Most people have heard the term “estate planning” many times; however, if you have yet to create an estate plan you may not have a thorough understanding of what the term actually includes. Estate planning is a broad concept, and means something different to each person, though there are some common components of most estate plans.
The primary goal of an estate plan is to address how your assets are to be distributed at the time of your death. Without an estate plan, state intestate succession laws will determine what happens to your assets by determining who your legal heirs are. This means that friends, charities, and distant relatives will likely receive nothing from your estate. By executing a Last Will and Testament, the foundation of any estate plan, you have the opportunity to decide whom the beneficiaries of your estate will be instead of letting the state decide.
Estate planning, however, can accomplish much more than simply distributing your estate assets. Another common component of an estate plan, for example, is incapacity planning. Whether as a result of an old age related dementia disease, or a sudden tragic accident at the prime of your life, you could become mentally incapacitated and unable to manage your finances and/or day to day tasks. Again, in the absence of an estate plan, a court will determine who controls your finances and who may make daily decisions for you. By including an incapacity plan in your estate plan, you will be able to decide ahead of time who those people are, providing you with the security of knowing who will control you and your money if the worst happens.
A comprehensive estate plan also affords you the opportunity to minimize your exposure to probate as well as decrease the taxes your estate will owe when you die. Probate is the legal process that an estate passes through upon the death of the estate owner. Assets that are required to go through probate are not immediately available to the intended beneficiaries, providing an incentive to create an estate plan that avoids probate to the extent possible. Of equal importance, all assets owned by your estate when you die are potentially subject to federal gift and estate taxes at the rate of 40 percent. For those who have significant estate assets, creating an estate plan that transfers that wealth prior to death and/or outside of the probate process is an important goal of the estate planning process.
Estate planning can also include special needs planning, asset protection, long-term care planning, and Medicaid planning, among numerous other goals. The important thing to understand is that your estate plan should be as unique as you are and will incorporate all of the goals and objectives that are important to you.