The Importance of Estate Planning
There are some things many people don’t want to think about — death and severe illness or disability are usually at the top of the list. Although they might be unpleasant things to consider, having a plan in place for death or disease can be the key to making sure your loved ones follow your wishes and that your family is protected should something happen to you.
Although thinking about the end of your life today can help protect your family in the future, the reality is that not many people have a plan in place. One survey from 2017 found that just 40 percent of adults in the U.S. had a will or living trust in place. Just over a third of parents of minor children have a will. Among millennials, the numbers are even more alarming: Just 20 percent of people between the ages of 18 and 36 have any will or plan in place.
While you most likely have many years of health and happiness remaining, it’s always a good idea to be prepared.
What Is an Estate Plan?
People often assume an estate plan is synonymous with a will. While a will is part of an estate plan, it’s just one section of a fully developed and laid-out plan. Estate planning involves more than drafting up and signing a will. Other components of an estate plan can include:
- A Living Will: While a last will explains your wishes after your death, a living will focuses on what should happen to you physically if you need medical treatment. For example, you can state in your living will whether you wish to be kept alive on life support or not. You can also indicate whether or not you want to be revived if you stop breathing.
- Financial Power of Attorney: There might come the point in your life when you aren’t able to make decisions about your finances or handle your day-to-day money management — such as paying bills — on your own. A financial power of attorney appoints a person you trust to control and make financial decisions on your behalf.
- Healthcare Power of Attorney: Healthcare power of attorney is similar to a financial power of attorney, except that the person you name will make decisions about your health and care if you can’t.
- A Trust: A trust can also be part of an estate plan. Trusts are arrangements that let a third party hold assets for a beneficiary. After a person’s death, the recipient — which can be an individual or an organization — usually receives the assets in the trust much more quickly than they would have if those same assets hadn’t been placed in a trust.
- Last Will and Testament: Although people often assume that a will, also known as a last will and testament, simply divides up a person’s assets after their death, it can do much more than that. If you have children under the age of 18, your last will can name someone as their guardian. You can also name an executor of the will, a person who will be responsible for making sure the will is carried out based on your wishes.
Six Reasons You Need an Estate Plan
Now that you know what can be included in an estate plan, let’s take a look at six common reasons you might need such a plan, as well as the benefits of putting an estate plan in place sooner rather than later.
1. To Keep the Peace in Your Family
Even in the most loving of families, it’s possible for disagreements and arguments to erupt after a loved one dies and doesn’t leave any specific or clear directives for their assets. Leaving behind a last will and testament that states who in your family gets what and how much they will get will reduce sibling squabbles and other arguments.
Financial and property matters aside, having an estate plan can also help your family avoid stress and disagreements over what to do should you have any health issues. For example, if you have a do not resuscitate order in your living will or have made it clear that you don’t want any life-prolonging treatments at the end of your life, your family won’t be able to argue about those choices.
If you are concerned your children or siblings will argue over your will and wishes, creating an estate plan gives you an opportunity to discuss what you want for the end of your life and after your death. It will give your loved ones a chance to make their concerns known and for you to discuss these matters together before it is too late.
2. To Keep Your Estate Out of Probate
One primary reason to have an estate plan is because doing so will prevent your estate from going into probate after your death. The probate process involves paying off any debts owed by the deceased person, then distributing any remaining assets to inheritors. If the person did leave a will, the assets are divided up based on the will. But if there is no will, then the assets are divided up based on the particular laws in a state.
Probate takes some time — anywhere from a few months to a year — which means it can keep your beneficiaries from receiving the money or other assets they might need in a timely fashion. Probate can also be pretty pricey because of the combination of court and attorney’s fees.
An estate plan can help you avoid probate in a few ways. For example, if you set up a trust before your death, the assets in the trust will not go through the probate process, since the trustee technically owns the trust. After your death, the trustee can transfer the assets to the beneficiary without probate.
Another option is to name beneficiaries for specific accounts and make those accounts “payable on death.” Depending on where you live, you can make certain retirement accounts, vehicle ownership and real estate assets payable on death, so they don’t go into probate. Instead, the person you’ve named as a beneficiary will receive the asset immediately.
3. To Reduce Taxes on Your Estate
When you hear the phrase “estate tax,” your first thought might be, “well that won’t affect me.” After all, it’s your inheritors who might be left to pay a hefty tax bill after your death.
However, estate tax is certainly something to consider. Although you won’t be the one responsible for paying it, a high tax rate can significantly reduce the amount your beneficiaries can inherit.
As of 2018, the federal estate tax is due on the value over $10 million in an estate. That means if the total amount of assets you leave behind is $9 million, your heirs wouldn’t owe any federal estate tax.
While only people with very sizable estates are likely to have their heirs face federal estate taxes after their deaths, the rules for estate taxes are usually different from the federal rules. For example, in Pennsylvania, the estate tax is called the inheritance tax. The PA inheritance tax is based on who inherits what from the deceased.
For example, in PA, there is no tax on asset transfers to a spouse or children under the age of 21. The inheritance tax is 4.5 percent for transfers to lineal heirs or direct descendants, such as children over the age of 21. If you leave an asset to a sibling, they will pay an inheritance tax of 12 percent. Finally, the tax is 15 percent for any transfers made to other heirs, such as a close friend or another relative.
Understanding the specific estate or inheritance tax rules and exemptions both at the federal and state level can help you put together an estate plan that minimizes the tax burn on your heirs.
4. To Protect Your Children and Beneficiaries
Only 36 percent of adults with minor children have a will, despite the fact that your estate plan can protect your young kids and other beneficiaries. For example, you can name a guardian for your children in your last will and testament. Doing so will give you peace of mind that a person you trust will step forward to take care of your kids in case you and your spouse die at the same time or within a month of each other.
Naming a guardian for your children ensures they will be raised by the person you chose, not a family member determined by the court or the foster care system. Selecting a guardian also reduces the risk of there being any arguments or disagreements among your surviving family members. They might not agree that the person you’ve named as guardian for your children is the best fit for the role, but they won’t be able to disagree with your wishes or go against your will.
Along with choosing a guardian for your minor children, an estate plan can help to protect their future. For example, if you are leaving your children a sizable inheritance and don’t want them to spend it all before they reach maturity — or want to ensure an unscrupulous family member doesn’t get access to the money — you can create a trust. The trust can include specific rules about when the money is distributed to your heirs, how much can be distributed at a time and who can have access to it.
5. To Protect Your Assets
Whether you’re leaving a hefty estate or a modest one, your accumulated assets represent what you’ve worked for throughout your entire life. Without a will, your most treasured belongings or a portion of your estate could end up in the hands of your least responsible child or your least-liked sibling.
If you don’t leave behind a clear plan stating who should get what, it’s up to a court to decide how to divvy up your estate. The court might simply decide to split things evenly, giving each of your children the same amount.
Another way estate planning can protect your assets is by keeping certain creditors from swooping in after your death and making a claim on a portion of your estate. For example, creating certain types of trusts can protect a portion of your assets from the claims of creditors.
6. To Protect Your Wishes and Desires
One last reason to put together an estate plan: Doing so will protect your wishes and desires. Remember, an estate plan goes beyond the financial realm. It can also dictate who ends up raising your children and whether that person is someone with similar beliefs and values as you. Plus, it says what happens to you at the end of your life. If you don’t want certain medical treatments or if you have certain beliefs that spell out which medical treatments are acceptable and which ones aren’t, your plan will ensure hospitals and doctors abide by your wishes.
When to Start Estate Planning
When should you start putting together an estate plan? While some think it’s something that can wait until you are married or have children, it’s really something you should start once you hit adulthood. If you’re over the age of 18 and don’t have an estate plan in place yet, now is the perfect time to create one.
Mid Penn Bank offers trust and wealth management services to residents across Pennsylvania. If you are looking to learn more about creating a trust and getting started with an estate plan, contact us today.