Estate Planning is basically insurance for four things: death, disability, end-of-life-care, and taxes.
We all die and pay taxes, and most of us need to worry about end-of-life-care or disability at some point. Estate planning can’t stop the world from turning or the pain our family will feel at our death–but it can make life a little easier for everyone in difficult situations.
End-of-life care and Disability
The most important part of estate planning while someone is alive is the end-of-life care and benefits in case of disability. If you get injured the wrong way or get dementia, you may be unable to make your own decisions. Estate planning helps with this in two ways: it lets you say what decisions you would want made, and it lets you say who you trust to act for you.
Nominating a guardian for your kids is part of this: who do you trust to make decisions for your kids if you cannot?
Advance Health Directives are another part. They can be used for any legal medical instructions, but they most frequently are used for saying when you would want a hospital to stop artificially prolonging your life. This can be incredibly useful and make it much easier on relatives, who otherwise will be forced to make decisions without knowing what you would want. Even if they would make the same decision you would, as is sometimes the case, it is often better to spare a loved one the agony of making that decision, and to give them the guidance of “this is what (s)he wanted, and you’re doing the right thing.”
Powers of Attorney give your loved ones the ability to make decisions for you without having to take you to court to prove that you are incompetent. Many people use powers of attorney when they want to delegate some tasks as they get older, even if they never become incompetent. Health Care Powers of Attorney name health care agents–the medical decision-makers who stand in your place if you can’t make your own decisions. (Without this, relatives can still make health care decisions for you in a certain order based on where they are in a list made up by your political representatives.) Financial Powers of Attorney name attorneys-in-fact to make financial decisions for you.
Without Powers of Attorney, it becomes much more likely that a relative who cares for you will need to take you to court–which is more time-consuming and more expensive than drawing up a power of attorney. There is also the risk that if you don’t name someone, the court will pick someone for you who you never would have chosen to make decisions for you.
When estate planning is done correctly, every will is different. What’s more, what you learn from an attorney while estate planning will affect not just your will, but all of your property. We have complicated lives, and wills deal with all of the property that we have gathered over our lifetime. Changing a beneficiary designation on a retirement plan may save you a fortune. The way in which you title your real estate may affect whether your surviving partner can keep your house. The gift you leave to your mother can wind up being wasted if it is left to her in the wrong way. Estate Planning isn’t about filling out a template form and nothing else: it’s about understanding what problems a plan can lead to and how to mitigate that risk.
And wills are also not the only way to transfer property on death. Living Trusts, Transfer-on-death Deeds, Retirement Plan Beneficiary Designation Forms, real estate or bank accounts held in joint accounts with rights of survivorship, community property agreements, Buy-sell agreements, and many other instruments can be used depending on your needs.
Taxes come into play in estate planning in two ways: first, once estates reach a certain size, designing an estate plan that minimizes estate taxes is important and can save a lot of money.
But even before then, designing an estate plan to minimize taxes can make all the difference in the world for those who survive you. An estate planner can help draw up a trust for your kids that can hold your retirement plans in it and help advise you on the financial implications of leaving your retirement plans to kids instead of adults, for example. This can let you decide who will manage the funds for your kids, but it can also make a massive difference in how much wealth your kids have when they retire–by getting the tax advantage of your retirement plan for additional decades, even a small retirement plan can increase tremendously in value.