Blog Disclaimer
The content on Retiremetstep.com is for informational purposes only and does not constitute financial advice. Please consult a qualified financial advisor for personalized guidance.
Responsibly passing on your assets and legacy to loved ones requires proactive estate planning, regardless of your net worth. With 2024 approaching, now is an opportune time to get your estate plan in order.
Thoughtful strategies can help you minimize taxes, avoid probate delays, and ensure your wishes are honored when you’re gone. This detailed blog covers key estate planning tools and considerations to protect your legacy in the year ahead.
Core Estate Planning Documents
These essential legal documents form the backbone of your estate plan:
Last Will and Testament
A last will and testament is the cornerstone of your estate plan. This legal document dictates how your assets should be distributed upon your passing. It also names guardians for any minor children or dependents you are leaving behind.
Your last will should be written to abide by the laws of the state where you reside. The will must be signed in the presence of two adult witnesses who are not beneficiaries listed in the will. The witnesses do not need to review the will, but they must witness the testator signing it. Nearly all assets that are owned individually rather than jointly typically must go through probate court after your passing before they can be distributed to beneficiaries per your will.
It’s important to keep your last will up to date as major life circumstances change, such as divorces, deaths, births of children, changes in estate value, moving to a new state, or the executor named in the will becoming unable or unwilling to serve. You should review your will at least every 2-3 years with your estate planning attorney and make any necessary revisions.
Durable Power of Attorney
A durable power of attorney for finances document authorizes someone to handle your financial and certain legal affairs if you become incapacitated or incompetent. This person can pay bills, file taxes, manage real estate, and make legal decisions on your behalf per your wishes. It grants them considerable control, so name someone you trust completely who also has strong attention to detail and organization.
In addition to naming a primary power of attorney agent, it’s wise to designate a second alternate person in case your original choice is unable to serve due to unavailability, incapacity, or death. The alternate POA can step in seamlessly. Your power of attorney document should be durable, meaning it remains in effect if you become incompetent. Most states require this for POA documents.
Healthcare Power of Attorney
A healthcare power of attorney also called a healthcare proxy, appoints someone to make medical decisions on your behalf if you are unable to do so yourself. This includes decisions about treatments, procedures, medications, surgery, life support, and other preferences. Like your general POA, name a primary agent and an alternate agent.
Your healthcare POA gives the agent power to access your medical records and speak with doctors on your behalf, so it must be someone you trust. Discuss your medical wishes in detail with the person so they can make healthcare choices aligned with your values and preferences. Also, consider giving them a written document detailing your personal philosophy and feelings on end-of-life care to provide further guidance.
Living Will
A living will is a document that provides specific instructions about your preferences for end-of-life medical care and treatment if you have a terminal diagnosis or enter a vegetative state. It gives clear legal permission to doctors and healthcare agents regarding your care wishes. This may include not wanting to be kept on life support indefinitely, avoiding artificial nutrition/hydration, and your feelings on palliative care options.
Having a living will helps remove the burden of difficult healthcare decisions from family and instead makes your preferences clear. It can supplement guidance in your healthcare POA. Keep a copy of your living will in an accessible place and ensure your healthcare agent and family members know its location.
Trusts
There are many different types of trusts that can be useful estate planning strategies depending on your specific situation and goals. Trusts allow you to place assets in the trust to be distributed per your instructions by a designated trustee. This enables you to control the distribution of your estate while avoiding the time-consuming probate process.
Common trusts include:
- Revocable living trusts – Avoid probate and remain in control as a trustee during your life.
- Irrevocable life insurance trusts – Keep life insurance proceeds out of your taxable estate.
- Charitable trusts – Support a charity from your estate tax-free.
- Generation-skipping trusts – Pass assets tax-free to beneficiaries like grandchildren.
- Special needs trusts – Provide assets for dependents with disabilities.
Trusts require customized drafting by an estate planning attorney to match your needs and situation. Be sure to fund trusts during your lifetime to realize their benefits fully.
Key Estate Planning Strategies and Tools
In addition to core documents, your estate plan should incorporate specialized strategies:
Setting Clear Beneficiaries
One easy way to pass specific assets directly to beneficiaries and avoid probate is to set clear beneficiaries on all your retirement accounts like 401(k)s and IRAs. You should also name specific beneficiaries on any life insurance policies and annuities.
These beneficiaries are legally entitled to those proceeds directly upon your passing. Review designated beneficiaries annually and after major life changes to ensure your assets will transfer to the right people.
Annual Gift Tax Exclusion Gifting
A smart way to reduce the eventual size of your taxable estate is to gift assets to loved ones each year during your lifetime. The IRS allows individuals to gift up to $17,000 per year to as many people as they want gift tax-free. Married couples can jointly gift up to $34,000 tax-exempt to any recipient annually.
Lifetime gifting helps reduce estate taxes when properties transfer upon death. Over many years, you can transfer substantial assets tax-free. Gifts above the annual exclusion amount require filing a gift tax return but won’t incur gift taxes until lifetime limits are exceeded.
Charitable Donations
Donating a portion of your estate to qualified charities and nonprofits through vehicles like donor-advised funds and charitable trusts can be an excellent way to reduce potential estate taxes significantly while benefiting causes you care about.
You can leave set amounts or percentages of assets to charity in your will. Or donate via charitable trusts that disburse income to you beforehand. There is no limit on the estate tax deductions you can realize from charitable gifting.
Irrevocable Life Insurance Trusts (ILITs)
ILITs are a more advanced estate planning strategy where an irrevocable trust owns your life insurance policies, rather than having you own them directly. This structure keeps the life insurance payouts from being included in your taxable estate upon death.
To fund the ILIT, you make gifts to the trust which in turn pays the policy premiums. At life expectancy, the trust beneficiaries (your loved ones) receive payouts tax-free. The trust agreement dictates distribution instructions. ILITs require careful setup, so consult an estate planning attorney.
Business Succession Planning
If you own a business or commercial real estate, it is crucial to detail succession plans for its future ownership and leadership transition to ensure continuity when you retire or pass away. A buy-sell agreement can outline valuation and sale terms.
Estate freezing and gifting interests to families can limit estate taxes on business assets. The succession plan helps avoid disruptions, litigation from heirs, or forced sales. Communicate plans clearly to family and business partners.
Pick an Executor Carefully
Choosing a responsible, detail-oriented executor is key for ensuring your estate is settled properly per your last will and testament. Inform the person beforehand and go over probate procedures. Many people choose spouses, adult children, siblings, or professionals like attorneys.
Review Plans Annually
Make it a priority to review beneficiary designations, account titles, trusts, powers of attorney, guardianship wishes, and all other estate plans annually. Life changes like marriage, new children, divorce, or moving can necessitate revisions. Estate plans also need adapting to new tax laws and retirement account rules.
Conclusion
Creating a thoughtful estate plan is one of the greatest gifts you can leave your family. Taking time to make legally binding decisions about asset transfers, estate taxes, probate avoidance, funeral wishes, and care for dependents provides peace of mind your legacy is protected. Consult an estate planning attorney to ensure your strategies follow state laws. With 2024 fast approaching, now is the ideal time to proactively put your estate in order to protect your loved ones for years to come.
FAQs About Estate Planning Essentials
What documents constitute a basic estate plan?
The core estate planning documents every adult should have prepared include a last will and testament, durable power of attorney, healthcare power of attorney, living will, and potentially one or more trusts depending on your assets and situation.
How often should you review or update estate plans?
It’s wise to review your full estate plan with an attorney at least once a year and whenever a significant life event occurs like a marriage, divorce, death of a beneficiary, birth or adoption of a child, change in assets, retirement, moving to a new state, or death or incapacity of your named executor or agent.
What professionals can help you create an estate plan?
Your estate planning team may include an estate planning attorney, financial advisor, life insurance agent, accountant, trustee, and fiduciary consultants. Different professionals can assist with different pieces of planning, asset evaluation, tax minimization, and documentation.
What percentage of assets can you gift tax-free each year?
Under current IRS rules as of 2023, you can gift up to $17,000 per person annually gift tax-free. Married couples can jointly gift up to $34,000 per year to each recipient. Gifts under these limits do not need to be reported to the IRS.
How long does the probate process take after someone dies?
The length of probate after someone passes away can vary greatly based on the complexity of the estate, potential contesting of the will, the state probate procedures, if a trust is involved, and the efficiency of the executor. The process can range from 6 months to 2 years in some cases. Having a Revocable Living Trust can avoid probate.
