When they hear the term “estate planning”, most people assume it’s something that only the rich need to do. The truth is having an estate plan is important-no matter how much money you have. It will determine what will happen to your assets once you pass away, but it also does much more than that. Here are the basics about estate planning that are important for you to know.
Defining Estate Planning
As stated before, an estate plan isn’t just for the wealthy. It is planning for your future, and the future of your beneficiaries. It will help with the disposition of your property and other assets after you die. Having a legal estate plan in place can:
- Help avoid confusion and conflict for your heirs regarding your final wishes
- Provide any minor children with a legal guardian of your choosing
- Ensure your loved ones will receive your assets
- Reduce legal expenses and taxes regarding your estate and final wishes
When talking about estate planning, there are many terms that you may hear. Some you may already know, but here is what they mean in relevance to estate planning.
- Estate-Your “estate” is all the property that you owned. It includes your physical property, as well as your liabilities and assets.
- Property-This is divided into 2 categories. Real property refers to the land you owned, and personal property refers to everything else, such as cars, jewelry, valuable household items, loans, bank accounts, insurance policies and securities.
- Grantor-The grantor is the person who is transferring property to another party (or the grantee) under a trust. In the case of your own estate plan, the grantor is you.
- Beneficiary-This is the person who the grantor leaves property to. It can be a single person or multiple people.
- Trustee-The trustee is the entity who will administrate the property on behalf of the grantor, in accordance with the trust document. The trustee should be someone your trust to carry out your final wishes once you are gone.
- Successor Trustee-This is the person who will take over trustee duties should the original trustee not be able to do so. The terms of your trust should determine the circumstances for which your original trustee is no longer able to serve.
- Probate-The term “probate” refers to the legal process that takes place once you pass away. Your estate will go through the courts in order to identify your rightful heirs, how much they get and eventually transfer the title of property to the right individuals. Not all your property will be subject to probate, but the portion that is could possibly be tied up in the court system for quite some time.
- Estate Transfer-Refers to the process which legally transfers property interests to another person. It can take place in during your lifetime, such as when you sell or gift your estate, or upon your death.
There are many, many documents that can go into an estate plan, but to eliminate confusion, I’m going to list the most common that everyone should have, or at least consider.
- Last Will and Testament-Perhaps one of the most common planning documents and one most people have actually heard of. A will allows you to dictate how you would like your property and other assets to be distributed once you die. Without a valid will in place, your state laws could end up deciding what happens to your remaining assets. You can also use your will to name who will manage your estate and designate someone to care for your children if they are still underage at the time of your passing.
- Revocable Trust-Revocable Trust, or Revocable Living Trust, will let any assets you have in trust pass on to your beneficiaries without the hassle of having to go through probate. It designates the disposition of your assets. It may also help reduce the costs and time that are associated with designating your assets, and also avoid having them pass through a will, which will keep the value of the assets confidential.
- Bypass Trust-Also known as a credit shelter, a bypass trust is the document that lets a married couple transfer an available amount upon the death of one spouse to someone other than the surviving spouse. It organizes a bypass that does into effect once the first spouse dies. If the surviving spouse should pass away, the trust then gets passed on to the family and is not subject to a federal estate tax.
- Power of Attorney-The Power of Attorney document is used to appoint a person who will act on your behalf if you are unable to, due to death or becoming mentally incapacitated. The person you appoint, known as your agent, will manage your financial and legal affairs.
- Healthcare Power of Attorney-With this document, it allows your agent to make any healthcare related decisions for you if you are unable to make those decisions for yourself. It does not have to be the same person that you named as your Power of Attorney. Your Healthcare Power of Attorney will make decisions regarding your medical treatment and nursing care. He or she will also be allowed access to your medical information in order to make the best medical decisions on your behalf.
- Anatomical Gifts-Also known as the “Gift of Life,” anatomical gifts states that certain organs, skin and tissues may be harvested from your body upon death and gifted to another person by way of a transplant.
Estate planning isn’t just for those who are wealthy. Sure, it determines what will happen to your money once you pass away, but it also helps organize much more than that. A valid estate plan at the time of death can eliminate confusion, provide a legal guardian for your underage children, ensure your beneficiaries get what they deserve and name who will act on your behalf. For the majority of people, the basic documents listed here are a great place to start. They cover what you need to know about estate planning.