What Is an Estate Plan and Do You Need One?
If you’ve been reading this blog for any amount of time, I assume you care about how you manage your money. As a good money manager, you hate waste. You avoid anything that robs you of your hard earned money and do everything to keep it safe and protected. But, there’s one thing you might have overlooked that could cost you dearly!
60% of Americans do not have a plan for how their estate will be handled after they die. Perhaps it’s because they’re in good health or young and don’t feel they need to worry about it right now. Unfortunately, life is unpredictable and no one is guaranteed tomorrow.
No matter what age you are, if you’re an adult and have any assets you should have an estate plan. If you think you don’t have any assets you’re wrong. If you have a checking or savings account, own a car, a home, life insurance, furniture, or any personal possessions, you have assets and you need an estate plan.
What is an estate plan?
An estate plan is simply a plan for how your assets will be managed or distributed after you’re gone. No doubt you’ve heard of a will. A will is one instrument you can use to direct how your assets will be handled. A better instrument is a living trust because it better protects your assets, which is what you should be after. More on this later.
Why should I have an estate plan?
Aside from the financial benefit of having an estate plan, the most important reason to have one is to protect your family. We’ve all heard of family’s squabbling over mom's and dad’s estate. Don’t hope your heirs will play nice, guarantee it.
Not having an estate plan puts the pressure on the family to divide your assets in a way that’s good for everyone, which is asking a lot. An estate plan allows you to decide how you want your assets divided. If anyone’s unhappy about the division of the estate, they’ll be unhappy with you, and not each other.
Why is a living trust better than a will?
A living trust will avoid probate while a will will not. Probate is a legal process through which the court ensures that, when you die, your debts are paid and your assets are distributed according to your wishes. If you don’t have a will, your assets are distributed according to state law.
Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. The court could easily take control of your assets even before you die. A revocable living trust avoids probate and lets you keep control of your assets while you are living - even if you become incapacitated - and after you die.
Why you should avoid probate
1. It can be expensive
Probate will cost the estate legal fees, executor fees, and other court costs, which must be paid before the assets can be distributed to your heirs. The more assets you own and more dispersed they are the most costly probate will be.
2. It takes time
Probate can take anywhere from 9 months to 2 years but can be longer. Your assets will be frozen at least part of the time until an inventory can be made. Nothing can be distributed without a court and executor approval. This could affect your family should they need the money to live on.
3. It’s public
Probate is a public process, so anyone can see what you owned, whom you owed, and who will receive your assets. This exposes your heirs to unscrupulous solicitors and can cause disgruntled heirs to contest your will.
What are the benefits of a living trust?
1. It Avoids probate
A living trust will keep your estate out of probate saving money and time and keeping your estate private.
2. Reduces or eliminates estate taxes
Federal estate taxes can be expensive (35%-55%) and they must be paid in cash, usually within 9 months after you die. A living trust gives you the capability to control and manage your assets so you can legally reduce or eliminate estate taxes.
3. Provides full control of your estate
As the trustee of your estate, while you’re alive, you can manage your assets as you wish. The trustee you designate will manage your estate after your death, ensuring your wishes are carried out, all along your assets are protected and guarded against unnecessary expenses.
4. Customized distribution of your assets
Through a living trust you can designate who will receive your assets, retirement benefits, and proceeds from a life insurance policy. Even more importantly, you can direct the guardianship of your children – especially if any of them have special needs, to whomever you think is best suited to raise them.
If your children are minors or young adults, you can coordinate the release of fund from the trust based on a timeline and the financial maturity of your children. No parent wants to damage their children by leaving them a large sum of money before they are mature enough to handle it.
Conclusion
An estate plan is for everyone. At the very least you should have a will. A better option is a trust. Although it's more involved than a basic will and will require an estate attorney to set up, don't let that stop you. The benefits are more than worth the expense because it provides the protection and flexibility you want for managing your estate.