Navigating the complexities of inheritance can be a daunting task for heirs. And while there will always be certain challenges associated with transferring assets, there are ways to simplify this process for loved ones. It all comes down to strategic planning.
The Pillars of Estate Planning
Estate planning is an all-encompassing term that folks in the financial world use to describe planning for the bequest of assets to heirs, as well as the settlement of things like debt and estate taxes at death.
As financial journalist Julia Kagan explains it, “Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated.”
Contrary to what a lot of people think, estate planning is not something that is reserved for one-percenters or ultra-wealthy families. Anyone can and should take the time to develop a proper estate plan.
Here are some of the core components of a good estate plan:
- Will. A will serves as the cornerstone of most estate plans. It lets you determine who will inherit your assets, ranging from bank accounts and real estate to personal possessions like jewelry and heirlooms. (And if you have minor children, it allows you to appoint their guardian.) Consider this the foundation of your estate plan. Without a will in place, your heirs will face an incredibly chaotic situation.
- Trusts. A trust is a legal arrangement that gives a third party, which is known as a “trustee,” the ability to manage assets on behalf of the beneficiaries of the trust. These trusts come in a number of forms, each one serving a unique purpose. Ultimately, a trust removes much of the burden that heirs face in terms of knowing what to do, dividing up assets, etc. It allows them to bypass probate, save time, and maintain more privacy.
- Beneficiary designations. Don’t underestimate the significance of assigning beneficiary designations for all of your accounts (including life insurance policies, 401ks, bank accounts, etc.). This will make it a lot easier for your heirs to close out your financial affairs after your passing.
These are just the basics. Depending on your location and the types of assets you’re planning to pass on to heirs, there may be additional ways to make the process more seamless. For example, are you familiar with lady bird deeds?
As attorney Gideon Alper explains, “A lady bird deed allows a property owner to transfer property upon death while avoiding probate. The deed is inexpensive, revocable, and simple compared to a trust.”
It’s difficult to know about all of these different estate planning tools without giving it some strategic forethought. This is why partnering with a professional is such a good idea.
How to Communicate About Estate Planning
Estate planning is smart, but most people don’t do it right. They either leave certain tasks incomplete or they don’t take the time to let their heirs know ahead of time what’s in store. Good communication is a critically important component of estate planning.
Keeping your loved ones in the loop about your estate plans not only prepares them for their responsibilities but also helps them understand your decisions. When heirs know what to expect, it minimizes the chances of disputes or surprises that can lead to family discord.
For one, it can help explain why certain decisions have been made – perhaps why one heir has been named the trustee, or why assets haven’t been divided equally. Understanding the reasoning behind these decisions can often prevent disagreements down the line.
Secondly, it’s good for everyone to know what steps should be taken, where to find information about the estate (so that the appropriate parties can be contacted), where physical assets are hidden/stored, and more.
Getting Professional Estate Planning Help
Estate planning isn’t something you want to tackle on a DIY basis. It involves a number of legal, financial, and tax implications. A simple oversight could have significant consequences for your heirs. This is why we highly recommend working with financial advisors and estate planning attorneys to get your affairs in order.
Don’t wait until you’re in your 60s or 70s to think about estate planning. This is something you should start as soon as you have heirs. Then you should make it a point to update your plan every three to five years to ensure it accounts for any changes or developments in your family or estate law.