Financial planning refers to a systematic approach to the management of your money, assets, and other investments to maximize your wealth. One of the key aspects of financial planning which often remains ignored is estate planning. While other elements of your financial plan help you benefit from your wealth during your lifetime, estate planning helps you do the same for your loved ones in your absence.
Estate planning helps you choose who gets your assets after your death. Creating an authorized legal plan for the distribution of your property and other assets before your death will place your loved ones in a safe zone wherein they can distribute the property legally. It will also help your family members to minimize the legal battles which may occur among them due to ambiguity related to the distribution.
What Is Estate Planning?
Estate planning is a process that helps you decide how everything that you own, be it your assets, properties, or financial obligations, will be managed, distributed, and preserved after you pass away or become incapacitated.
It is a common misconception that estate planning is meant only for rich people. No matter what your economic status is, you should plan the future of your estate to equip your loved ones and dependents (if any) with a plan for the management of your belongings which can keep them financially shielded at the time of emotional grief.
How to Do Estate Planning?
Estate planning is more than writing a will. It requires in-depth planning which includes accounting for all of your assets as well as ensuring that they get transferred to the people of your choice smoothly. It also requires you to keep the beneficiaries informed about your decision so that they can help with its implementation when you aren’t around.
Step-By-Step Guide for Estate Planning?
You can follow the below-mentioned steps to prepare an estate plan –
1. Writing of a Will:
A will is a type of legal document which gives instructions and information on how the assets, property, and the custody of the minor children (if any) of an individual will handle in case of their death. It also mentions the name of an executor who will implement it after the individual is gone.
A will needs to authenticate by a legal process known as probate. It is supervised by a court that assesses its validity and declares it as the final testament of the deceased. The court also appoints the individual or entity named in the will as the executor for the distribution of the estate.
2. Appointment of an Executor:
It is important to choose the executor of the will wisely. The executor is responsible for supervising the distribution of all the assets and financial obligations of the decedent. The executor is also responsible for estimating the value of all such assets and liabilities by either using the date of death or an alternative date in accordance with the Internal Revenue Code.
The executor is also responsible for clearing off the deceased individual’s debts and filing their final income tax returns. After completion of evaluation of the assets and payment of all debt, the executor approaches the court to seek permission for distribution of the remaining wealth to the named beneficiaries.
3. Planning for Estate Taxes:
During estate planning, there are various steps that an individual can take in order to reduce the taxes applicable to an estate as they can reduce the value of the holdings significantly.
Following are a few steps that you can take to minimize your estate tax liability:
- AB Trust: It can be used by married couples to divide their wealth to reduce the taxable value of their individual estate.
- Education Funding: Another tax-saving strategy could be a transfer of certain wealth to an education fund for the future education of your children or grandchildren. It is a more efficient way of saving the taxes than making transfers which become effective after the death.
- Charitable Contributions: Transfers made for charity purposes qualify for tax exemption and thus, can help you reduce the size of your taxable financial holdings and enjoy tax incentives available for making such contributions.
- Estate Freezing: It is the processing of freezing the current value of your assets and attributing any change in their future value to a beneficiary such as your spouse, children, or grandchildren. By locking the current value of your asset, it helps you limit your tax liability.
Also Read: Solid Ways To Become Financially Independent
Should You Hire an Estate Planning Attorney?
State laws are often difficult to comprehend. However, they dictate all legal processes, including estate planning, to keep the procedures fair for everyone. However, the lack of knowledge of laws and their complete understanding can result in legal issues when implementing an estate plan.
Thus, in such a case, you can consider hiring an estate planning attorney who has professional knowledge and experience in creating and executing estate plans. The attorney also helps you write your will, determine the value of your assets, and ensure its correct implementation in your absence. For instance, if you own a house in Montgomery County and are unable to assess its actual worth, you can consult the woodlands estate planning attorney to ascertain its correct value.
Importance of Life Insurance in Estate Planning
Life Insurance is one of the basic sources of finances available for the payment of death expenses and taxes, retirement plans, and other financial commitments. It also offers an immediate cash reserve to pay for funeral expenses, debts, and income tax. Moreover, life insurance proceeds received by beneficiaries are usually free from the application of taxes.
Estate planning is one of the finest ways of maintaining the financial standing of your loved ones when you are not near. It might seem difficult to plan for your own death but creating an effective and solid estate plan as a part of your financial plan makes things easier for your family in your absence.