Many people believe that only people with lots of assets need to do estate planning. This common misconception needs to be broken. At its core, estate planning is the process of deciding what happens to your assets and personal effects upon your death or incapacity.
Maybe you want to ensure that your assets are disseminated according to your wishes. Or maybe you want someone to get your affairs in order before you die. As long as you have assets and a family, you’re going to need an estate plan.
When we talk about estate planning, the first thing that usually comes to mind is the last will. While a will is a crucial part of the process, there are other things you have to consider. For instance, high-net-worth individuals might want to set up a trust to circumvent high inheritance taxes and protect the family assets.
Estate planning isn’t just for your money and property, either. You could empower someone to make health or financial decisions on your behalf if you become incapacitated. Some people also make arrangements for their funeral, such as a pre-arranged cremation.
If you’re not sure where to start, here are a few tips that will help you make plans after death.
1. Focus on your most important assets
When setting up your will, you need to ensure that it includes clear and specific instructions for your most important assets, such as your home. If your real properties aren’t mentioned in your will, or if you don’t have a living trust, estate disposition reverts to the state. Your next-of-kin won’t even be able to enter your home until the court appoints an executor.
It pays to leave specific instructions, especially for certain assets. For instance, if you have a property with historical or cultural significance, your last will should clearly mention that the property should be kept in the original condition.
2. Get a living trust
A living trust is an instrument that puts your assets into a trust while you are alive. Upon your death, your assets are distributed to your heirs or beneficiaries by a trustee. While living trusts require more paperwork than a regular last will, they offer more advantages to you and your heirs.
For starters, a living trust ensures that your beneficiaries avoid probate. If you only have a will, a probate court will handle your estate, and the court-appointed executor will distribute the assets. Probate often takes a long time and might devalue your estate. To ensure your heirs can benefit from your estate right away, a living trust is your best bet.
Living trusts also save you more money in the long run. While the upfront costs are higher, due to the document’s complexity, the estate remains when it is distributed to the beneficiaries. Probate usually costs around 5 percent of your estate. For an estate valued at a million dollars, that fifty thousand down the drain.
Finally, living trusts are private, even upon your death. Nobody will know who inherited what unless you tell them. Meanwhile, a will is considered part of the public record, and anyone can access your personal records.
3. Insert backup provisions
Even in death, you need to have a backup plan. It pays to be prepared for all sorts of scenarios, and you need to make sure your arrangements remain intact in the event of a catastrophic event, such as a trustee predeceasing you.
For instance, you can name a succession of trustees to prepare for all eventualities. If trustee A dies, trustee B will take over, and so on. If all else fails, you can designate a firm to serve as the trustee.
You could also insert specific provisions for a separate trust to pay for your beneficiaries’ education, healthcare, and other specific expenses. When appointing a trustee, make sure to choose someone you can trust to make the best decisions for your estate.
The bottom line
You don’t need to be a multimillionaire to create an estate plan for your family. The goal is to preserve your legacy and ensure that your family will be taken care of after you pass on. Planning your estate allows you to do all of that and more. More importantly, know your options so you can choose the right plans for you.