Estate planning is becoming increasingly common among young people. Keep reading to learn more about estate planning and its benefits.
For many Americans, trusts, wills, and estate plans have seemed like wealth management and legal tools reserved only for the country’s ultra-wealthy. But following the COVID-19 pandemic, an increasing number of middle class adults are seeing that these devices can make a real difference regardless of tax bracket. In particular, younger respondents to a recent study said that the pandemic changed their outlook on estate planning –– with 18-34-year-olds now being 50% more likely to have estate planning documents (like a last will and testament or durable power of attorney) in place. But young or old, wealthy or “working on it,” understanding the benefits of a comprehensive estate plan is vital.1
While we are not trust and estate attorneys, we are constantly working to make these seemingly complex concepts more accessible to everyday Americans. Read on as we answer the question, “what is an estate plan?” and do our best to demystify this valuable legal tool.
If you’ve ever moved into a new apartment or home, you’ve likely been reminded of exactly how much stuff you have accrued over the years as you’re forced to consolidate your life into dozens of cardboard boxes. In addition to these material items, an estate plan facilitates the transfer of your financial assets in the event of your passing. And while creating an estate plan for even the smallest estates can be time-consuming, this is a worthwhile process for many people.
Of course, you don’t have to have an estate plan. In the absence of a carefully organized plan, however, you’ll have little to no control over how your assets are distributed in the future, or what kind of care you may receive in the event that your health declines. Should you become incapacitated or otherwise unable to make decisions for yourself, an estate plan can ensure that your wishes for yourself and for your loved ones are being respected.
Simply put: What is an estate plan’s greatest value is the way it allows you to care for and protect your loved ones even after your passing. In that way, it might just be the closest thing we have to time travel. Below are the three key ways in which an estate plan can protect friends, family members, and all other loved ones.
When your precious family heirlooms pass on to your children, they own them free and clear. Right? Well, not exactly. In the eyes of the IRS, the act of keeping these heirlooms in the family may be seen as a “gift,” making the transaction subject to a gift or inheritance tax. With an estate plan in place, however, you can limit your loved one’s tax exposure by reducing both their inheritance tax and state or federal estate tax. Further, without an estate plan, the division of your assets will be left up to the courts –– potentially embroiling your children and loved ones in a lengthy and costly legal battle.
Younger Americans are becoming privy to the benefits of an estate plan, with young parents, in particular, beginning to see the estate planning process as a means of continuing to care for young children. A comprehensive estate plan can allocate resources for your child’s upbringing, clearly outline your chosen guardian(s) in the event of your untimely passing (and specify which relatives are not to be given that role,) and even make decisions surrounding schooling. Without an estate plan, these decisions and more may be left up to the court system to decide, which is surely a risk no parent is willing to take.
If you’ve seen knock-down, drag-out family fights on the small or silver screen, there’s a decent chance a vague or non-existent estate plan was to blame. And as grim as it may be to think about a family member feuding over who gets what in your absence, this may very well be a reality. So, whether or not you feel like your loved ones have it in them to fight for what they think they’re owed, clearly organizing your estate plan will ensure you never have to find out. In the short term, it prevents uncomfortable conversations at best and all-out wars at worst. But in the long term, it guarantees that your family remembers you for the good times and cherished memories; not just the nice things.
Now that you understand the benefits of an estate plan, we can take a look at what goes into creating a comprehensive plan. While an estate plan can comprise numerous elements to serve specific purposes, a basic plan consisting of the below elements will accomplish most future planning goals.
This legal document is likely what most people think of when they hear the words “estate plan.” Going back to our earlier moving analogy, a will effectively tells the movers what room each box goes to (and which boxes are especially delicate) once they start unloading the truck. This “unloading” process is known as “probate,” and this process is necessary with or without a will. Without a will, however, the probate process will see the courts determine which of your heirs get your belongings in accordance with local law.
A last will and testament is also where you can specify guardians of young children or children with special needs, and an executor of your estate — who will be responsible for paying taxes and fees, organizing and distributing belongings and assets, and communicating with all beneficiaries. A will is what is known as a “living document” which means that it can (and should) change throughout your life as your needs and wishes change.
While a last will and testament may be one of the most important and common estate planning documents, this document does not take into consideration what happens in the event of unforeseen circumstances such as your incapacitation. For this reason, a durable power of attorney can be a valuable tool to ensure that your affairs are in order and your wishes executed.
“Durable” power of attorney specifically means that this tool stays in effect in the event of your incapacitation, allowing another person (be it your estate executor or someone else) to make key decisions on your behalf. This can include things as innocuous as ensuring your bills are paid or as vital as signing important legal documents, depending on whether their powers are “limited” or “general.” Those hoping to plan for any and every circumstance can name a number of “contingent agents,” who can serve in the event that your primary choice is unable to.
Similar to a durable power of attorney, an advance directive (or advance health care directive) outlines who will make decisions surrounding your care when you are no longer able to do so. When drafting your advance directive estate planning document, you can specify what type of care you would like –– and which types you would like to avoid –– to ensure you are comfortable and your wishes are respected by your appointed agent. It is worth noting that an advance directive applies only to health care and medical decisions, paired with a durable power of attorney to ensure that all or most possible decisions are accounted for.
With the combination of these three estate planning documents, you can ensure that, no matter the circumstances, your loved ones are cared for, your health wishes are respected, and your belongings end up in the proper hands.
Finally, after outlining the key benefits of an estate plan and a few of the components which make a comprehensive plan, we’ve arrived at a question that many Americans have asked: “Do I need an estate plan?” As we mentioned earlier, it’s not just wealthy seniors with third homes and sizable investment portfolios that can benefit from estate plans. Further, whether or not you “need” an estate plan will likely change throughout your life. The following are some key life changes that can necessitate an expertly drafted estate plan.
While thinking of the circumstances which necessitate an estate plan may not be the most fun pastime activity, creating an estate plan is one of the best ways to safeguard your and your family’s future. Visit our resources page for more tips on how to increase net worth and how to start a budget. For other family financial planning tools and to learn more about creating the future you’ve dreamed of, visit our resource library.
1. Caring.com. 2022 Wills and Estate Planning Study. https://www.caring.com/caregivers/estate-planning/wills-survey/
2. AARP. Haven’t Done a Will Yet? https://www.aarp.org/money/investing/info-2017/half-of-adults-do-not-have-wills.html?&_ga=2.87668248.1071050.1672516475-361729381.1670097955
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