Financial Planning

Estate Planning Series Part 1: The Basics Of Estate Planning

Estate planning is one of the most overlooked areas of peoples’ financial lives. Whether you’ve put it off because you think it’s boring, expensive, or because you don’t have enough assets, this series will help you understand:

  • Why you need it
  • Some of the common terms
  • Parts of an Estate Plan
  • What trusts are
  • Types of trusts
  • How to go and get it done

But for todays post, we are going to focus on the first 3 bullet points above.

What Even Is An Estate Plan? 

Your estate is everything you own. It ranges from your business, to your house, to your money, to your investments, and any other personal belongings. Even if you don’t own a lot of stuff, you still need a plan for where all of these things will go. 

However, your estate plan is more than just a map of where all your possessions will go.  It also helps dictate:

  • Where you kids will go
  • Who will take care of you if you are unable to
  • Who will handle all your affairs if you can’t
  • Who will take your loved pets
  • Etc.

It’s a combination of how to pass down assets, to how the end of your life will be managed, and who will handle everything. 

Documents Included In An Estate Plan

Everyone’s estate plan is slightly different, but there are a few specific documents that most have in common. 

  • A Last Will – The goal of a will is to lay out your wishes for who will receive what after you pass away. You will also select someone as a guardian for your children as well. 
  • A Living Will – This is a document that is part of the advance directive which allows someone to make decisions for your health if you cannot make them on your own. 
  • Power Of Attorney – This is a document that names someone to make the financial decisions for you if you are unable to do. 
  • Health Care Directive – Used to name who will make medical decisions for you if you are unable to.
  • A Living Trust – Very similar to a will where you outline the instructions of who gets what. The difference with a trust is that these assets are placed in there while you are still alive. Once you pass away, these assets will be moved without needing probate. 

What Actually Happens To An Estate After You Die? 

Most people have no idea what the process is like after someone passes away. Those that do, totally understand why these documents are so important. So let’s dive into this so you get a real life understanding. 

Everything you own at the time of your death is part of your estate. Your estate then goes through probate. A will does not help you avoid probate like many think, trust’s can though!

Probate is the process where the court decides what happens to your assets now that you are gone. This is where having estate planning documents becomes so helpful. If you have a will, the court uses this as their guide to splitting up your estate. If for some reason you don’t have one, you are considered to have died intestate and the court uses local laws to decide who gets your assets. Let’s be real, you don’t want them deciding who gets your stuff! Having a will helps ensure everything goes to the right people. 

You can avoid probate by adding trusts or utilizing payable-on-death accounts for things like bank accounts.

Who Handles Your Estate? 

When you create your will, you get to name someone as the executor of your estate. This person manages your estate through the probate process. They handle unpaid bills, taxes, debt, and anything else that relates to your estate. They also help distribute your estate to all the right people. Typically, people pick their kids, spouse, or siblings to do this for them as it is not a quick and easy job. You definitely want someone you trust to be your executor. 

If you do not name someone before you die, the judge will choose someone as your administrator. 

Other terms you may need to know:

  • Beneficiary – Simply put, this is who will be receiving the stuff in the estate plan. They are the one’s who benefit from it. Oftentimes, this is kids, spouse, an organization, etc.
  • Testator – A Testator is the person who is making and owns a Will. 
  • Trustee – A Trustee is the person you name to hold the title of Trust property. They are responsible for administering the terms of the Trust.
  • Trustor – The Trustor is whoever makes the Trust. You’re setting up how your legacy will live on for those you love the most.
  • Executor – Your executor is the one who will help handle all the tax bills that could be due. They will use money in the estate to help pay these bills and if they need to liquidate to help pay for taxes, they will.

Taxes On Your Estate

Many people worry about estate taxes, but it only really applies to people with a lot of wealth. In 2023, the first $12.92 million ($25.84 million per married couple) of your estate is exempt from federal taxes. The only way you have taxes is if you have more wealth than that or if you live in one of the 12 states that have a state estate tax. These states are:

  • Connecticut
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

Some of these states have a lower exemption than the federal one so you may have to pay state tax even if none is due federally. You definitely want to be aware of this and plan for it!

This is part 1 of what you need to know about estate planning. Next week we will talk about trusts, intro them, and go through both revocable and irrevocable trusts.

Thanks for reading!

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