FROM THE LEARNING CENTER

The Ultimate Estate Planning Guide: Everything You Need To Get Started

by Alfred Alonso | September 30, 2021

17 Minute Read

If you’re like most people, you probably find yourself having two thoughts at once. The first is “I should think about an estate plan.” And the second is “but what is an estate plan, anyway?” There’s no shame in being unsure. It can feel complicated, and there isn’t exactly an instruction book. Let’s start with the basics: 

What Is An Estate? 

Your estate includes everything you own, from your car, home, and debts to the clothes on your back. It even includes those who depend on you, like your spouse, children, or even pets.

Without an estate plan, you open up the possibility of leaving it up to your state’s court system to do it for you. Putting matters into the court’s hands could potentially cost your family time and money. You also give the court control of your child’s future if you do not know someone willing to act as their legal guardian.

When you really stop and think about everything you might be leaving behind, the idea of estate planning starts to make much more sense — even if you think your material possessions aren’t that valuable. 

What Is Estate Planning?

Estate planning is how you pass on your personal property to those you love according to your wishes. Specifically, estate planning answers three questions regarding your estate:

  1. Who do you want to receive your belongings?
  2. What or how much do you want them to receive?
  3. When do you want them to receive it?

By answering these questions, you can avoid arguments between family members, unnecessary court costs, legal fees, and even certain taxes.

How To Get Started With Your Estate Planning 

There are four main parts of estate planning – listing out your assets, making a plan, executing the plan, and keeping everything up to date. 

1. List Out Your Assets

  • Create a list of everything you own, including debts. Be sure to include: 
  • All financial accounts and their balances, including bank accounts and investment accounts
  • All retirement plans and retirement accounts like IRAs
  • Your insurance policies 
  • Any real estate and other property you own
  • Any material thing of value – family heirlooms, jewelry, collectibles, furniture, etc. 
  • All debts

This list will likely be longer than you expected and will give you a great jumping-off point for deciding what needs to be included in your will, as well as get you thinking about your beneficiaries and what you’d like to leave to each one. 

2. Start Your Plan

With your list of assets, you can begin thinking about who you’re going to name as your beneficiaries, as well as what you’re going to bequeath to who. 

Be sure to also consider secondary beneficiaries, also known as contingent beneficiaries, in case something happens to your primary beneficiaries. That way, you can help your family avoid a lengthy and time-consuming probate process.  

3. Execute Your Plan

Start putting your plan into action. For those with larger, more complicated estates, hiring an estate planning attorney may be your best bet for making sure your estate is handled exactly to your preferences. For the entire process, an estate planning attorney can cost anywhere between $500 -$1,500. 

If you don’t have many assets, or you only want to name a few beneficiaries, you may be able to handle your estate planning yourself. Learn more about writing a will, and read on to learn what documents you need to put your estate plan into action. 

4. Keep Your Plan Updated

Updating your will, often referred to as ‘adding a codicil’, is an incredibly important part of estate planning. Be sure to keep your plan updated as you move through life to account for new assets, spouses, children, and additional beneficiaries. 

5 Important Documents for Estate Planning

To make sure you’ve addressed all of the most pressing items in your estate plan, here is a brief checklist of all the estate planning documents you should (or may) include:

  • Creating a last will and testament that specifies where your financial and material assets will go. 
  • Include a living will or a set of instructions detailing your preferred medical care and other health care decisions if you’re incapacitated or disabled before you die.
  • Name a guardian and an inheritance manager you trust to oversee your children if they are minors.
  • Purchase a life insurance policy so that your children are provided for after you die.
  • Setting up a trust 

We’ve covered what to include in an estate plan, but there are different approaches that could save you and your family time and money. First, we will cover what exactly to include in a living will and then dive into other end-of-life documents and how they affect your estate.

Last Will and Testament

A will, or last will and testament, is a legal document where you state your final wishes regarding your property. Once you die, your will dies with you, and every asset titled to your name in that will — from personal valuables to your home — must go through probate court.

Probate court is a special type of state court that deals with the administration of estates. Because probate exists on the state level, the rules and regulations vary between jurisdictions. As your estate goes through the probate process, court costs, legal fees, and various taxes are all taken directly from your estate before it’s distributed to your beneficiaries. In total, the process can take anywhere from nine months to two years (or longer).

To minimize the costs and the amount of time probate takes, it’s important to cover as much as possible in your last will and testament. Here is a detailed list of what to include:

  1. Executor: A person or institution you appoint to ensure that your wishes are honored and carried out as written.
  2. Beneficiary: The person(s) you name to inherit your property after you pass away.
  3. Personal property: The specific properties listed in your will, and how and to whom they are to be distributed.
  4. Business assets: The specific business interests under your name are usually addressed separately from your personal assets.
  5. Debts, expenses, and taxes: Outstanding debts or other final costs, like funeral costs, and how they are to be handled should be addressed specifically.
  6. Special instructions: Any other details, like how your home should be cared for after you’re gone, should also be addressed.

If you have a complex estate, meaning you own several properties in different states, have a blended family, or have a substantial amount of wealth, then it’s wise to consult an estate planning attorney while drafting your will. While it varies from state to state, most states require you to have at least two impartial witnesses present as you sign your will.

A Living Will

A last will and testament takes care of your money and material things, while a living will takes care of yourself. End-of-life planning is an essential part of estate planning, and the more details you provide about how you want your end-of-life care to look like, the better off you and your loved ones may feel down the road. 

Documents to consider: 

  • Power Of Attorney (POA) – There are several different types of Power of Attorney documents. 
    • General Power of Attorney – grants broad legal authority on another person’s behalf
    • Durable Power of Attorney– allows legal authority on the behalf of a person even if that person is incapacitated. A general Power of Attorney is no longer legal if you become incapacitated. 
    • Financial Power of Attorney – permits somebody to make financial decisions for another, usually used if you cannot physically or mentally handle paying bills, doing taxes, or handle other financial matters. 
    • Health Care Power of Attorney, also known as Medical Power of Attorney or Health Care Proxy –  allows another person to make medical decisions for you if you are unable to do so yourself. 
  • Specific Health Care Directives – written, specific directives about your preferred end-of-life care should be included in your will. Some examples include: 
    • CPR
    • Tube feeding 
    • Dialysis
    • Organ and tissue transplants
    • Pain medication
    • Medical ventilation
  • Do Not Resuscitate and Do Not Intubate orders do not have to be included in your living will – talk with your doctor about your preferences, and they’ll include it in your medical record. 

Name a Guardian

Naming a guardian is the best way to provide a great future for your child. By naming someone you know and trust, you ensure your child can lead the best life possible without you. If you don’t take the time to name a guardian, though, the state will have the task of appointing one for you.

So what does a guardian do and what should you look for when choosing one? A guardian is anyone granted the legal responsibility of raising your children. For this reason, you need to pick someone you know and trust. Because this person will be responsible for providing for your children financially, it’s also important that they have access to funds if you pass away.

Here are some questions you and your spouse should discuss together when thinking through possible candidates:

  • Is this person responsible enough to raise my children and handle their finances?
  • Is this person a legal adult?
  • Do they love my children?
  • Should this person live close by or is it okay for my children to relocate?
  • Does this person have a stable home life?
  • Is it important for this person to embody my religious and/or moral beliefs?
  • Does this person have any medical conditions that would prevent them from providing sufficient care for my child?

The most important factor here is trust. Ideally, you want to pick a financially responsible person that you know well. Once you’ve selected a guardian and they accept, you need to appoint them by naming them in your will.

Life Insurance Policies 

Purchasing life insurance is not a requirement, but it is definitely something to consider when you have children. Although there are many types of life insurance available, a popular option for young parents is term life insurance.

Term life insurance is more affordable than whole life insurance and it comes with many benefits. For one, life insurance doesn’t go through probate, so your dependents would receive a tax-free death benefit 30 to 60 days after a claim is filed.

Once your dependents receive the payout, it can be used to pay for end-of-life expenses, daily expenses, childcare, your mortgage, or even co-signed debt, among others. When naming your beneficiary, you can select your spouse, your appointed guardian, or even a sibling or relative.

If your children are under 18 (or 21 in some states), then they legally cannot receive your death benefit. In this scenario, the court would distribute the payout once they reach the age of majority.

A Trust

Unlike your will, a trust doesn’t die with you. Depending on the type of trust you’ve taken out, assets included under the name of the trust may not be subject to probate. Trusts also have other benefits, which we will discuss below. While this is not at all an exhaustive list, here are three types of trusts that have specific benefits for your children.

1. Revocable vs. Irrevocable Trusts

It’s important to distinguish between revocable and irrevocable trusts. A revocable trust, also called a revocable living trust, is a type of trust where you, the grantor, maintains control of assets put under the trust’s name. Revocable trusts are ideal if you do not have any major tax concerns. In the event that you become incapacitated, a designated trustee takes over ownership of the trust.

An irrevocable trust, on the other hand, cannot be modified or terminated by you, the owner. Once assets have been placed into the trust, you no longer have ownership of those assets; rather, the assets are managed by a predetermined trustee.

This affords your assets certain protections by placing them out of reach from creditors, lawsuits, capital gains taxes, and specific estate taxes, as well as nursing homes, which can access funds held under a revocable trust to pay for bills. Both types of trusts are exempt from probate.

2. Credit Shelter Trust

A credit shelter trust (CST) allows you to partially or completely avoid estate taxes when passing your assets on to your children. As a type of irrevocable trust, the real benefit of a CST is that a surviving spouse can tap into the funds held under the trust for specific purchases, such as paying for college tuition. Once the surviving spouse passes away, the assets are transferred to other beneficiaries without estate taxes being taken out.

3. Charitable Trusts

Charitable trusts are irrevocable trusts that you, the donor, create to support both a philanthropic cause and your beneficiaries after you die. By donating part of your estate to a cause as an outright gift, you can reduce how much of your estate is taxed, which will in turn reduce the amount of money taken from your beneficiaries.

How to Pass On Your Home to Your Children

If you would like to transfer assets like your home to your children, there are several ways to keep in mind. How you pass on your property has legal and tax implications, so you should consult an expert before proceeding.

With that in mind, here are three ways to transfer your home to your children:

1. Sell Your Home

You can sell your home to your children and still live in it. To do so, you need to sell your home at fair market value; otherwise, the sale could be considered a gift, which has its own tax implications.

You can also loan money to your children so they can purchase your home. If you go this route, then you’re legally obligated to charge interest, which you can use as income.

Another option is to establish a qualified personal residence trust (QPRT), which is a type of irrevocable trust that transfers your property from your estate to that of the QPRT. Doing so will lower the gift tax value incurred from transferring your assets to your children.

2. Give Your Property to Your Kids as a Gift

You can transfer property as a gift to your children while you’re alive or after you pass away. The latter is recommended, as it affords its own tax benefits. In 2019, transfers of $15,000 or less are exempt from the gift tax.

Although your home is undoubtedly worth more than that, there is also a lifetime exclusion exemption amount from gift and estate tax, which we mentioned earlier. As long as you do not exceed $11.4 million, you will not have to pay taxes on the property you give to your children.

If you do decide to gift your property to your children, it’s recommended to do so under a revocable trust. With a revocable trust, you still have control of the assets under the trust, so you could theoretically change your mind later if you needed to. However, you should consult your mortgage lender first as this could force you to pay your mortgage in full.

3. Transfer Property Deeds

25 states and the District of Columbia allow what’s called a “transfer-on-death” deed. The deed doesn’t come into effect until after you pass away and it allows your home to avoid probate altogether.

If your state permits this type of deed, you can get a state-specific deed that allows you to list a beneficiary (and additional beneficiary) to transfer the property.

4 Mistakes to Avoid When Naming a Beneficiary

If you are unfamiliar with estate planning, then the process of naming beneficiaries can seem quite complicated — and it is, especially if you have a large estate. Additionally, your last wishes could change with your life circumstances.

For instance, if you named your ex-spouse as a primary beneficiary years ago, you probably want to amend that in your will. You might even have more children in the future that you want to impart a portion of your estate to. Whatever the case may be, here are some mistakes to avoid when naming beneficiaries:

1. Naming Outdated Beneficiaries

As with the ex-spouse example, your beneficiary designations from six months ago may not align with your last wishes today. Your beneficiary may predecease you, which would force your assets to go through probate.

Again, you may have more children or marry someone with kids of their own. To avoid having outdated beneficiaries named in your will, make it a habit to review your estate plan every six months to make sure it’s in accordance with your last wishes.

2. Not Naming Alternative Beneficiaries

In the event that your primary beneficiary does happen to pass away before you do, you can name an alternative beneficiary. Doing so ensures that your estate falls into the right hands if you don’t have the chance to make changes to your will before you pass away.

You can add as many alternative beneficiaries as you like. This is also worth considering if you leave part of your estate to a group of people, such as your siblings or nieces and nephews.

If any of them passes away prematurely, would the group as a whole receive a larger percentage of your estate or would you prefer that person’s share be passed along to their children? You can, and should, specify this in your will.

3. Naming Minors as Beneficiaries

If you name your minor children as direct beneficiaries of either your will or your life insurance policy, they cannot receive the benefit until they reach the legal age of majority in their state. 

It’s likely not in their best interest to receive a large sum of money at that age. One way around this mistake is to name a guardian as the beneficiary. Another workaround is to start a living trust with provisions dictating how much and how often funds can be distributed to your child. 

4. Naming Special Needs Children as Beneficiaries

It’s important to understand what constitutes “special needs” in the eyes of the law: A special needs individual is anyone receiving government benefits due to a disability. To qualify for these benefits, the individual must have no more than $2,000 in cash assets available — monetary gifts, settlements, or even inheritance money count towards that amount.

Because the income threshold to qualify for government aid is so low, naming your child with special needs as a beneficiary could tip them over their monthly amount and disqualify them from government aid in the future.

So that you do not jeopardize your child’s eligibility, one option is to start a special needs trust (SNT). Funds deposited into an SNT do not count towards monthly income and therefore do not affect your child’s benefits.

As you can see, estate planning is an intricate and complicated process. It requires you to think about your material possessions in a new light: How will you bestow these gifts upon your children and when? If you start your research and planning today, you’ll be much better off later on.

Will I Be Affected by State or Federal Estate Tax?

Currently, only 12 states charge an estate tax and exemption levels are up in the millions. You are only expected to pay estate tax if your estate’s total value exceeds your state’s exemption level. Although it’s true that not all states have an estate tax or even an inheritance tax, there is such a thing as a federal estate tax.

The federal gift tax exemption for 2019 is $11.4 million, meaning that only the portion of your estate that exceeds the exemption will be taxed. For example, if your estate is worth $11.6 million, you would exceed the exemption by $200,000 and would only be taxed for that amount. You should only worry about state or federal estate taxes if you really do have a large estate, at which point you should incorporate a tax advisor in your estate planning to walk you through it. 

Need Life Insurance?

Planning your estate can make you realize the need to get your future finances in order, which can include buying life insurance. 

Bestow can help you get started with easy, no-fuss term life insurance policies that require no medical exam, ever. Get your first quote in seconds and coverage today, if approved. 

 

Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation.