Welcome to the Investor’s Edge column and the last article in my six-part series on the financial planning process. Last, but not least, Estate Planning is the sixth essential part of the process. All six steps are equally critical to the success of the financial planning process, and while I have not addressed them in any particular order, estate planning may be the best to discuss last in this series because it is ultimately the sum of all the parts of your financial plan. If estate planning conjures up thoughts of the fame and fortune such as the vast wealth of Bruce Wayne, the billionaire with a butler (remember Batman?), think again. Estate planning is a method that enables you to decide how the things you own should be handled after your death or incapacitation.
The best way to predict the future is to plan for it.—Abraham Lincoln
Sadly, many people put off creating an estate plan or think they don’t have enough assets to need one. Sadder still are the uber-rich that just put off estate planning. Well-known people have died intestate, meaning without a valid will. Ironically, President Abraham Lincoln was one of those. Lincoln was a respected and esteemed lawyer, but he didn’t even have the legal services needed to create a will for himself. It is estimated that his estate was worth about $100,000 at his death in 1865, which would be several million dollars today. The lack of a will created over two years of delay in his estate going to his surviving wife and two sons. Likely an early end to his life at 56 was a reason. Sonny Bono, Pablo Picasso, Howard Hughes, James Brown, and John Denver, all passed away intestate. More recently, Aretha Franklin and Prince are among the wealthy people who died without wills or estate plans. This tied up Franklin’s $80 million estate and Prince’s $200 million estate as both landed in probate.
YOU DON’T HAVE TO BE RICH TO HAVE AN ESTATE PLAN
At a minimum, an estate plan allows you to select someone you trust to make decisions on your behalf after your death or if you become incapacitated. This enables your wishes to be carried out quickly and smoothly to avoid probate. Many mistakenly believe estate planning as a technique to minimize taxes. True, a blunt way to refer to “estate tax” is “death tax.” Your estate tax liability, if you have one, is the tax you pay when you die. It is a tax owed on the value of all the things you own at your demise. The good news is, the IRS gave us all a Unified Tax Credit to apply to our estate at death. This year it is $11.4 million (you get $22.8 million if married). Therefore, after applying that credit to the value of your estate when you die, only any amount above the credit is taxed. So, while it would be a nice problem to have, most people won’t pay an estate tax. Reducing your estate tax bill, then, is probably not the primary reason to have an estate plan.
Estate planning is about making sure your wishes are carried out. It gives you “post-mortem control”—the ability to be the boss of what you earned and saved over your lifetime after you die. An estate plan can also cover the extent of medical treatment you desire.
So, while not all of us will have an estate tax bill to pay, there are several estate planning steps that everyone should take. Here are five:
Write a Will: If you die without a will—or intestate—state laws, and not your wishes, will decide who gets your assets. Even if your assets do go to the people you intended, it could cost your heirs more time and money to get their inheritance in the probate process.
Consider Tax Issues: It’s said that there are no sure things in life except death and taxes, and the two also often go together. Depending on the value of the estate and other issues, there may be steps you can take, such as establishing a trust or making gifts while you’re still living, that can help lower the taxes your heirs will pay on their inheritance.
Create a Durable Power of Attorney: These documents designate someone to manage your financial, legal or business affairs in case you are incapacitated.
Address Medical Decision Making: A living will can establish how you would like your medical care to be handled in case you are unable to speak for yourself. A medical power of attorney names someone to make sure your wishes are followed.
Fill Out and Regularly Update Your Beneficiary Forms: When you sign up for life insurance or create a retirement account, you are asked to name beneficiaries who would inherit your money if you die. After an important life change—such as marriage, birth of a child or divorce—consider whether you need to update your beneficiaries.
Now is better than later to establish your estate plan. You never know what can happen. Remember Lincoln. With minimal planning, you will have assurance that your estate and all your assets go to the beneficiaries you choose and on the terms you want.
Please see my November Investor’s Edge column: Understanding the Alphabet Soup of Investing.
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