The term "estate planning" brings gloomy images of funerals and grieving family members but the estate planning process involves a good bit more than deciding who gets your property after your death. Having a plan becomes even more important for married couples with a blended family, according to the Office of Financial Readiness. An estate plan expresses your own decisions regarding some critical matters.
What Is Estate Planning?
An estate plan is essentially a collection of legal documents. The most common is a last will and testament, according to the American Bar Association (ABA). But you might consider placing your assets in a trust instead because you want to avoid the probate process. You can also bypass probate court by titling your assets in such a way that they transfer directly to a named beneficiary.
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A solid estate plan will also include a power of attorney so someone can deal with your financial accounts and personal affairs if you become mentally incapable of doing so yourself and a living will to cover end-of-life decisions.
Estate Distribution: Your Will
Your first estate-planning decision will be whether you want to pass property to your beneficiaries through a will or a living trust. An estate planning attorney can guide you as to which best suits your circumstances. Most people use a will, but the ABA warns that this document can only transfer assets that don't already have beneficiary designations – which is something else to think about. Your will can also name a guardian for your minor children and an executor to guide your estate through the probate process.
Choosing a will for your estate plan becomes more complicated if you own property, such as real estate, in more than one state, according to SeniorLiving.org. You'll need a will in each of those states in this case. Forming a living trust avoids this requirement.
Forming a Living Trust
A trust is a legal entity designed to hold your property and distribute it after your death or at any other time you designate at the time you form it. As the "grantor," the individual who forms and funds the trust, you can act as trustee and manage the trust and its assets during your lifetime if you create a revocable trust. This type of trust avoids probate, but not federal estate taxes.
An irrevocable trust dodges estate taxes but you must permanently give up ownership of your property and you can't act as trustee. Trusts can also only disburse assets that are titled or funded into them.
Most states direct that everything you own will go to your spouse and your children, assuming you have either or both.
Concerns During Your Lifetime
A will can't plan for end-of-life financial decisions or mental incapacity, although a revocable trust can do so to some extent. You can name a successor trustee to step in and take over if you're no longer competent and able to handle your own affairs as well as in the event of your death. This type of trust can serve in both capacities. You can also create other types of directives to state your wishes under certain circumstances.
A power of attorney names someone to whom you give authority to act on your behalf. It's a very flexible document. You can name an individual or an institution. You can limit them to handling just one task or some or all your financial affairs. The authorization can be temporary or open-ended. It can simply sit in place until a named event occurs to trigger it. You can take it back or revoke it at any time, provided that you're competent. A durable power of attorney will remain in effect if you become incapacitated.
You can create a medical power of attorney to deal only with health care issues if a time comes when you're unable to state your own wishes. Or you can create a living will if you're more comfortable with stating your wishes for medical care yourself in advance of a catastrophic event.
Your death automatically cancels any and all powers of attorney you may have in place, according to the Illinois State Bar Association.
Without an Estate Plan
Maybe you're still young, robustly healthy, and you don't own all that much yet. Do you really need an estate plan? In a word, yes, if you want to name a guardian for your children. A court will decide who raises them otherwise.
Your state will determine who gets your property at the time of your death if you don't leave some estate planning document behind stating where you want it to go. Most states direct that everything you own will go to your spouse and your children, assuming you have either or both. Your parents, siblings, stepchildren, other dependents, friends and unrelated loved ones will typically get nothing if you leave a spouse and/or children and don't direct where you want your property to go by writing a will or forming a trust.