What is Estate Planning?
Organizing your affairs to prepare for life’s inevitable conclusion is an essential task, and estate planning encompasses far more than simply drafting a will. This ongoing process involves determining who can make decisions on your behalf, ensuring the care of your dependents, mitigating unnecessary taxes, and avoiding lengthy waiting periods. Estate planning encompasses any choices related to finances, property, medical care, dependent care, and other matters that arise upon one’s passing.
The primary advantage of estate planning is the peace of mind that comes from knowing your wishes will be fulfilled for the benefit of your loved ones.
At the very minimum, almost everyone should have a basic estate plan in place – young or old, rich or not so rich, married or unmarried.
The Fundamental Elements of Estate Planning
The core of this process revolves around creating and finalizing essential estate planning documents such as wills, trusts, powers of attorney, and living wills. Some individuals choose to include a letter of instruction alongside their estate plan to guide family members through the various documents.
Wills: Dictating Your Legacy
A will, formally known as a “last will and testament,” is a legally binding document that outlines how you wish your executor (the individual legally obligated to administer your estate) to distribute your assets upon your passing. Dying without a will is referred to as dying “intestate,” in which case state law dictates what happens to your estate.
Probate is the process of distributing your estate after you’ve died. Your estate will go through probate whether you die with or without a will, but having a will ensures your executor honors your wishes. Navigating probate court without a will is more time-consuming and costly, with the expenses being deducted from your estate.
If you already know where you want your assets to go, it’s straightforward to create a will online with Gentreo, www.gentreo.com, using interactive questionnaires. Gentreo ensures your will is legally binding and specific to your state’s laws.
Trusts: Protecting Your Assets
A trust is a legal contract that allows another person (the “trustee”) to hold property on your behalf (as the “grantor”). This arrangement is typically made so that the beneficiaries (individuals or institutions designated to inherit something) can use the property at a specified future time. You can place money, physical assets, or most anything else of value in a trust.
Property distribution through a trust is often faster than the probate court process as trusts are not subject to probate, thus making trusts a preferred option for some individuals.
Living Trust vs. Testamentary Trust
You can create a living trust, also known as an inter vivos trust, to hold property both before and after your death. In contrast, a testamentary trust is a type of trust created by a will and only becomes effective after the grantor’s passing.
The key difference between these two types of trusts is that a living trust is effective while the grantor is alive, whereas a testamentary trust only takes effect after the grantor’s death.
Revocable vs. Irrevocable Living Trusts
A revocable living trust allows the grantor to retain the right to modify, amend, revoke, or terminate the trust. In an irrevocable living trust, the grantor is not permitted to make changes to the trust, although some states may allow the trustee to transfer property in and out of an irrevocable trust with permission from the trust’s beneficiaries.
A revocable trust becomes irrevocable when the grantor passes away, as they can no longer make changes to it. Some individuals choose to place their assets in a revocable trust rather than relying solely on a will. Upon the grantor’s death, the executor can distribute assets in a trust more quickly because they do not have to go through probate.
Trusts are not exclusively for wealthy individuals. Anyone who wants their assets to be transferred to their relatives promptly and efficiently can create a trust. For example, parents of young children may establish a trust specifically designated to fund their child’s education.
Powers of Attorney: Granting Decision-Making Authority
Power of attorney refers to the authority you grant someone else to make legal, financial, or medical decisions on your behalf. These documents are included in Gentreo, https://www.gentreo.com/power-of-attorney.
The person to whom you grant power of attorney is called your “agent.” You identify this individual in a document that only takes effect when you are deemed unable to act on your own behalf, or you can grant someone power of attorney for a specific purpose, such as purchasing a vehicle for you.
If you become unable to manage your own legal or financial affairs and you have not designated an agent to act on your behalf, a court may appoint one for you. Each state has its own laws regarding powers of attorney, but the general types to be aware of include (but are not limited to) durable, limited, and financial.
Durable Power of Attorney
A durable power of attorney allows your agent to continue acting on your behalf even when your situation changes, such as if you become ill and are unable to make decisions. It can grant broad authority or be restricted to a specific purpose.
Limited Power of Attorney
A limited power of attorney gives the agent authority to make decisions for a specific purpose or for a limited period of time. In contrast, a general power of attorney gives the agent broad authority to act.
Financial Power of Attorney
A financial power of attorney grants the agent authority to manage your financial affairs. You can make this effective immediately or at the time of an event, such as a sudden incapacitating illness or death.
Health Care Decisions: Ensuring Your Wishes Are Respected
Health care is one of the most common aspects of estate planning. You want someone you trust to help ensure your wishes are respected if you become unable to advocate for yourself. Living wills, health care proxies, and advance health care directives are tools you can use to protect yourself in the future. All are included in Gentreo, https://www.gentreo.com/health-care-proxy.
Living Wills
A living will outlines your preferences regarding health care planning, such as whether you want life-extending treatment, how you want to manage long-term care, what procedures you do or do not want, and other end-of-life matters.
Health Care Proxies
A health care proxy is a durable power of attorney specifically for medical treatment—you appoint someone to make decisions on your behalf when you are deemed unable to do so by a medical professional.
Advance Health Care Directives
Advance directives is an umbrella term that can refer to any document regarding future medical decision-making. It can refer to a living will, health care proxy, or other legal document.
One document to include with your advance directive is a HIPAA authorization. HIPAA stands for the Health Insurance Portability and Accountability Act (1996). This federal law protects your medical records by requiring a signed authorization form before you grant access to someone other than yourself. Having a signed authorization for your agent ensures they can access your medical records when the directive takes effect.
Tax Planning Documents: Minimizing Your Estate’s Tax Burden
Taxes can claim a substantial portion of what you leave to your beneficiaries, but you can limit the taxes your estate pays in several ways. Each state has its own tax laws, so your obligation will depend on where you reside. While financial and tax planners are best equipped to advise you on these matters, you should consider a few types of taxes when organizing your affairs: estate, inheritance, and gift taxes.
Estate Tax
According to the IRS, an estate tax applies to estates valued above a certain threshold at the time of death. You calculate the tax by:
- Adding the fair market value of everything a person owns
- Subtracting deductions
- Adding the value of gifts made during the person’s lifetime
- Subtracting any credits
If the estate value exceeds $12.92 million (as of 2023) or $13.61 million for 2024 the estate pays a tax to the federal government.
Inheritance Tax
Six states that impose inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
While estate taxes are owed to the federal government, inheritance taxes are owed to the state government. Additionally, while estate taxes are paid directly from the estate itself, inheritance taxes are paid by the heir or beneficiaries based on what they received in probate.
These taxes do not apply to surviving spouses or to payouts from life insurance policies. Instead, inheritance taxes usually only apply to more distant relatives and heirs. It’s unlikely this tax affects you, but it’s good to be aware of if you live in one of the six states that applies it.
Gift Tax
Many people choose to make gifts during their lifetime to reduce the value of their estate when they die. According to the IRS, a gift is the transfer of property, money, or anything else of value without receiving full compensation in return. This includes selling something for less than its full value, transferring the right to use income from property, or transferring money or property without expecting to receive the full value in return. Usually, the person giving the gift owes the tax, but other arrangements are possible with the advice of a tax professional.
A Step-by-Step Estate Planning Checklist for 2024
The best way to approach estate planning for the first time is to create a checklist for yourself.
Take an Inventory
Write down everything you own of value that you can think of. This may seem overwhelming, but keeping a running list of assets is worth the time to ensure nothing important is left out. Make sure to consider both tangible and intangible assets.
Tangible assets include vehicles, furniture, jewelry, homes, and other physical items of value.
Intangible assets include bank accounts, retirement accounts (like 401(k)s or IRAs), life insurance plans, financial elements (like bonds or annuities), and other non-physical items.
Listing liabilities, such as mortgages, lines of credit, and other debt, is also a good idea, as certain debts must be paid—even after death. In that case, the payment will come out of your estate.
List Your Family Members
The purpose of listing your family members is to account for the needs of immediate family and dependents. Your will and life insurance policies are the primary ways to plan for the needs of your surviving spouse and make guardianship designations for children and other dependents. Many people also make arrangements for pets.
Choose Which Directives You Want in Place
The more you plan ahead, the fewer decisions you’ll have to make during an already stressful time. The tools discussed in this article (such as living wills, powers of attorney, and trusts) make it easier to navigate illness and other end-of-life matters because you’ll have a plan for most scenarios. Decide which of these tools you want in place and how you want to set them up.
Once you know which directives you want to include in your life plan, talk to anyone you are considering naming as an agent. You’ll want to be sure they are willing to act if needed. You should also consider naming secondary agents in case the first person is unavailable when the directive takes effect.
Designate Your Beneficiaries
A beneficiary is a person or institution inheriting a piece of your estate, such as money, physical property, or control of or interest in a business.
You should name your beneficiaries on your bank accounts, retirement accounts, and life insurance policies. If you name beneficiaries in your will, make sure the names match those on your accounts to avoid any confusion.
Choose backup beneficiaries for your assets in case a person is unavailable or dies before your estate distribution. You can also name a beneficiary in a “residuary” clause in your will. This person will inherit anything left over after your estate distribution.
This is a good time to check the named beneficiaries on all of your accounts to ensure they are updated. For example, if you are married for the second time, and your first spouse is still named as a beneficiary of a bank account, you can change it to your current spouse to avoid conflict in the future.
Look Up Your State’s Laws
States have different laws regarding what happens when a person dies. To ensure you have optimal asset protection, check your state’s estate planning laws. If you believe an estate or inheritance tax may apply in your state, contact a professional to help you reduce your tax burden as much as possible.
Get Started with Gentreo
Now that you have a clear picture of your estate and who should receive it, you can decide whether an online estate planning service like Gentreo is right for you.
After Estate Planning: Maintaining and Updating Your Documents
Once you’ve finalized all the necessary documents and the originals are in one safe space, remember to keep them updated. Gentreo provides an annual review of what documents you have and what you may still want to create. Some instances when you might want to update your estate plan include:
- A marriage, divorce, children, grandchildren
- A change in assets and liabilities (property, business, financial circumstances)
- If laws like tax, inheritance change
- If your personal wishes change
- If your health care preferences change
Typically, you should revisit your estate plans at a very minimum of every two years —even without major life changes. For instance, it is suggested a health care proxy should be updated every two years. With Gentreo it’s easy to update your estate plan whenever you need to!
The Importance of Proper Estate Planning
Proper estate planning is crucial for ensuring your wishes are carried out after you’re gone. It provides peace of mind knowing that your loved ones will be taken care of, and your assets will be distributed according to your preferences.
By taking the time to create a comprehensive estate plan, you can avoid unnecessary taxes, legal complications, and lengthy probate processes. Additionally, having a plan in place can help alleviate stress and uncertainty for your family during an already difficult time.
Remember, estate planning is an ongoing process, and it’s essential to review and update your documents regularly to reflect any changes in your life circumstances, assets, or personal preferences.
While the process of estate planning can seem daunting, services like Gentreo make it easy and accessible for everyone. By taking the time to plan ahead, you can help ensure that your legacy is protected and your loved ones are provided for, even after you’re gone.
Don’t wait until it’s too late; start your estate planning journey with Gentreo today. By doing so, you’ll not only protect your loved ones but also gain the peace of mind that comes with knowing your legacy is secure. Click here to join now https://private.gentreo.com/auth/register.
This article is for informational purposes only and should not be considered legal advice. Consult with a qualified attorney or estate planning professional for personalized guidance.
