Estate planning is the process of setting up how your assets and property will be distributed upon your death. Through these plans, you can ensure your assets are given to the people and organizations you care about. Additionally, estate plans can minimize the amount of taxes your estate and family will incur once you’re gone. Estate planning is a necessary venture even for those who aren’t particularly wealthy, but it’s also a complicated one.
Consider working with a financial advisor if you need help setting up an estate plan or managing inherited money.
What Is Estate Planning?
Estate planning is the series of preparation tasks that dictate how your assets will be dispersed upon your incapacitation or death. Put simply, estate planning means electing heirs for your estate.
Everything you own is part of your estate. That means property like real estate, in addition to cars and other valuables. Your estate also includes financial products, like stocks, bonds, life insurance, retirement savings and bank accounts. Things you share, like joint accounts, count too. Even if something only has sentimental value, you’ll want to specify its bequest. This ensures that your loved ones receive your assets instead of a probate lawyer or the IRS.
Estate planning entails far more than just creating a will. It may also include:
- Assigning a power of attorney and healthcare proxy to make decisions on your behalf
- Creating trusts
- Establishing guardians for living dependents
- Appointing or updating beneficiaries on life insurance plans and retirement accounts
- Making funeral arrangement
- Preparing for estate taxes, potentially by scheduling annual gifting
Steps for Creating an Estate Plan
Before you begin your estate plan, take inventory of your assets. Create a list and include corresponding values for each item. You’ll also need to ask yourself who you want to leave your assets to and how you want to divide them. After you’ve decided all of the above, you can begin the following process:
- Draw up your last will and testament. In it, you should name an executor, assign a legal guardian for any minor children and establish any necessary trusts.
- Your will doesn’t account for everything. Now, you’ll need to review all your plans, accounts and shared assets to assign or update beneficiaries.
- Assign a power of attorney and healthcare proxy to make financial and medical decisions on your behalf if you cannot.
- Write a letter that includes any information that hasn’t been accounted for. This may include desired funeral arrangements or the bequest of sentimentally valuable assets.
- Ensure that all documents are organized, properly notarized and stored someplace safe, like your attorney’s office or safety deposit box. This includes a list of your digital assets and passwords.
Estate planning is typically an ongoing process. While you should start estate planning as soon as you acquire assets, it likely won’t end there. You should review your estate plan every few years, whenever you experience a life-changing event or in the event that Congress makes any changes to estate tax law. This will ensure your plan reflects your current desires and goals.
How to Choose an Executor
In addition to drawing up your will and trusts, you’ll also have to choose an executor. Your executor will be responsible for administering your assets after your death and ensuring your final wishes are met. An executor’s duties may include:
- Filing court papers to begin the probate process
- Taking inventory of the entirety of the estate
- Distributing assets to named beneficiaries
- Filing final personal income tax returns
- Paying remaining bills, including taxes and funeral costs
Often, people choose a family member, such as a child or spouse, to fill this role. You can also select a friend. What’s important is to make sure you pick someone who is dependable, trustworthy and organized. Also consider a person’s age and health, as you want your executor to be around after you’re gone. If your chosen executor lives in a different state, be sure to check your state’s laws as there may be requirements regarding an out-of-state executor.
Will I Need to Pay Estate Taxes or Inheritance Taxes?
Another big piece of the process is estate taxes. If you don’t plan accordingly, taxes can take a big bite out of your estate. Your assets can be taxed in two ways: estate taxes and inheritance taxes. With estate tax, the tax is taken out of the estate before it’s divided up and distributed to beneficiaries. Inheritance tax, on the other hand, is levied after the inheritance is distributed to beneficiaries. While estate tax is taken directly out of the estate, beneficiaries are responsible for paying inheritance tax.
Inheritance tax is only levied by states, but both the federal government and states may collect estate taxes. As of 2022, the federal estate tax only applies to estates worth more than $12.06 million. Here’s a breakdown of each tax on the state-level:
|2022 Estate and Inheritance Taxes by State|
|Estate Tax (13 states)||– Connecticut |
– Washington, D.C.
– New York
– Rhode Island
|Inheritance Tax (6 states)||– Iowa |
– New Jersey
There are steps you can take to mitigate the estate tax so more of your assets go to your beneficiaries. For instance, you can gift portions of your estate to your family ahead of time instead of waiting until you die to give everything away. Other tactics include setting up an irrevocable life insurance trust, making charitable donations, establishing a family limited partnership and funding a qualified personal residence trust.
Risks of Not Creating an Estate Plan
If you don’t come up with an estate plan, your state will take control upon your incapacitation or death. If you become disabled, the court will determine how your assets will be used to care for you through a conservatorship or guardianship. Similarly, if you die without an estate plan in place, your state will distribute your assets according to its probate laws.
As you might have guessed, these scenarios can have significant downsides, as you will lose control over who is in charge of your care or how your assets are distributed. If you have minor children, the court will take control of their inheritance. In the instance that both you and your spouse died, the court would appoint a guardian for your children.
In other words, estate planning is crucial no matter your age or level of wealth. You want to have a say in where your assets end up and ensure your loved ones are adequately cared for should something happen to you.
DIY Estate Planning vs. Hiring an Estate Planner
You can do estate planning on your own with thorough research. However, know that there are risks to DIY estate planning and it can be overwhelming. An estate planning professional, like a financial advisor or attorney, can help. A planner has years of education and experience, while you usually only do this once. Estate planning laws are very specific and vary state by state. One mistake and your whole plan could be invalid or work differently than you want.
As your estate grows in size, estate planning becomes more complicated and the need for a professional becomes greater. This is especially true if you have children under the age of 18 who would need to be provided for and taken care of. If you own a business, own property in more than one state or don’t have obvious heirs, an estate planner’s expertise will come in handy.
In addition to elucidating the process and taking work off your hands, an estate planner can help you save money. Federal and state governments tax your asset transfer through estate taxes. A planner can help you to mitigate or avoid these costs, as well as avoid probate and protect your assets from your beneficiaries’ creditors.
How to Find an Estate Planner
If you’ve decided you don’t want to handle estate planning alone, there are a number of ways to find a qualified estate planner. Both estate planning attorneys and financial advisors can be helpful in the process. Ideally, your financial advisor and attorney will work hand-in-hand to make sure you’re making the best estate planning decisions for your situation and have your assets in order.
A lawyer can help you with everything from creating a will and drafting living trusts to developing a plan to minimize estate taxes and preparing powers of attorney. To find an estate planning lawyer, check with the state or local Bar Association. Also take note of certifications, like the National Association of Estate Planners and Councils’ Accredited Estate Planner designation, which indicate expertise in the area.
Your financial advisor can also help you find a qualified attorney to draw up your estate planning documents. Additionally, a financial advisor can help you better define your objectives before legal documents are drafted and also ensure your estate planning documents align with your goals.
There are few financial endeavors that are more important than creating an estate plan. Having a complete and secure estate plan in place when you pass away will leave your loved ones in a much easier spot. Without an adequate estate plan, you run the risk of forcing your family into an extended trip to the probate courts, where they’ll undoubtedly incur legal fees and may not receive the full inheritance you intended for them.
DIY estate planning, with the help of estate planning software or websites, is an option for simpler estates. But you may be better off working with an advisor or an estate-planning attorney. If you go this route, do your due diligence, asking them about their practice, fees and background. One way to compare multiple financial advisor options is with SmartAsset’s free advisor matching tool.
Estate Planning Tips
- Planning out your entire estate can seem overwhelming and difficult. But a financial advisor who specializes in estate planning can help. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you have a sizable estate, estate taxes on either the state or federal level could be hefty. However, you can easily plan ahead for taxes to maximize your loved ones’ inheritances. For example, you can gift portions of your estate in advance to heirs, or even set up a trust.
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