Why is estate planning important? Read on to learn about estate planning basics, and why you should care.
Did you know over 68% of Americans don't have a will? Many of us put off estate planning, whether it be because it's intimidating or we just don't want to think about it. But estate planning is too important to put off, and it’s not just for the rich and famous.
So what is the purpose of making an estate plan? To ensure your property goes where you want when you're gone, you need a plan that goes beyond your spoken word to trusted family. Join us as we review the basics of estate planning and why it's so important.
We begin with a fundamental question: What is estate planning? The truth is that many people don’t really know what "estate planning" means, or why estate planning is so important, even if they understand it roughly in practice.
Estate planning, at its most basic, is planning for what's going to happen to your assets when you pass away. However, the specifics can be complex enough that many people will want an estate planning lawyer to help them do it properly.
While it is possible to do some or all of one's estate planning without a lawyer, it can be difficult. The relevant laws vary by state, and the specifics often depend on how large your estate is and what you want your plans to include. And the reality is that estate planning is worth getting right--if something goes wrong later, the consequences will more than undo any money you may have saved in the short term.
Important to estate planning is a document most people are familiar with, one's will. A will is a legal document that covers how you want your property (assets) to be distributed, as well as who will have custody over any children or other dependents in your care.
But estate planning extends beyond one's will. Estate planning involves trusts, designating an executor, and more. The larger your estate and more complex your local laws, the more planning that needs to be done.
Without a well-written will, the odds are good that your assets aren't going to be split the way you're imagining. In fact, any friends, romantic partners, or organizations you'd like to receive a donation will get nothing by default.
Dying without a will results in what is called an intestate succession and results in an asset distribution many people wouldn’t be happy with. As a rule, spouses tend to benefit the most and then any children you have.
If you die without a spouse or any children, your parents would then receive your assets. (The basic rule from this point on tends to be that whoever is most closely related to you receives your assets.) Intestate succession has no regard for the needs of individuals in your family nor the importance of one person over another to you. All that matters is how close their relation is under the law.
Note that if you have children with someone with whom you are not married, your partner will not receive your assets through intestate succession. The same is true of any kind of lifelong partner.
In legal terms, these people more or less have no official connection to you when it comes to inheritance. If you're in such a relationship, estate planning is essential if you want to leave them with anything when you're gone.
Keep in mind that these are even worse situations to be in if your family are on bad terms with each other or there are particular items of emotional value to different individuals. So why is estate planning so important? Because having a will is crucial for making your last wishes known and giving you the peace of mind that they will be followed.
When you die, your estate or your inheritors may be taxed. While this isn't universal, you'll want to know whether this will be the case so you can plan ahead.
First, there is the federal estate tax. This tax tends only to affect wealthy individuals, with special exemptions in place protecting things like farms or family businesses. That said, it can be a heavy tax for those it affects.
Then there are taxes on the state level. Seventeen states may tax your estate when you pass or will tax those who inherit from that estate. In fact, Maryland has laws in place to tax both estates and the inheritors of those estates.
How much these taxes will impact you again depends on your wealth, with many states having a sliding scale so that estates above certain thresholds see higher taxes.
While it's a good idea to discuss all tax questions with a professional, estates with a total asset value of less than one million dollars are much less likely to see an issue.
As one reaches the $3 to $7 million thresholds, more and more states' tax laws will start to take effect. At this level of wealth, a thorough review of your options from a tax and estate professional is essential. It might make sense to explore options for avoiding probate or any other number of tax and estate planning measures in such situations.
Keep in mind that the numbers above refer to the combined value of your estate. When one factors in the value of their home, any vehicles, all their electronics, and more, their estate is often more valuable than they realized.
Another essential element to estate planning, and one that may affect more people than estate taxes, is establishing trusts.
Trust agreements are fiduciary relationships between three parties:
A trustor first decides that some of their assets should be put into a trust. This may be done for tax reasons, to ensure the assets can provide for someone over an extended period of time, or many other reasons.
The person forming the trust then needs to decide if the trust will take effect while the trustor is living or after they pass. If they want the trust to take effect while they're alive, they can also decide whether they will be able to revoke the trust or not.
Once the trust is in effect, the relevant assets are held by a trustee. This party controls those assets for the benefit of a third party, the beneficiary.
Trusts are financial planning topics worthy of their own article, with a great deal of nuance and utility depending on what a trustor is looking for. But on a very basic level, they are an important estate planning tool to keep one's assets safe from misuse, taxation, bad actors, and more.
Another critical element of estate planning is choosing one's executor. This is the person who will carry out (execute) your wishes after you pass away.
This job isn't easy and, at the very least, will require someone who can plan ahead and stay well-organized. The larger and more complex your estate is, the more difficult the executor’s job will be.
For smaller estates, it may be okay to choose a trusted loved one to be your executor so long as they are willing and of sound mind. For larger estates, many people instead choose to have a lawyer or accountant perform the role.
Planning who will be your executor ahead of time is important because they need to be prepared. They'll be responsible for a good deal of your final paperwork and need to settle your debts with your estate funds.
The role also comes with a good deal of power. While in theory, an executor should only be able to execute your will, in practice, they have a lot of control over what happens to your estate.
Someone who would disregard or manipulate your intentions would be obviously problematic, but someone who is simply not up for the task could also mess up your will unintentionally, leading to results as bad or worse.
The good news about hiring help for your estate planning is that costs tend to be scalable. For example, if all you're interested in is a basic will, professionally written wills tend to cost between $300 and $1000 depending on the complexity of your needs.
Unfortunately, though, not all of that complexity is in your control. For instance, estate planning in New York tends to be on the expensive side, in part because of the state's more complex inheritance laws.
There is a middle ground between doing the work yourself and hiring a lawyer, however. For smaller estates, like Policygenius, Trust & Will, and Willing are often able to do the heavy lifting at a lower cost than a lawyer.
But if you're wondering whether you can do estate planning online, remember that the downside of such services is they tend not to come along with legal advice. This means the lower-budget options might work well if your estate plan is straightforward and you’re comfortable navigating the necessary tools.
But the reality is that saving a few hundred dollars now is not worth it if things go wrong later. That’s why many people work with estate planning attorneys each year, and the peace of mind that doing so can give you and your family can be invaluable.
So this is where some reflection and planning can help you make the right choice. Review your estate planning checklist and try to determine how much work your plan requires.
Is your estate relatively large and complex? Then you should use the services of a legal professional.
Are you middle income or lower? It may be possible to get by using an online service or even trying the paperwork yourself. Just remember to be thorough; you still need to follow the proper procedure for a smaller estate.
So why is estate planning so important? An estate plan is all about making sure that if something happens to you, your family knows what to do.
The importance of estate planning doesn’t depend on how much money you have, or how many assets you own. It’s about planning ahead, so your family can grieve in peace knowing that they are carrying out your wishes.
The questions estate planning brings up can be complicated and uncomfortable. However, with the help of a legal expert, estate planning can allow you and those you love some peace of mind.
If you'd like more legal advice on getting help with wills and more, we hope you'll sign up with us. At evident, we've made it our mission to help people connect with great lawyers and get the legal help they need.