You have a plan for your assets after you are gone
Why is estate planning important?
Having an estate plan is vital to help you use your assets to provide care for your loved ones in the event of your death or incapacity. When you do not have an estate plan, financial decisions regarding your money, medical care, and other issues may not be made the way you want them to. A lack of a plan can be a burden on your friends and family, especially if they have to manage your money without knowing your wishes.
Death
You may not want to think about your death, but it is practical to put a plan in place to prepare for it. A will is a common tool used to determine where your wealth will go after your death. If you do not create a will, your state laws determine what happens to your assets, along with other decisions, and the outcomes may not align with your wishes.
Incapacity
An estate plan can also ensure that someone can make financial decisions on your behalf if you are unable to manage your money due to injury or illness. For example, you might lose consciousness, become incapacitated, or simply lack the energy to communicate or take action. Without assistance, your bills may pile up, or your insurance policies could lapse.
Who is estate planning for?
There is a common misconception that estate planning is only for the wealthy and those with children. “Estate planning is for everyone,” said Pam Horak, CFP and founder of Pathfinder Planning, in an email to The Balance. Horak said that low-income individuals and single people also need to plan for what happens to their assets when they pass away or become incapacitated.
You may want to leave property to people outside your family, or you may wish to name specific guardians for minor children. An older individual may want to leave money to a church.
Note
The estate plan can specify what happens to online accounts like social media accounts, websites you own, email accounts, or other digital assets.
Basics of estate planning
An estate plan is a readiness to deal with some of life’s toughest situations. “The plan is the details about what happens to your money and property when you are not there,” said Horak.
The basics listed below are common factors that make up estate plans. You may not need to include them all based on your financial situation; there may be other strategies not listed here that make the most sense for you. Again, discuss your goals with an estate planning attorney.
Last will
A will, which is a common foundation for an estate plan, is a legal document that provides instructions on how to manage the assets in your estate after death. A will can name who will receive cash, investments, homes, vehicles, valuables, and more.
Note: A will may not necessarily address all of your assets. For example, if you name a beneficiary on a retirement account or life insurance policy, the will does not determine who receives that money – the beneficiary designation does.
Wills can accomplish more than just property distribution. For example, a will may: appoint an executor or personal representative to handle your estate, designate guardians for minor children, create and fund trusts.
Once you have drafted your will, inform someone you trust where your estate planning documents can be found.
Trust documents
A trust is a legal arrangement that holds assets for the benefit of a beneficiary. Instead of holding assets in your name, you can hold them in the trust. Trusts can be beneficial for estate planning as they can help keep your assets out of probate, which can be a time-consuming and costly process. Trusts can also detail rules about when and how beneficiaries receive their inheritance.
Not
Everyone needs trust, but it can be particularly useful in complex situations, according to Jeff McDermott, CFP and founder of Create Wealth Financial Planning, who said in an email to The Balance: “Trusts can also handle special cases, such as a special needs beneficiary or a beneficiary with bad financial habits who needs conditions around their access to inheritance.”
Note: A trust can empower another person to manage your money if you are unable to do so. By naming a backup trustee, you allow that person to act on your behalf. The backup trustee can pay your bills and manage your accounts.
Finally, a trust can provide privacy. A will is a public document once it is submitted to the court. Similarly, if you become incapacitated, anyone wishing to manage your affairs must go to court to gain control over your assets. In contrast, a trust can eliminate the need to create public records.
Insurance Protection
Life insurance can play a key role in estate planning. Life insurance often pays a tax-free death benefit to beneficiaries, and the death benefit can be substantial. That money can replace the deceased person’s income, pay off debts, and ensure children can afford education, among other things.
McDermott said, “Determining how much life insurance you need to replace your income in the event of your death is an important part of the estate planning process.” An insurance agent or financial planner can help you determine the appropriate amount of insurance you need and what types of policies may be suitable.
Financial Power of Attorney
A Power of Attorney (POA) is a legal document that grants someone the right to manage your legal and financial affairs on your behalf. They can pay bills and invest money for you in a variety of situations.
You may want to have a POA in your estate planning to empower someone to make major life decisions, including your health or financial decisions, when you cannot.
Healthcare Directives
A comprehensive estate planning plan includes a specific plan for the treatment you want when you are unable to make decisions or communicate, regardless of your age. Without proper healthcare directives, you may not receive the treatment you desire.
You can either outline your healthcare wishes in a written document or appoint someone to make decisions on your behalf.
Living Will: This is a legal document that specifies your medical treatment preferences. For example, you may specify that you do not wish to be kept alive by feeding tube. Depending on your state, this may be referred to as
Source: https://www.thebalancemoney.com/key-elements-estate-planning-1289907
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