It seems odd, and somewhat frightening, to be thinking about incapacity, death and estate planning when you are young and don’t have much of a net worth, but it’s important for everyone to understand a few concepts and take several basic steps to make it easier on your family and loved ones.
Estate planning is the comprehensive process of planning how to grow, conserve and distribute all your assets in the manner that you want. Estate planning can, and should, be done early and throughout your life—as your life changes. And like other major life decisions, estate planning is likely most effective when done during times in which you don’t think you need to. This planning and early decision-making allows for your family and loved ones to know your goals and wishes and simply carry them out for you, rather than having to guess.
Who needs estate planning anyway?
Well, everyone. Basically, if you don’t have an estate plan, your assets and property might not be distributed in the way you want. And more importantly, if you don’t have an estate plan, it can cause confusion, angst and disputes among your family and loved ones.
Often, people see estate planning to avoid the only two givens in this world—”death” and “taxes.” However, current federal estate tax laws for 2022 allow for no taxes due upon your death if your net worth is below $12.06 million (rising with inflation annually). So, while taxes are an important consideration in a plan, estate planning should be done to make sure the process of distributing your assets is smooth and your assets go to where and to whom you want, rather than just to avoid taxes.
Some basic estate planning can be done through executing documents, such as a will, a power of attorney, and an advanced directive—“a living will.”
A will generally states how and to whom your assets should be given upon your death. These are your heirs. You can change your will at any time during your life if you ever change your mind about your plan, as long as you are not incapacitated. A will can also serve in other important planning areas, such as nominating a guardian to take care of any minor children.
A power of attorney designates someone of your choosing to act for you as your “attorney-in-fact” should you become disabled or incapacitated. If you become disabled or incapacitated, your “attorney-in-fact” can handle your personal business for you—such as paying bills or opening a new account. There are also more specific power of attorney documents, such as a healthcare power of attorney, that appoints someone to make health care decisions on your behalf.
Finally, an advanced directive, also known as a living will, is a written declaration about your wishes for the use or non-use of life-prolonging medical care should you become incapacitated. Again, this document allows your wishes to clearly be stated so that your loved ones don’t feel like they have to make certain decisions without your input.
How do I get started?
It makes the most sense to engage an estate attorney to draft these basic estate planning documents for you. An attorney will listen to your goals and wishes and then help create the necessary documents in order to achieve those goals. An attorney can also help you understand and realize if you have more complex estate planning needs, such as a business owner or a child with special needs. Once you have your estate plan in place, it requires some continued oversight. It likely makes sense to change or alter your estate plan after certain life events like the birth of a child or a new marriage, and the accumulation of more assets (such as an inheritance). It is also very important for you to share your estate plan with you family and loved ones so that they understand your plan.
Finally, a review of your estate plan should be done periodically to make sure it still aligns with your goals and wishes. And because of the importance of your estate plan, it should be integrated into your overall personal and financial plan. Working with a financial advisor is beneficial because they can help you make decisions about certain financial assets that make up your estate plan and how they transfer upon your death. For example, you can designate a beneficiary of certain retirement accounts that will transfer to your designated beneficiary immediately upon your death without going through the estate probate process. Also, if you have charitable intentions as part of your estate plan, a financial advisor can discuss ways to efficiently give to charities, such as listing the charity as the beneficiary on your pre-tax assets since they will not be subject to taxation when the charity receives them.