Estate Planning: Definition & Steps

Instructor: Maria Airth

Maria has a Doctorate of Education and over 20 years of experience teaching psychology and math related courses at the university level.

What is an estate plan? Who needs one? Why do they need it? How is an estate plan created? The answers to all of these questions are given in this lesson on estate planning.

Do I Need an Estate Plan?

Meet Matt, an accountant with a young family. Matt and his wife have two children. They have a modest savings account, a home, and two cars.

Matt would not consider himself rich at all. In fact, he feels like he is just barely making ends meet most of the time. Does he need an estate plan?

Let's help Matt get to the bottom of estate planning through answering these common questions of Who, What, Why, and How.

Who Should Have an Estate Plan

The best question to ask someone deciding whether or not they need an estate plan is: ''Do you own anything?'' If the answer is yes, then they have an estate and estate planning would be beneficial.

Since Matt has minor children, a house, life insurance policies and other belongings he definitely needs to develop an estate plan.

What is Estate Planning?

So, ''What is an estate plan?'' An estate plan is an intentional and active method of legally determining what happens with your valuables and belongings after death. It is not just about having a will, but also about taking legal measures to protect your belongings (that is your estate).

It is a plan for how your assets should be given to others and can include a health directive which indicates what your wishes and who can make decisions for you in the case of you being medically unable to make your own decisions.

Okay, now that Matt understands what an estate plan is and that it would be beneficial to him to have one, he wants to know ''Why?''.

Why Create an Estate Plan?

When someone dies without proper estate planning, their estate goes into probate. Probate means that a judge must decide what happens to estate assets. Probate requires legal fees to be paid and this reduces the overall value of an estate.

So, a great reason to have an estate plan is to avoid probate.

Estate planning also helps reduce estate taxes. Did you know that both your state and the federal governments have a claim for estate taxes (depending on the size of your estate)? Through estate planning, you can set up trust funds and incorporate other techniques (such as late in life gift giving) to ensure that your money goes to those you want to have it.

Setting up a solid estate plan also helps those left behind know exactly what you want and avoid fighting over your estate. Too many families deal with a loved one's estate after they have died and end up fighting and causing rifts in the family. If the person had only left a clear plan for the estate everyone else could have simply followed their instructions and avoided all the extra hurt and sorrow.

The ability to protect both minor beneficiaries (those receiving part of your estate) and adult beneficiaries who are not able to protect themselves is an additional reason why estate planning is important.

A final reason to have an estate plan is to protect your estate (and thus your beneficiaries) from creditors. This is called asset protection planning and protects your estate from creditors that have not already made a claim on the estate. Using trusts and other asset protection techniques can protect a spouse from the family home being taken after the death of the primary wage earner. It is a very important reason to ensure a strong estate plan is legally in place.

Matt is convinced that he does need an estate plan now. But how can he go about getting an estate plan to protect his family?

How to Plan an Estate

Everyone interested in estate planning should start with writing a will to clarify in writing who their beneficiaries are and how they want their estate to be divided. Include a health directive and a power of attorney so that people can make decisions for you when you are not able to do so yourself.

Next, any time there are major life changes (such as divorce, marriage or the birth of a child) people should review their beneficiaries for accuracy. Remember to check private and employment-related policies.

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