Everyone needs some level of estate planning; it is not just for the wealthy. For some, this type of planning includes a will to distribute their property. For others, it may include trusts that can benefit their family over generations. What these efforts have in common, more than other types of financial planning, is that we won’t witness the fruits of our labor. Instead, we make this effort to plan so that the people who survive us—our loved ones—benefit both economically and psychologically when we pass.
Relieving Burdens on Loved Ones
No matter the age or circumstance, losing a loved one is difficult—from a financial standpoint for some, from an emotional standpoint for all. By properly establishing an estate plan, we can relieve—on some level—both burdens. If we fail to plan, not only will our loved ones be in mourning, but they may have to deal with complicated financial or legal issues they don’t understand. This will increase their stress levels and money will be spent unnecessarily on taxes, court costs, and legal and accounting fees.
Components of a Basic Estate Plan
To avoid these issues and instead leave a positive financial legacy, we need to act now. Most people should have a basic estate plan in place that includes a will, powers of attorney for financial and medical matters, a living will and do-not-resuscitate orders. These important documents spell out who will serve as your estate executor (the person responsible for distributing your estate and paying any remaining debts); who will act as guardians to raise your minor children; who will make financial and medical decisions while you are alive, but physically or mentally unable to do so; and how you want to receive medical treatment at the end of your life. These documents cover all end-of-life decisions we should be making ourselves, so as not to create that needless burden for our loved ones.
Maximize Inheritances Through Planning
From a financial standpoint, an estate plan should try to minimize any transfer costs and maximize our loved one’s inheritance. This area of planning should begin with a review of beneficiary designations that have, or have not, been made. When designating a beneficiary, you are passing assets by contract law, which avoids probate, but that also means your will doesn’t control the ultimate disposition. If you have a life insurance policy or a 401(k), and only name one child as beneficiary, it won’t matter that your will states both children should split your estate 50/50, only the named beneficiary will inherit.
Speaking of life insurance, the questions of need and amount should be carefully considered, however if there is little to no net worth, it would be beneficial to at least buy enough to cover final expenses, such as burial costs. Lastly, any debts should be openly discussed with those who may be negatively impacted upon our passing. Having to pay off personal debts are difficult enough but having to pay debts that may have been hidden from loved ones for years is especially excruciating.
As many have opined, nothing is certain except death and taxes. Given this inevitability, we should take the effort today to prepare our estate plans to benefit our families in the future, leaving them a positive financial legacy.