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Contemplating your own death may not be on your list of things you look forward to doing.
Still, for your family or other loved ones who find themselves trying to settle your affairs while dealing with the emotional fallout of your loss, it’s important that you have a so-called estate plan, experts say. And this is the case whether you are rich or not.
“When you get your house in order, it’s a gift you give to your family,” said certified financial planner Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia.
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Simply put, your estate plan outlines who you want to make decisions and who will inherit what you own. “Estate” simply refers to possessions and other assets.
Experts say most estate plans don’t need to be complicated. But to make sure your wishes are carried out, they need to be done correctly – which may be worth consulting with a local lawyer who specializes in estate planning.
Here are five key things to know if you’re starting to think about how you would develop an estate plan.
1. A Will May Not Cover All Your Bases
“If your ex-spouse is listed on the beneficiary designation, your ex-spouse will receive the money regardless of what your will says,” said CFP Stephen Maggard, counselor at Abacus Planning Group in Columbia, South Carolina.
Be aware that many 401(k) plans require your current spouse to be the beneficiary, unless otherwise agreed by law.
Ordinary bank accounts may also have beneficiaries listed on a form payable on death, which your bank can provide. The same goes for brokerage accounts.
If your ex-spouse is listed on the beneficiary designation, your ex-spouse will get the money, no matter what your will says.
Advisor at Abacus Planning Group
If no beneficiary is listed on these different accounts or if the designated person is already deceased (and there is no contingent beneficiary listed), the assets automatically enter into probate.
It’s the process by which all your debts are paid off and the remaining assets that are subject to probate – including those that go through the will – are distributed to the heirs. This can take anywhere from several months to a year or more, depending on state laws and the complexity of your estate.
2. You will need to choose your executor carefully, other key roles
When you write a will, you name an executor to carry out your wishes and manage your estate. It can be a lot of work.
Things like winding up or closing accounts, ensuring your assets go to the right beneficiaries, paying all outstanding debts (i.e., taxes due) and even selling your home could be among the tasks overseen by the executor.
This means that you must ensure that the person you nominate is a candidate for the position and is willing to accept it.
Additionally, an estate plan should include other end-of-life documents, including a living will. It describes the health care you want and don’t want if you become unable to communicate those desires yourself.
You can also assign powers of attorney to trusted people so that they can make decisions on your behalf if you become incapacitated at some point. Often, the person who is given responsibility for decisions related to your health care is different from the person you would appoint to manage your financial affairs.
Just be sure to name alternatives.
“It’s very important to have backups in all roles in the estate plan…in case someone can’t serve,” said CFP Jennifer Bush, financial planner at MainStreet Financial Planning in San Jose, Calif.
3. Some assets get a “base boost”
If you have assets such as stocks, bonds or real estate (i.e. a house) and you plan to give them to children or other heirs during your lifetime, it may be -be more logical to wait.
When these assets are sold, any increase over what is known as the cost basis (the value at the time the asset was acquired) and the sale price are subject to capital gains taxes.
However, upon your death, your heirs who inherit these assets get a “base increase”. In other words, the market value of the asset at your death becomes the basis for the cost to the heir, which generally means that any prior appreciation is not taxed. And when the heir sells the asset, any gain (or loss) is based on the new cost basis.
On the other hand, if you were to gift such valued assets to your heirs before your death, they would assume your original cost basis, which could result in an outsized tax bill when the assets are sold.
“We often find ourselves advising customers to give adult children money instead,” Maggard said.
4. You may want to consider setting up a trust
If you want your kids to get money but don’t want to give a young adult – or someone prone to mismanagement of money or other concerning behaviors – unlimited access to a windfall suddenly, you may consider creating a trust to be the beneficiary of a particular asset.
A trust holds assets in the name of your beneficiary(ies) and is a legal entity dictated by the documents that create it.
If you choose this route, the assets are left with the trust rather than your heirs. They can only receive money in the manner (or when) you have stipulated in the trust documents.
5. You will need to review your estate plan
Whenever you have a major life change, such as the birth of a child or divorce — it is important to review your estate plan.
You will want to confirm that your appointed executor (or trustee, if you are creating a trust) is still an appropriate choice. Also, check all beneficiaries listed on your financial accounts to make sure no updates are needed.
Also, if you’re moving to a new state, be sure to check if you need to update any part of your plan to comply with that state’s laws.