By: Jedediah McClure, JD
Key Points
- Financial Security: Estate planning protects your assets like home, investments, retirement accounts, and life insurance.
- Avoid Probate: Proper planning helps beneficiaries avoid the lengthy and costly probate process.
- Misconceptions: Estate planning is not just for the elderly or wealthy; it’s essential for everyone.
- Trusts: Understand the differences between revocable and irrevocable trusts.
- Regular Updates: Keep your estate plan current with life changes and financial updates.
Important Definitions
- Estate Plan: A set of legal documents and strategies to manage and distribute your assets in the event of illness or death.
- Probate: The legal process of validating a will and distributing assets under court supervision.
- Revocable Living Trust: A trust where the grantor retains control over the assets and can make changes during their lifetime.
- Irrevocable Trust: A trust where the grantor relinquishes control over the assets, which cannot be changed without a lengthy legal process.
- Simple Trust: A trust that distributes all earned income to beneficiaries, taxed at their income rates.
- Complex Trust: A trust that can retain or distribute income, with retained income taxed at trust income tax rates.
Estate Planning Is More Important Than You Think
Estate planning ensures financial security for your loved ones if something should happen to you by protecting your hard-earned assets – such as your home, investments, retirement accounts, and life insurance.
An estate plan is a necessary tool that allows you to protect, maintain, and manage your property if you become ill or pass away. Beyond this, it also helps ensure that minor children are protected in an emergency and minimizes taxes paid on assets by beneficiaries.
The Importance of Estate Planning
With proper planning, probate can even be avoided so that your beneficiaries receive your assets in a way that’s controlled by you and not by attorneys, the government, or the IRS.
I recently hosted an estate planning workshop and noticed a common issue among attendees. A substantial portion were already in their mid-60s, and several others were over the age of 80. That’s alarming considering some of their comments, including misconceptions and reasons for delaying.
Why Do People Delay Estate Planning?
Despite the clear benefits, many hardworking individuals fail to take the time and effort to build an estate plan and preserve their assets. Here are some common misconceptions and reasons for postponing estate planning, along with why these justifications fall short.
Misconceptions in Estate Planning
A common misconception is that estate planning is only for the elderly or those with substantial wealth. Many people also assume that the process will be complex, time-intensive, and expensive. However, these assumptions are often not true. Here are a few steps you can take to begin thinking about your estate plan:
- Gather Important Documents: Ensure key family members know where these documents are stored.
- List Your Assets and Liabilities: Record the value of each asset (properties, collectibles, jewelry, etc.) and note any liabilities, such as mortgages. Print copies of your most recent account statements and note the values and benefits from insurance policies.
- Define Your Objectives: Determine who should receive which assets, who should inherit if something happens to your primary beneficiaries, and who should care for any minor children. Decide who should handle your assets if you become unable to make decisions.
- Review Existing Documents: Update your will, review the beneficiaries of your retirement accounts and insurance policies, and update powers of attorney for health care and other affairs.
- Consider a Trust: Evaluate whether establishing a trust is right for you, and prepare to discuss this with an attorney and financial adviser.
Trusts: Revocable vs. Irrevocable
Trusts are powerful tools when used correctly. There are two main types: revocable living trusts and irrevocable trusts.
Revocable Living Trusts
With a revocable living trust, you retain control over the assets, can change the trustee at any time, and can sell your assets while you’re living. The primary benefit of a revocable living trust is to ensure your assets bypass probate, although it does not provide immediate tax benefits. Income from a revocable living trust is taxed to the grantor.
Irrevocable Trusts
Irrevocable trusts are used to reduce a grantor’s taxable estate by “gifting” assets. Once you transfer assets to an irrevocable trust, changes are permanent and cannot be undone without a lengthy process. You no longer have control over selling investments inside the trust and will need to rely on your trustee, typically your children or grandchildren, to do so. The assets are either taxed at trust income tax rates or your beneficiaries’ tax rates.
Within irrevocable trusts, there are two types:
- Simple Trust: Any interest or income earned must be distributed to the beneficiaries and taxed at their income tax rates.
- Complex Trust: Can retain or distribute interest or income earned to the beneficiaries. If retained, the trust pays tax according to trust income tax rates.
The Benefits of Avoiding Probate
Creating a trust can help your heirs avoid probate, a process of legitimizing your will and ensuring proper procedures during asset distribution. Probate can be lengthy and costly, often taking months to years and consuming 5% to 10% of your estate’s value. Additionally, probate proceedings are public, offering little privacy to families.
Keeping Your Estate Plan Current
Once your estate plan is complete, review and update it after significant life events, such as births, deaths, marriages, or divorces. Also, revisit your plan whenever there is a significant increase or decrease in your finances or changes in laws related to your estate.
Take Action Now
While planning for the inevitable might feel morbid, remember that you don’t want attorneys, the government, or tax agencies to make decisions about the care of your loved ones and the assets you’ve worked hard to obtain. Investing a little time and effort now can provide peace of mind for you and your family.
If you need assistance with your estate planning or have questions about what to include in your estate plan, contact me today. At Supernus Law, we specialize in creating comprehensive estate plans tailored to your unique needs. Schedule a consultation with me, Jedediah McClure, and take the first step towards securing your legacy and protecting your loved ones.
Contact Information:
- Phone: (618) 354-0302
- Email: jed@supernuslaw.com
- Website: Supernus Law Website
Don’t let misconceptions and excuses prevent you from creating an estate plan. Proper estate planning ensures your wishes are honored and reduces the potential for legal disputes among your heirs. Let’s work together to secure your future and provide peace of mind for you and your family.
