Thinking about one’s own mortality is no one’s favorite way to pass the time. Yet if you own any stuff or love anyone, it is something you will eventually have to consider. You work hard to provide a home, a living, a fulfilling present, and a secure future for yourself and your family, so it is unlikely that you would want disinterested courts or your state government to decide what happens to your assets and identify who your heirs are after you shuffle off this mortal coil.
Estate planning is the process of making arrangements for how your assets will be handled and identifying your heirs after you die or are incapacitated. The process can involve naming guardians for minor children, creating various powers of attorney, identifying medical requests, purchasing life insurance, and creating wills and trust documents.
Most estate plans involve four foundational documents, but your own plan may contain only some of these documents or could include additional ones. The commonly used documents are:
- Durable power of attorney - gives the person you choose (your agent) the ability to manage your financial affairs, including paying bills, managing investments, filing taxes, and collecting benefits to which you are entitled. This is a custom document that can grant as much or as little authority to your agent as you wish.
- Advance directives – focus on your health care. These documents can include a healthcare power of attorney that allows your agent to make medical decisions on your behalf. A living will is a written statement in which you identify the type and level of medical intervention you want or do not want. For example, you can specify that you do or do not want the use of ventilators, artificial feeding, or dialysis in keeping you alive. A DNR (do not resuscitate) order tells medical personnel not to perform CPR if you go into cardiac arrest.
- Will – specifies who inherits your assets, who will serve as your executor, who will be a guardian for minor children, and how your assets will be distributed.
- Revocable Trust – there are many types of trusts that can be formed, but the revocable living trust is one of the most common. These trusts allow you to change, add, or remove assets from the trust any time prior to your death or incapacity. Trusts allow you to transfer property directly to your heirs with little to no time delay, so they represent an important part of your estate plan. This type of trust typically becomes irrevocable upon your death.
Reasons you should think about estate planning
- Avoid probate. Probate is a legal process that determines the validity of a deceased person’s will, identifies heirs, and distributes the person’s assets. A personal representative or executor is appointed to collect the deceased’s assets, pay their debts, and distribute remaining property. If the decedent had no will, state law would determine who the beneficiaries are and how assets will be distributed. Probate can be costly and take a great deal of time to settle.
- Protect beneficiaries. Estate plans can provide for minor children or incapacitated adult beneficiaries. Trusts can also be used to prevent adult beneficiaries from making poor decisions about their inheritance, or to avoid a transfer of assets to unintended beneficiaries.
- Minimize taxes. An estate plan should be structured to take advantage of available deductions and exemptions that can minimize income, gift, and estate taxes.
- Avoid conflict and confusion after you pass. A clear, legally sound plan can help prevent misunderstandings and conflicts by making your wishes clear and establishing procedures to see that they are carried out.
Although you can create an estate plan with minimal outside help, we strongly recommend consulting with an attorney to draft these documents and include your financial planners and CPA in the process to be sure all aspects of your plan are covered. We have seen more than one sad scenario where well-meaning individuals created nightmares for their survivors by doing flawed estate planning without professional input. The cost of such errors can far exceed the cost of obtaining professional help.
Once your estate plan has been established, you should see your attorney to update it every three to five years, or anytime there is a life event such as a marriage, divorce, birth of a child or death of a family member. Share your estate planning documents with your tax professional so they can assist with appropriate tax planning.
At R&A CPAs, we have tax professionals with in-depth knowledge of trust and estate taxation who can assist with tax return preparation and help you understand the tax consequences of various planning decisions. We can also help you find other professionals who can prepare necessary planning documents for you. If you have any questions or would like additional information about this topic, please call or come see us.
About this Author
Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.