Maria has a Doctorate of Education and over 20 years of experience teaching psychology and math related courses at the university level.
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.
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.
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?''.
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?
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.
Setting up trusts is a great way to protect estate value from estate tax burdens. Irrevocable trusts have the most tax benefits. Trusts can be thought of as an account of money to be managed by a responsible adult in order to provide for a minor or incapable adult for the life of the trust or until a defined milestone has been met (such as the minor child reaching a pre-determined age).
It is important in estate planning to change any retirement accounts in existence to Roth IRA's since Roth IRA's avoid income tax fees on distribution (money is taxed when it is deposited into the account but not when it is drawn out of the account).
Finally, the best way to avoid estate taxes is to reduce the size of your estate while you are still alive. By gifting large sums of money to your beneficiaries (be careful to stay beneath the level of taxable gifts per person), you effectively decrease the size of your estate leaving less to be taxed after your death.
If Matt completes these steps, his estate should be protected for his family upon his death. A good estate planning attorney can help ensure that Matt has completed the estate planning process correctly.
Everyone should have an estate plan. Planning your estate is an important act to protect your assets for your family after you die. The reasons to plan an estate are: to avoid probate, lower tax burdens, avoid family disputes, protect beneficiaries (those receiving part of your estate) and defend against unknown creditors. Probate means that a judge must decide what happens to estate assets and requires legal fees to be paid and this reduces the overall value of an estate. The steps in creating an estate plan are: write a will, manage beneficiaries on any policies, set up trust funds, establish Roth IRA's and gift money while alive. Remember to consult an attorney to ensure that your estate plan is legally sound.
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AEPA Middle Grades Social Science (NT202): Practice & Study Guide79 chapters | 656 lessons | 50 flashcard sets
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