Estate Planning [Guide]

Last updated on March 27, 2021 by Chris Granwehr in Retirement Planning

Three generations of women getting tips on estate planning.

No one wants to contemplate their own death, particularly when your family depends on you financially. Estate planning can be a difficult process, but it is crucial ensure your heirs will receive the maximum benefit in order to maintain financial security upon your death. AARP statistics show 60% of Americans do not have a will or similar plans for the distribution of their assets.

A lack of preparation can cause major headaches and deprive your beneficiaries of their full inheritance. Estate taxes can cost over 1/3 the value of all assets, so taking calculated steps can save your family thousands of dollars, if not more.

While we suggest everyone solicit advice from estate planning and financial advisors, we have compiled a list of several actions everyone should consider when creating their estate plan.

Create a Will and Nominate the Right People

The most important step in estate planning is officially designating how your assets will be inherited. Creating a will officially states your desires for your estate after your death. This document also establishes rules for determining guardianship of children, trusts for heirs, and nominates an executor of the will.

Upon an individual’s death, the will is taken to a probate court which rules on the legitimacy of the will and transfers control to the executor. The executor then oversees the distribution of assets and fulfills the wishes of the deceased. Naming the right executor is a critical step in estate planning.

It is prudent to speak with this person before writing your will and ask if they are comfortable with the responsibility. While most people designate a close family member, appointing multiple executors in typically allowed, so it can be smart to include a tax or financial advisor who can provide professional knowledge.

One other important person to nominate is a medical power of attorney. This person will make decisions regarding your health if you are incapacitated and can save a significant intra-family struggle. Creating a living will that dictates your opinions about end of life care is also imperative.

Update Retirement Accounts and Life Insurance

While many assets are covered by the will, retirement accounts, pensions, and life insurance policies are typically awarded to the designated beneficiaries upon the owner’s death without reference to the will. These can be significant amounts of money, so it is a good idea to revisit these accounts annually to ensure the right people inherit the benefits.

Additionally, life insurance can be an excellent component of estate planning. The death benefit is generally passed tax free and can cover funeral costs and legal fees associated with executing the will. Life insurance can also help cover taxes on other assets within the will, leaving more for the heirs. For example, if you expect your estate will be taxed at a certain amount, say $300,000, purchasing a policy with an equal death benefit will cover estate taxes without depleting your assets.

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Preparing for Estate Taxes

State and federal taxes can diminish the assets passed on to your heirs by up to 40%, but fortunately, most people are below the federal estate tax exemption level. But for those whose estate exceeds $11.2 million, there are avenues for reducing the amount of the estate taxed, such as establishing trusts or donating to charitable causes.

Trusts generally allow for assets to be transferred to heirs tax-free, although any income earned by the trust is taxed accordingly. You can even designate what the trust will pay for and how much can be accessed at a time. Many people use this to cover education and real estate costs for their families. Donating to charity also can diminish the estate tax burden. Not only will there be fewer assets to distribute, any charitable donations are free from estate taxes.

Currently, 15 states also have estate or inheritance taxes that vary widely. To see your state, check this map.

Consult Professional Advisors

Estate planning can be an incredibly complicated process even for the simplest of estates. Accessing expert advice can reduce the headache on your part and streamline the process, providing your heirs with the most advantageous outcome. Estate planning attorneys can guide you through the process and navigate any hurdles with wills and trusts. Tax professionals can help avoid burdensome estate taxation, saving your family money. We recommend at least meeting with these professionals for a free consultation, even if you ultimately decide not to utilize them.

Hopefully, this article has provided some useful advice to assist your estate planning decisions.  Remember to reach out to professional resources and to act soon in establishing your will and executor.

Mason Finance does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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