all estates worth a specific set value. Note that it only applies to the amount that surpasses the maximum value.
- Inheritance tax: the beneficiary of property or money pays inheritance tax.
- Gift tax: The gift receiver pays a tax on gifts surpassing a specific dollar amount.
You don’t have to be wealthy to prepare an estate plan. If you ever become incapacitated, your estate plan speaks for you and lets your wishes known to your loved ones.