Prudent estate planning involves several key steps that are designed to safeguard your beneficiaries financially in the event of your death. Therefore, it’s generally recommended that you create an estate plan if you have substantial assets, you want to provide for your dependents or if you have specific wishes regarding the disposition of your property or your future health care. You can create an estate plan on your own or with the assistance of an experienced estate planning attorney. When drafting your estate plan, you should consider the following five components in order to ensure that the interests of you and your beneficiaries are protected.
Establishing A Will
A last will and testament allows you to specify how you want your property or other assets to be distributed after you die. A will is the most basic document you should include in your estate plan if you want to ensure that your assets are divided according to your wishes. If you die intestate, meaning without a will, your estate will be distributed to your heirs according to state inheritance guidelines. Each state has different rules regarding how a will is established but generally, you must be age 18 or older and of sound mind to write a will. Some states recognize oral or videotaped wills, but it’s generally a good idea to put your will in writing and have it witnessed by at least two other people. You may also want to have your will notarized and file a copy with your local probate court.
Do You Need A Trust?
A trust is a legal entity that can be established in conjunction with or independently of a will. A trust allows you to transfer control of specific assets to a trustee who is responsible for managing these assets according to your wishes. You can instruct the trustee as to how your finances should be handled after your death or in the event that you become permanently incapacitated. Generally, a trust is recommended for those individuals who have substantial assets, own a business or want to plan for the financial well-being of a spouse and/or minor children. For example, you can use a trust to specify the conditions under which your children will be eligible to receive their inheritance or name someone to act as a financial conservator on their behalf until they reach adulthood. You can also use a trust to make charitable donations or to protect your assets from creditors.
Health Care Planning
Estate planning is not limited to financial considerations. You should also consider including an advance directive in your estate plan if you have specific wishes regarding your future medical care. An advance directive consists of two specific elements. First, you can establish a legal document naming someone to act as your health care agent. Your health care agent is responsible for making decisions about your care in situations where you are temporarily unable to do so. For example, if you’re going in for routine surgery and will be under anesthesia, your health care agent would have the authority to act in the event that emergency medical care is necessary.
The second component of an advance directive is a living will which specifies your wishes regarding your care if you are terminally ill or become permanently incapacitated. For example, you can specify whether you want to be kept alive using artificial methods such as a respirator or feeding tube or whether you want to donate your organs after your death.
Life insurance is designed to help your loved ones cover your funeral expenses, pay off any remaining debts and cover the cost of living expenses should you die. If you have a mortgage loan, student loans or other debts or you are the primary income-earner for your family, purchasing a life insurance policy can help them to avoid an undue financial burden. There are several types of life insurance you can purchase including whole life, universal life and term life. Whole life insurance builds some cash value while universal life is a type of permanent life insurance. Term life pays a fixed death benefit but expires after a specified amount of time, typically 10 to 20 years. The type of insurance you need generally depends on your income, debts, age and overall health.
Depending on the size of your estate, you may also need to consider the potential tax implications involved. While federal estate taxes only apply in a small percentage of cases, this type of penalty can potentially cost your beneficiaries hundreds of thousands of dollars if you don’t take steps to minimize your tax liability. Creating an estate plan not only protects your assets and your beneficiaries. It can also provide you with financial peace of mind. While you may not want to think about planning for the inevitable, it’s not something you or your loved ones can afford to put off.