Essential steps for estate planning: Secure your legacy with these key strategies
Estate planning isn't just for the wealthy; it's an essential process for anyone with assets. In other words, if you have “stuff,” you have assets that must be protected. Proper estate planning ensures your wishes are carried out and eases the distribution process for your heirs. In this article, we'll look at the key steps that will empower you to create a comprehensive estate plan that secures your legacy and provides peace of mind.
Step 1: Crafting essential estate planning documents
Estate planning documents are the foundation of a well-structured estate plan. Consultation with an estate planning attorney, tax advisor, or financial professional is recommended to ensure a comprehensive approach.
Here are some key documents to consider:
Medical directive/living will
A medical directive, often called a living will, outlines critical end-of-life healthcare instructions, including decisions about life-sustaining procedures, artificial nutrition and hydration, information release to loved ones, and organ donation. It is a vital tool to ensure your wishes are respected even when you can't communicate them directly.
2. Power of attorney
Power of attorney documents grant a trusted individual the authority to act on your behalf for legal or financial matters. They can encompass health care, financial matters, and durable power of attorney that remain effective even if you become incapacitated.
3. Will
A will is your way of articulating how your assets will be distributed after your passing. It also names an executor to oversee asset distribution. You can choose a family member, friend, or professional executor for this role. A codicil can be used to amend the terms of a will.
4. Disposition of last remains
This document outlines your wishes for burial, cremation, and memorial services and designates responsible parties for carrying out these wishes.
5. Instructions for digital assets
Consider how you want your digital assets accessed and managed. This includes financial accounts, emails, social media, and other online presence. The Revised Uniform Fiduciary Access to Digital Assets Act empowers your executor to access these accounts with proper authorization.
Step 2: Designating beneficiaries for financial accounts
Naming beneficiaries for various financial accounts is a strategic way to ensure a seamless transfer of assets, not to mention avoiding probate. Different types of accounts, such as bank accounts, life insurance policies, and retirement plans, allow you to name primary and contingent beneficiaries.
Step 3: Regular beneficiary review
Regularly reviewing your beneficiary designations is essential, especially after major life events such as marriage, divorce, or the death of a beneficiary. Beneficiary changes can often be made by completing a form.
Step 4: Understanding estate tax exemptions
Being aware of estate tax exemptions is helpful to effective estate planning. As of 2023, the federal estate tax exemption is $12.92 million per person, subject to a 40% tax rate on amounts above this threshold. Married couples can combine their exemptions for a total of $25.84 million. Gifting assets and using lifetime exemptions strategically can help manage potential tax liabilities.
Step 5: The sunsetting estate tax exemption
The current estate tax exemption, established in the Tax Cuts and Jobs Act of 2017, is set to expire in 2025. At that point, the exemption will decrease to $5 million per person with adjustments for inflation. While you may currently be below the $12.92 million threshold, changes in the coming years could affect your estate tax liability.
Step 6: State estate tax considerations
Several states have their own estate tax laws with lower exemption thresholds than the federal level. Even if you're exempt from federal estate tax, you might still be subject to state estate tax. Consulting your tax advisor is crucial to understanding these potential obligations.
Preparation for the future
Estate planning secures your legacy and provides for your loved ones. By creating essential documents, designating beneficiaries, staying informed about tax exemptions, and considering state-specific regulations, you can ensure your wishes are carried out efficiently.
Regular reviews and professional consultations will help you adapt your plan to changing circumstances. Consult with an estate planning attorney or financial professional to create a comprehensive and tailored strategy that reflects your values and protects your assets for future generations.
Your legacy is worth safeguarding, no matter the size of your estate.
