Passing away without an estate plan is a huge mistake that can tie up your estate for years in probate. Yet, many people fail to create a will, living trust and other key financial instructions.
"If you don't have an estate plan, instead of people knowing what you want, you force people to guess," says Chas Rampenthal, general counsel at LegalZoom, an online company that helps customers create legal documents. "That guessing can be the cause of a lot of pain, a lot of strife. (The estate plan) is one of the single biggest acts of love you can do."
What Is Estate Planning?
Communicating your final wishes can be emotionally draining, and many people are reluctant to get started. It's common to feel intimidated by the complexities of estate planning and forced to make difficult decisions before you are ready.
"They have to go through the process and think about something that's not pleasant to think about," says Matt Nadeau, wealth advisor at Piershale Financial Group in Barrington, Illinois. "It's easier to put off, because it's dealing with stuff you don't want to think about."
Delaying estate planning can put a huge burden on your family. "One of the biggest reasons people don't do an estate plan is they don't know what an estate plan can do," Rampenthal says. "They don't understand the power of putting it down on paper."
The lack of an estate plan can cause big issues for heirs. Here's why everyone should make an estate plan:
If you die without a will, your estate will go through probate. "The probate process in most states takes a minimum of seven months to allow creditors to put through claims," says Manhattan attorney Ann-Margaret Carrozza. "It is a public hearing. It allows everyone to know your business and everyone to put in a claim. Many are frivolous."
The probate process can also be expensive, and legal costs will reduce the amount your loved ones inherit. "You want an easy transition of your assets," Nadeau says. "Probate gets in the way."
Some advance planning can save your heirs from getting a big tax bill. For example, your beneficiaries will need to pay income tax on money they inherit in a traditional IRA. However, money you leave them in a Roth IRA can be withdrawn tax-free. A careful estate plan can create less of a tax burden for your relatives.
If you plan to leave behind an estate in excess of $11.4 million, you need to make a plan for estate taxes, or the so-called "death tax." Some states also have an estate or inheritance tax with a different threshold.
You can reduce estate taxes with an estate plan, Nadeau says. "If you don't have a trust in place, you can get socked."
Set Up Care for Dependent Children
Families with dependent children should make a plan for childcare if both parents pass away. Many young couples don't think about it, but in the event of both of their untimely deaths, they need to appoint someone to be the guardian of their children.
"Make sure that if you have minor children, that you have named someone to be the proper caretaker," Rampenthal says. "That is one of the biggest bones of contention when it comes to couples with small children less than 18. A lot don't get an estate plan because they are so uncomfortable having the conversation (on who will be the caretaker) -- my parents, your parents, my brother."
Setting up an estate plan can prevent fighting among family members. Carrozza says, "The biggest danger for people with minor children if the husband and wife don't have an estate plan is the risk of relatives crying and squabbling over who gets custody."
Choose How to Distribute Your Assets
An estate plan allows you to allocate your assets according to your wishes. If you don't have an estate plan, your money and property may not get to the correct person.
Some people who get an inheritance in one big sum blow through it pretty quickly. Carrozza suggests using an estate plan to customize inheritances for certain beneficiaries, especially those who might be young, immature or irresponsible.
If there is not a will when you die, it is called dying intestate. Each state has a succession formula for who receives money and property left behind.
"The last person on that line of succession happens to be the state," Rampenthal says. "If they can't find anyone, it goes to the state where you passed away. You don't want to do that."
Make a Plan for Pet Care
Pets will need to be cared for in the event that the owner passes away. "You want to say who gets custody of pets in death and leave money in a pet trust to make sure animals are taken care of," Carrozza says. "I see senior citizens reluctant to get a pet because they are concerned about what will happen to the pet when they die, but a pet makes you live longer. So, there are provisions we can make."
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