- Protects loved ones by ensuring assets are passed according to the deceased’s wishes
- Protects minor children by naming guardians for their care in case both parents unexpectedly pass
- Can lower taxes for heirs through strategies to minimize estate, inheritance, and income taxes owed upon death
- May help families avoid conflicts over money
- Clearly defines who manages property when one is unable or after death, as well as customizing plans for a child with special needs
Planning can be fun when it involves a vacation, wedding, or birthday party. However, when it comes to estate planning, the excitement is quickly sucked out of the room.
The main reason is that no one wants to think about their demise. After all, your estate plan doesn’t kick in until you kick the bucket. Yet, it’s an essential step to take if you want your affairs settled with ease once you’re gone.
And estate planning is not just for the wealthy, either. Most people should have a plan in place to alleviate the potentially long, burdensome, and expensive process that heirs commonly face.
Here are four reasons why estate planning is essential to any financial plan.
1. Estate planning can safeguard your loved ones
Certain accounts with named beneficiaries bypass the lengthy court process of probate. Life insurance is one such example, as long as you have named at least one beneficiary. However, your house(s), individual bank and brokerage accounts, cars, furniture, artwork, and more can be probated.
Without an estate plan, these assets will be left to the courts to decide who gets them, and this takes time and money. Probate can last anywhere between nine months to several years. During this time, the estate’s assets are frozen. And the longer your assets are in probate, the more it costs. The average cost of probate is 3-7% or more of an estate’s total value.
2. Estate planning can protect minors
If you have young children, who will care for them if you pass away? It’s a tough question for sure, but an important one nonetheless. A will can accomplish this part of the estate planning process.
To ensure your kids are looked after the way you want them to be, you may want to consider naming their guardians in case you and your partner unexpectedly pass away. Without named guardians, it will be up to the courts to decide who cares for your children.
3. Estate planning can lower tax burdens
Another way an estate plan can protect your heirs is by mitigating the amount of taxes they have to pay on your estate.
Even a modest amount of estate planning can significantly reduce, or even eliminate, federal and state estate taxes, as well as state inheritance taxes. Additionally, there are strategies available to minimize the income tax burden on beneficiaries. Failing to have a plan in place could result in a substantial financial liability for your heirs to the IRS.
4. Estate planning can help families avoid adverse incidents
Even the most tightly-knit families can be torn apart by money. But these family feuds would never happen in the first place if an estate plan was established.
A revocable living trust, for example, is one common tool people use to designate who takes charge of their assets if they become unable to or pass away. This helps your family avoid unnecessary unrest and ensures your assets are treated in the way you wish.
Additionally, it can assist you in creating customized plans if needed. For instance, you can make arrangements for a child with special needs or establish a trust for someone who may benefit more from receiving scheduled payments rather than a lump sum.
Moreover, it enables you to allocate resources more appropriately, giving greater support to the child who provided the majority of care in your later years or allocating less to the one whose extensive education you funded while contributing comparatively less for their siblings. This ensures fairness and thoughtful distribution of resources.
Having an estate plan in place is essential to protect your assets and loved ones in the future. Without one, your heirs may encounter significant tax obligations, and the courts could determine the division of your assets and even the guardianship of your children. By creating an estate plan, you can safeguard your legacy and provide peace of mind for your family.