When making financial decisions, don’t forget to create an estate plan. People carefully choose investments and regularly save money but often make the mistake of avoiding estate planning. This happens because they don’t know what it means and how it’s different than a will. So, let’s find out the basics of estate planning and its key components.
Estate Planning Basics
Estate planning is a broad term that includes setting up a will and trust. It is a comprehensive plan that determines who will eventually receive your assets. Besides the distribution of assets, it allows you to decide how your affairs should be handled if you ever become unable to handle them on your own. Estate planning involves naming heirs to any wealth and assets, as well as managing an individual’s affairs in the event of their incapacitation or death. Estate planning is more detailed and complex than creating a will. So, it becomes necessary to seek the assistance of an estate planning lawyer to draft this document and make way to reduce estate taxes. Estate planning can be defined as the process of preserving, managing, and distributing an individual’s assets after death or in the event they become incapacitated. Creating a detailed, legally binding estate plan offers many benefits such as protecting your beneficiaries and minor kids, preventing family squabbles, reducing probate time and cost, minimizing the tax burden, and more.
Components of an Estate Plan
People have a misconception that estate planning ends with drafting a will. In reality, a solid estate plan focuses on several factors besides the transfer of assets. It serves multiple purposes such as lowing estate taxes, reducing probate hassles, naming an executor of the estate, deciding guardianship of minor kids, or designating a trustworthy individual to act on your behalf should you become incapacitated. Now, let’s take a quick look at the major components of a comprehensive estate plan.
- Wills and Trusts
Wills and estate plans aren’t the same things. A will is a part of the estate plan. It also allows you to decide who will take care of your underage children should you and your spouse die or become incapacitated. Trust, on the other hand, makes legal arrangements that hold assets on behalf of your beneficiary. These legal documents are created to ensure a smooth distribution of your estate after your death.
- Durable Power of Attorney
An estate plan not only comes into effect after death but also names an individual to legally make decisions regarding an individual’s estate in the event of incapacitation. A durable power of attorney gives a person authorization to make legal and financial decisions on behalf of the individual if the person is unable to perform these tasks due to illness, injury, or death.
- Healthcare Directives or Medical Power of Attorney
Health care directives are similar to a power of attorney. The only difference is that power of attorney appoints someone to make financial decisions; health care directives intend to handle your medical decisions. It includes a living will and health care proxy.
- Beneficiary Designations
An estate plan makes sure that your beneficiary designations are up to date. It makes sure the beneficiary designations in life insurance policies and retirement plans are same as the estate documents to prevent disputes.
