Whether or not you’ve considered estate planning at this point in your financial journey, if you have assets and an estate, you need an estate plan. Without an estate plan, you and your family could be vulnerable to financial risk. In this guide to the importance of estate planning, we’ll break down an estate planning definition and discuss six critical elements of estate planning to help you get started.
Are you ready to create a personalized financial plan that ensures your ability to leave a legacy for future generations? Schedule a call with Bay Point Wealth to find out how we can help.
What Is Estate Planning And Why Is It Important?
Let’s begin by walking through a simple estate planning definition: Estate planning involves working with a financial advisor and an attorney to prepare for your potential incapacity and eventual passing. One of the main goals of an estate plan is to mitigate income taxes and estate taxes in the event of your death.
The legal documents of an estate plan are unique to every situation. These documents can be simple and concise, or they can include a high level of specificity and can require detailed instructions.
Depending on your situation, creating your estate plan can be either a lengthy and complex process or a straightforward and relatively simple process. Regardless of the level of complexity, however, it is essential to work with a team to help navigate this process, clarify and define your wishes, and avoid any unintended consequences.
The Importance Of Wills And Estate Planning
We all have a duty to take care of our families. Part of that duty involves ensuring there is a plan in place if something happens to you. When you pass away, especially in the event of a sudden death, your financial affairs must be in order so your family won’t have to endure any additional stress during this time. When you have a well-structured estate plan, it enables your loved ones to focus on grieving and healing and allows them to access the remainder of your estate without difficulty.
Several instances have made headlines over the past few years in which high-profile individuals passed away without estate plans. These situations created serious complications for their families. For example, the musician Prince didn’t have a will or estate plan, which left his family in a dispute over assets and royalties after his death. Nearly half of the value of Prince’s estate may end up going toward taxes and penalties which could have been avoided with proper planning.
In another case, the actor Philip Seymour Hoffman didn’t have an updated estate plan, and his wishes for his children’s inheritance were not known at the time of his death, putting their financial future in a precarious position. In addition, because he and his girlfriend weren’t married, Seymour Hoffman’s assets were unable to pass to her tax-free, which would have been possible if they had been married.
These examples demonstrate the importance of estate planning in reducing the burden on your loved ones after your death. Working with a financial advisor and an attorney to create an estate plan protects your children’s and grandchildren’s financial futures and helps you minimize taxes so your family can hold onto your hard-earned wealth.
The Importance Of Estate Planning: 6 Crucial Elements
You now have an answer to the question, “What is estate planning and why is it important?” It’s time to explore six key components of an estate plan.
1. Beneficiary Designations
In the event of your death, any account or insurance policy with beneficiaries designated on it will pass to the beneficiary listed on the account or policy, regardless of the instructions you leave in your will. For example, if your ex-wife is listed as the beneficiary on your employer 401(k) account, she will receive the funds in the account even if you’ve listed someone else as the recipient of those funds in your will.
Forgetting to update your beneficiaries when you create an estate plan is a common mistake. That’s why at Bay Point Wealth, every time we work with a client on an estate plan, we have them update every single beneficiary as soon as they engage with us, so we can all be sure this information is accurate.
2. A Will
A will is the first basic document in an estate plan that everyone must have. The importance of wills and estate planning is significant, especially when it comes to naming a guardian for minor children, although this step is sometimes overlooked.
Your will should specify the executor of your estate, the guardian of your children, and the individuals and charitable organizations that will receive your assets upon your death.
3. Living Or Revocable Trusts
When you’re planning to leave assets to your loved ones, you need to ensure those assets will pass to the right people with as little tax as possible, in a manner that is protected from creditors, divorce, and other marital issues. The most common way to do this is by setting up a revocable living trust, which provides for the ongoing management and distribution of your estate if you become incapacitated.
Any assets titled in a revocable living trust can be managed by someone you designate. This kind of trust governs the assets that are normally included in a will. At Bay Point Wealth, we prefer most clients to have a revocable living trust to help avoid the probate process, which is time-consuming and expensive.
4. Irrevocable Trusts
Irrevocable trusts are typically more complicated to set up and administer than their revocable counterparts. These trusts are commonly used for asset protection and estate tax plans because they provide significant opportunities to reduce taxes through mechanisms that “discount” your estate’s value.
You can create an irrevocable trust during your lifetime or specify in your will that you want the trust created after your death. All of your assets in an irrevocable trust are held outside of your taxable estate, which makes this kind of trust an excellent option for passing wealth to future generations.
5. Financial Power Of Attorney
Part of the importance of estate planning involves designating a durable power of attorney to manage your property and financial accounts in the event of your incapacity—for example, if you are hospitalized for several months and unable to oversee your affairs. In this case, a financial power of attorney would pay your mortgage and your tax return.
Granting someone this kind of power over your life is a significant decision, so it’s important to choose carefully. The person you select must be competent and trustworthy. Ideally, your best bet is to choose someone who knows and cares about your family. They can always seek help from a professional if they have questions along the way.
6. Healthcare Power Of Attorney
In some states, such as Maryland and Virginia, a healthcare power of attorney is referred to as an advanced healthcare directive. This directive assigns someone to manage your healthcare in the event of your incapacity, which includes making decisions about whether you will receive certain medical procedures (i.e., life-sustaining treatment).
These instructions are also sometimes known as your living will and specify whether you want heroic measures on your deathbed, or just to be kept comfortable until the time of your passing.
Pro Tip: Once a child reaches the age of majority in their state (normally age 18), they should have estate documents, a financial power of attorney, and a healthcare directive. Parents are sometimes surprised in emergencies, such as an accident, that they don’t have the authority to access their child’s medical records because the child is technically an adult.
Trusted Estate Planning Expertise
While estate planning can be complicated, don’t let that deter you from getting started. Our clients often tell us it’s not as difficult as it seems to create an estate plan with the help of trusted experts.
At Bay Point Wealth, we understand the importance of estate planning, and we’re committed to developing close relationships with our clients and guiding them through the process every step of the way. When you work with us, we’ll take a comprehensive approach to make sure you receive an estate plan that not only meets your legal and tax-related obligations but also meets your family’s needs.
In addition, we’ll help you communicate your plans to everyone involved in the distribution of your estate so that when the time comes, the process goes smoothly. Schedule a call with us today to learn more about how we can help.