Mention estate planning, and many people assume it’s a financial activity reserved for the wealthy or someone with lots of assets. But an estate plan, even a basic one, is important for everyone regardless of their net worth amount or income level. Why? It can minimize confusion and the costs involved in dealing with your estate after you die, which can ease the stress on your family.
What is an estate?
An estate is the total net worth of an individual at any point in time, which includes all their personal assets, such as real estate, intellectual property, business equity, stocks, bonds and bank accounts. An estate can continue to grow after a person’s death, such as with artist royalties or investments that continue to accrue interest.
What is estate planning?
Estate planning is the process for creating a legal document that gives instructions for managing and allocating your assets after your death. While it can be a difficult topic to address, ultimately it's an important one. Without the roadmap that an estate plan provides, your assets can wind up in legal limbo for years, putting a burden on your heirs and other family members who are left to deal with sorting out your finances.
What you decide to have people do with your estate is up to you within legal limits; for example, some people allocate assets to take care of a beloved pet. Besides facilitating the transfer of your assets to those you choose, planning can help minimize income, gift and estate taxes, among others.
What are wills and trusts?
There are several items typically included in a checklist of estate planning, starting with a will or trust. Generally, a will allows you to name heirs to your assets and the amount or percentage to be given to each. For parents of young children, you can also name a guardian if something happens to both you and the other parent.
A trust can be more complex and costly to set up than a will, but it has several pluses. You can avoid probate court with a trust, allowing your beneficiaries to save time and court fees while more quickly accessing assets as you had intended. You can create a trust years before you reach an age where you might become incapacitated, too.
What is power of attorney?
A power of attorney provision hands over the decision-making responsibilities on your property and finances to a trusted individual in case you become incapacitated and are unable to make decisions. You can create a separate power of attorney for healthcare, giving an individual, such as a family member, the authority to make medical decisions on your behalf if you can’t.
What are beneficiary forms?
Another way to avoid probate is by designating an individual on beneficiary forms, which allows accounts to be automatically payable to them upon your death. Accounts can include retirement plans such as a 401(k), life insurance policies and bank accounts. Many states also allow you to name a beneficiary on stocks, bonds and brokerage accounts.
For anyone who owns a home or has young children, or will likely have a large estate tax or debts owed upon their death, investing in life insurance can be a wise decision. See how Nationwide can help you find a life insurance policy to lessen your family’s debt burden after you pass.