What is estate planning?
Make sure your assets are distributed how you want after you die
Estate planning is a critical part of financial planning that helps protect your assets even after you’re gone. You can set your children and grandchildren up financially, ensure your spouse is taken care of and protect the wealth you’ve built over your lifetime.
It’s important to know exactly what estate planning entails, including the components of an estate plan, how to start the estate planning process and what to consider when putting together your estate plan.
Key insights
- Estate planning involves creating a plan for the distribution of your assets in the event of your death.
- Estate planning includes your last will and testament, but it may also include beneficiary planning, trust creation, tax planning and more.
- It is recommended to hire an estate planning attorney and possibly a tax attorney or certified public accountant (CPA) to help develop a comprehensive estate plan.
- If you don’t have an estate plan, your assets will be handled and distributed by your state’s probate system.
Estate planning definition
“Estate planning is the process of designating who will receive your assets and handle your responsibilities after your death or in case of incapacity,” explained Jason R. McWilliams, the owner of JRM Tax & Wealth Management in Aston, Pennsylvania. “It is a way of ensuring that your wishes are respected and your loved ones are taken care of.”
Estate planning may also include details about the guardianship of minors and pets that are in your care. It is much more than putting together a simple will. Estate planning includes the handling of all of your assets, including real property, such as your home, and personal property, such as your vehicles, jewelry, cash and investments.
Estate plans are an essential part of your financial plan for preserving your wealth and planning what to do with all of your assets. Working with an estate planning attorney and tax professional is essential for building an estate plan.
The components of estate planning
There are several components to an estate plan, starting with a last will and testament. This document serves as the centerpiece of the plan and instructs the estate what to do with your real property and personal property in the event of your death.
Here’s how the various components of an estate plan work:
Last will and testament
Putting together a last will and testament is the most critical component of your estate plan. A will is a document that details how your assets will be distributed, how to handle minor dependents and pets, and any other specific requests you have of the estate.
You will name an executor in your will, which is the person responsible for fulfilling the requests laid out in your will. The executor will have legal power to act on your behalf after your death.
Trusts
If you wish to establish a trust (or trusts) for your assets, this can be defined as part of an estate plan. A trust is a legal entity that can help protect beneficiary assets from creditors and has some tax advantages as well. As the trustor, you can instruct your estate to place assets in a trust for beneficiaries, and you can also dictate the terms of the trust posthumously.
Trusts are a popular estate planning tool as they help maintain a level of privacy and are not subject to the scrutiny of probate courts. There are two types of trusts: revocable and irrevocable.
- A revocable trust allows you to make changes to the trust while you are alive or in your estate plan. It is the most popular type of trust.
- An irrevocable trust does not allow you to make changes once assets are placed in there.
Power of attorney and health care directives
Your estate plan should include assigning power of attorney (POA) and any health care directives should you become incapacitated. These should be included in a living will, which allows someone you trust to make financial and health care decisions for you while you are still living.
Tax planning
Estate planning should involve some level of tax planning to ensure your assets are protected and your heirs can inherit the full amount allowed by law. While estates under $12.92 million for 2023 ($13.61 million for 2024) are not subject to estate taxes, if you have a larger estate, tax planning can help you avoid losing a large chunk of your assets to taxes.
Federal taxes, state taxes, gift taxes and other considerations should be a part of your overall estate tax planning strategy. Work with a qualified CPA or tax attorney to put together a solid plan for estate taxes that evolves with tax laws over time.
Beneficiary designations and life insurance
Beneficiary designation can help avoid major family drama in the event of your death. This includes not only beneficiaries in your last will and testament, but also assigning beneficiaries inside your financial accounts, including retirement accounts and life insurance policies.
Estate planning should also include survivorship planning to ensure your spouse is taken care of.
Charitable bequests and gifts
If you want to donate some (or all) of your wealth to charity when you’re gone, you’ll want to put that in writing inside your estate plan. Charitable giving and gifts can also be part of your estate tax planning strategy.
Why you need to do estate planning
There are several reasons why most individuals should have an estate plan:
- Distribution of assets: If you don’t have an estate plan in place, the state will determine the distribution of your assets, which may not happen in a way you’d prefer.
- Less drama: Having an estate plan can minimize the financial and emotional burdens on loved ones when you die. A clear plan on how assets are distributed can reduce any friction caused by the handling of your posthumous finances.
- Less taxes: An estate plan can help optimize your assets and financial plan for your beneficiaries in a tax-friendly way. If you have a sizable estate, estate taxes can reduce your distributions. Planning your taxes with a CPA or tax attorney can help you reduce taxes owed.
- Taking care of your heirs: If there is no plan in place, your estate enters into probate, which is a process managed by the state to distribute your assets. This can be traumatic for heirs and cumbersome for everyone involved.
- Peace of mind: An estate plan gives peace of mind that your assets will be handled according to your plan in the case of your incapacitation or death. You can ensure the financial security of your heirs and know that everything is handled before you’re gone.
“You should get an estate plan as soon as possible, regardless of your age, wealth or family situation,” McWilliams said. “You never know when something unexpected might happen that could affect your ability to make decisions or manage your affairs. By planning ahead, you can have peace of mind and confidence that you have done the best for yourself and your family.
How to begin estate planning
To begin estate planning, you’ll want to do the following:
1. Identify personal goals and values
Write down your personal goals for your wealth and your estate. And make sure to include your values as well. The more specific you get, the more likely your money will be distributed as you intend.
2. Select an estate planning attorney or advisor
Finding a trusted financial advisor or estate planning attorney is the key to building a well-designed estate plan that will be executed as you wish. Whether it’s a personal or professional recommendation, the best way to find a good attorney is through a referral from someone you trust.
3. Organize financial and legal documents
It’s important to account for all of your financial accounts and legal documents that will be included in your estate plan. This includes all bank accounts, investment accounts and a list of all assets and debts, as well as insurance policies and annuities. Having all this information in one place will make it easier for your attorney to build your estate plan.
4. Review and update the estate plan as necessary
Once you’ve established an estate plan, your work is not done. Plans change, new beneficiaries may enter your life (Hello, grandkids!), and your values may change over time. Regularly review your estate plan to make sure it’s still accurate, and update it with your attorney as needed.
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Estate planning considerations
When putting together an estate plan, it’s important to review your personal circumstances and evaluate what needs to be included in your plan. Here are a few considerations for your estate plan:
- What if you become incapacitated? Instead of just planning your estate for the event of your death, also consider planning for incapacity and disability. If you can’t make sound financial or life decisions, who will take care of that for you? And how will your estate be handled if you can’t do it while you’re still alive?
- What happens if you don’t have an estate plan? If you don’t have a plan in place, your state’s probate laws will kick in and handle it for you — most likely in a manner that you won’t like.
- What about taxes? There are many tax implications when executing an estate plan, so make sure to consult with a licensed tax professional who specializes in estate planning taxes. This can save your estate (and your beneficiaries) a lot of money down the road.
- Communication is key. When putting together an estate plan, it’s important to realize that it will impact a lot of people. Maintaining open communication with heirs can help them understand what the plan is in the event of your death and (hopefully) avoid drama when the estate plan is eventually enacted.
» MORE: What is a durable power of attorney and how does it work?
FAQ
When should I start estate planning?
Estate planning is important as soon as you have beneficiaries, such as a spouse or children. It can be simply getting life insurance and putting together a last will and testament. But as you accumulate more wealth, it’s important to have proper tax planning, health care directives and maybe even trusts established to protect your estate.
Can you pass assets to heirs before death?
Yes, you can pass assets to your heirs before your death. Assets can be gifted over your lifetime, though there are annual limitations on how much you can give before it counts against your lifetime gift tax exclusion. You can give up to $17,000 (as of 2023) to beneficiaries each year without having to file any gift tax forms or have it count against your gift tax exclusion.
Is my debt forgiven when I die?
No. In general, your estate will pay outstanding debts from the estate’s assets. If your estate has no assets or value, the debt will usually be canceled. There are many ways to protect your assets from debt collection, including trusts.
Is it better to gift or inherit money?
When receiving a gift, there are usually no tax consequences to the beneficiary, though the person giving the gift may need to file extra tax forms if they give over a certain amount. When you inherit money, there is typically no tax liability as well, but certain types of accounts or assets may require distribution or earn income that causes additional tax liabilities. Before choosing between a gift or inheritance, it’s a good idea to meet with an estate tax professional to help.
Bottom line
Estate planning can be as simple as creating a last will and testament, or it may be more complicated and require hiring a team of professionals to assist. If you don’t have any estate plan in place, your estate will go to probate and be distributed as your state sees fit — which can be a huge hassle to your loved ones.
It’s a good idea to put together an estate plan sooner rather than later and have the peace of mind that your loved ones are taken care of in the future.
Article sources
- Consumer Financial Protection Bureau, "What is a revocable living trust?" Accessed Nov. 22, 2023.
- Consumer Financial Protection Bureau, "What is a power of attorney (POA)?" Accessed Nov. 22, 2023.
- IRS, "Estate Tax." Accessed Nov. 22, 2023.
- IRS, "Frequently Asked Questions on Gift Taxes." Accessed Nov. 22, 2023.
- Consumer Financial Protection Bureau, "Does a person's debt go away when they die?" Accessed Nov. 22, 2023.
