What is Estate Planning and Why Do I Need It?
You may have heard that you need to make an "estate plan," but what does an estate plan cover and how do you make one? First, you should understand what makes up your estate.
Put simply, an estate is everything you own during your lifetime and at death. This includes real property, cash, stocks, bonds, retirement benefits, personal property, and anything else you might own. Everyone has an estate. Estate planning is putting together documents to manage your property during your lifetime and after your die.
Here is a basic list of the most important estate planning issues to consider:
A will. A will allows you to state who you want to inherit your property, as well as appoint the people you trust to handle your affairs. You can also name a guardian to care for your minor children should something happen to you and the other parent.
Trusts. Some people may benefit by holding property in a living trust. It is a way to avoid the probate process and in certain circumstances to appoint someone else to manage that property. There are also trusts that can be established on your death that will protect and care for your surviving loved ones as well as minimize tax consequences for your heirs.
Advance Healthcare Directives (Living Will). Writing out your wishes for healthcare can protect you if you become unable to make medical decisions for yourself. Advance Healthcare Directives include a health care declaration ("living will") and a power of attorney for healthcare, which gives someone you choose the power to make decisions if you can't. You can also state whether or not you want to be an organ donor.
Financial Power of Attorney. With a durable power of attorney for finances, you can give a trusted person authority to handle your finances and property if you become incapacitated and unable to handle your own affairs.
Protect your minor children's property. You should name an adult to manage any money and property your minor children may inherit from you. This can be the same person as the personal guardian you name in your will or it can be someone else.
Prepare and file beneficiary forms. Naming a beneficiary for bank accounts and retirement plans makes the account automatically "payable on death" to your beneficiary and allows the funds to skip the probate process. Likewise, you can register your stocks, bonds, or brokerage accounts to transfer to your beneficiary upon your death.
Consider life insurance. If you have young children or own a house, or you may owe significant debts or estate tax when you die. Life insurance may be a good idea.
Understand estate taxes. Most estates won't owe federal estate taxes. For deaths in 2019, the federal government will impose estate tax at your death only if your taxable estate is worth more than $10 million. (This exemption amount may change each year to adjust for inflation.) Also, married couples can transfer up to twice the exempt amount tax-free, and all assets left to a spouse (as long as the spouse is a U.S. citizen) or tax-exempt charity are exempt from the tax. Maryland estate tax is separate from the Federal tax and only applies if your estate is worth more than $5 million ($10 million for married couples). Taxes can be tricky though, so it’s best to speak with an estate planning attorney to make sure you understand.
Cover funeral expenses. Rather than a funeral prepayment plan, which may be unreliable, you can state in your will that you want your estate to pay funeral costs.
Make final arrangements. Make your end-of-life wishes known regarding organ and body donation and disposition of your body -- burial or cremation. This can be done with your Advance Healthcare Directives and in your will.
Protect your business. If you're the sole owner of a business, you should have a succession plan. If you own a business with others, you should have a buyout agreement. Your estate plan should cover who gets the assets from your business.
Store your documents in a safe place. Your attorney-in-fact and/or your executor (the person you choose in your will to administer your property after you die) may need access to the following documents after you die: will, trusts, insurance policies, real estate deeds, certificates for stocks, bonds, annuities, information on bank accounts, mutual funds, and safe deposit boxes, information on retirement plans, 401(k) accounts, or IRAs, information on debts: credit cards, mortgages and loans, utilities, and unpaid taxes, information on funeral prepayment plans, and any final arrangements instructions you have made. Make sure your agents know where you keep your documents and are able to access them.