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Six Things to Know About Estate Planning

elderly couple with realtor

When it comes to estate planning, the whole process can seem quite overwhelming and complex. To help keep it simple, here are six essential things you need to know (or consider doing) to help jumpstart your estate planning.

  1. Be Aware of Probate
    The first step in implementing an estate planning strategy is to understand the role courts play in the process, and how probate impacts even the smallest of estates.
    Probate is a term used to describe the process the court uses in settling the deceased’s estate. The time it takes to complete the estate distribution and the associated fees will vary by state, but probate expenses may add up, depending on your unique situation and which state you live in. The costs, along with the time and headache associated with settling an estate, means any step that will help navigate the probate process — or better still avoid it altogether — is worth exploring.

  2. Create a Will
    A valid will does not avoid the probate process, but it will make things much easier. A will serves as a guide to your final wishes for the courts and the executor (the person chosen to act on your behalf). When it comes to the courts, anything that speeds up the process of physical asset distribution will minimize fees and make things easier for everyone involved. It can also eliminate any potential family disputes over who gets which assets.
    But a will is only a roadmap. It’s best to make sure that all of your financial assets and valuable possessions (like a home or a car) have beneficiaries named in other documents besides the will.

  3. Decide on the Beneficiaries of Your Financial Assets
    Financial assets can have beneficiaries named so that the institution holding them knows who to turn the funds over to in the case of an account holder’s death. If an asset has a named beneficiary, it avoids probate (if probate is applicable in your situation). A retirement plan or life insurance policy are the most common instances, since these all ask the owners to name a beneficiary.

    To make things even simpler, you should know that in addition to an insurance policy and retirement plan, a lot of everyday assets allow for beneficiaries. Checking, savings and brokerage accounts are a few of the more common examples that are often neglected.

  4. Consider Creating a Revocable Trust
    For assets that don’t typically allow for a named beneficiary – often larger physical assets like a home or car – a revocable trust may be a solution to consider. Most anything placed in a revocable trust (also called a living trust) will avoid the probate process. The set of people involved in a trust — that is, the person or people who set up the trust, and the beneficiaries named in the trust — are called trustees. Revocable trusts allow the trustee(s) to retain control and will help transfer ownership of the asset in question to the living trustees upon the trust owner’s death. The trust itself (think of it as a separate entity) technically owns the assets, so transition of ownership can go more smoothly.

  5. Consider Having a Power of Attorney Drawn Up
    There are two Powers of Attorney (POA) worth exploring to accomplish some basic estate planning objectives.

    • Durable Power of Attorney
      It’s important to draft a durable power of attorney (POA) so an agent or a person you assign will act on your behalf when you are unable to do so yourself. Absent a power of attorney, a court may be left to decide what happens to your assets if you are found to be mentally incompetent, and the court’s decision may not be what you wanted. This document can give your agent the power to transact real estate, enter into financial transactions, and make other legal decisions as if he or she were you. This type of POA is revocable by the principal at a time of their choosing, typically a time when the principal is deemed to be physically able, or mentally competent, or upon death.

      In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases, it might make more sense to have another family member, friend, or a trusted advisor act as the agent.

    • Healthcare Power of Attorney
      A healthcare power of attorney (HCPA) designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. If you are considering executing such a document, you should pick someone you trust, who shares your views, and who would likely recommend a course of action you would agree with.
      After all, this person could literally have your life in his or her hands. Finally, a backup agent should also be identified, in case your initial pick is unavailable or unable to act at the time needed.

  6. Have "The Talk"
    Obviously, death is a really tough topic. And if you are younger, it may seem like something that can be dealt with much later. However, no one ever knows just when you will need to deal with it and the potential obstacles that may result.

    Perhaps the most important part of the estate planning process requires no paperwork or expense: discussing your relatives’ wishes (such as aging parents). Nothing will make that conversation easy, but a clear understanding of your family’s wishes can help avoid tough conversations at a time when loved ones need to rely on each other to get through a difficult time.

The Golden Rule of Estate Planning
One way to make sure you are taking care of your estate planning needs is very simple and easy – making sure your beneficiary designations are up-to-date. Doing so can help your money and other assets get where you want them to go. Anytime there is a major change in your life – such as birth, death, marriage, divorce – consider it a signal to update the beneficiaries on your retirement accounts, life insurance, bank accounts and other investment accounts. Don’t forget about your other assets, such as cars, boats, valuables and sentimental items – and be sure to record your decisions in your will. By making sure you properly name beneficiaries, you can remove a needless (and unpleasant) surprise that sometimes faces the heirs of someone who has passed.

A Quick Word About Taxes
If you’re like most people, your primary residence and your qualified retirement plan are likely your two largest assets. When it comes to estate planning, they are handled very differently from a tax perspective. Real estate, for example, can receive a step-up in value to your date of death. This is important so your heirs won’t face capital gains taxes based on a gain they did not receive. As far as your qualified retirement plan goes -- such as an IRA or 401(k) – the tax consequences can vary quite a bit and depend on your situation and who inherits your account (your spouse or partner, versus your children). An estate planning expert or financial planner can help you sort it all out, preserving your estate to the fullest extent possible.