If you think that creating an estate plan is only for the sick or elderly, think again. The unfortunate truth is that death can happen to anyone at any age, and you don’t want to leave your family to pick up the pieces of a messy estate after your death while they deal with their grief. Instead, take the burden off their shoulders and tidy up in your absence.
Whenever you stop and think about what will happen to your property after you die, you are in the early stages of estate planning. But now might be a good time to take those plans a few steps further by checking out our guide to estate plans and how you can create one no matter what your age.
By taking charge of your finances and learning about estate planning, you can be confident that you have taken the necessary steps to protect your family and assets.
What is estate planning?
Estate planning is the act of hiring an estate planning attorney – or trusted — to help you prepare the transfer of your assets, property, charitable gifts, donations and wealth in the event of death or incapacity.
This means that in the event that you are unable to represent yourself at the end of your life, you will have a plan to divide your property (or assets) between your loved ones.
This also means that you can also set up health care directives and a medical power of attorney to follow your wishes if needed.
3 elements of estate planning
Whether you’re creating your first estate plan or updating it later in life, every estate plan should have three main elements:
1. Wills and trusts
People under 40 must make a will or living trust to ensure an account of their property in the event of an accident or sudden illness. Because they are both documents that detail how assets should be handled after death or incapacity, differences between wills and trusts can be confusing.
- They are generally more affordable than trusts
- Only takes effect upon your death
- To become public after probate
- They transfer assets more slowly
- You may have to go through probate
- More expensive to perform
- Will remain private
- Can provide for your intensive care or disability
- Avoids probate
And wills and trusts:
- Children are allowed to leave property
- Let me name the main beneficiaries
- You can change
2. Power of attorney
A Power of Attorney (POA) is a binding legal document that allows someone to make decisions on your behalf regarding your legal and financial affairs. A POA comes into effect when you die unexpectedly or become incapacitated and unable to care for yourself. These documents contain specific instructions for attorneys based on the specific circumstances of your estate plan.
If you don’t execute a power of attorney while you’re alive or physically able, then the court will have to hire someone to appoint someone for you to take charge of your property, make life-changing decisions, or even pay for your accounts.
That being said, attorneys aren’t the only people who can get your power of attorney — family members can also take on the responsibility. For example, your sibling can be your medical POA.
There are several types of power of attorney, including:
- Lasting power of attorney: This is when you allow someone to make decisions on your behalf. This is a standard POA.
- Limited power of attorney: A limited power of attorney limits your attorney’s or representative’s authority to non-general powers of attorney, such as financial and medical powers of attorney.
- Medical power of attorney: This is when you allow your attorney to make medical decisions when you are unable to do so. These include end-of-life decisions, surgeries and medications.
- Financial power of attorney: Similar to a medical POA, you allow someone to make decisions about your money and property if you are unable to do so.
- General power of attorney: This is a POA that ends when you become incapacitated and allows your representative to control financial, medical, legal, business, medical and property matters.
In most cases, you can update your power of attorney as you see fit throughout your life—a medical power of attorney is an exception, as the best way to change it is to create a new one. Typically, you change your contract when you hire a new attorney or estate planning representative to handle your affairs.
3. Health Care Directives
Similar to a health care directive, a health care directive details your wishes and end-of-life care. These documents will sometimes include a durable power of attorney that allows another person to make health care decisions for you. They may also include a will detailing your wishes if you become incapacitated, depending on your principles.
How to create an estate plan at any age
Estate planning is important for people of all ages – especially those who have immediate family or equity in the form of homes or other property, savings accounts, or valuables such as family heirlooms.
Although we may conjure up the image of an elderly person when we think of creating an estate plan, accidents and illnesses can happen to people of any age.
Estate planning for up to 40 years
When creating an estate plan under the age of 40, you first need to find a trusted estate plan lawyer to manage your assets. Decide on the right power of attorney that fits your lifestyle. Then create a living trust or will to ensure that your estate plan is followed in the event of an emergency or incapacity.
Estate planning over 40
When you turn 40, it is important that you become more specific about your estate plan. For the next two decades, you should have a long-term retirement plan and an updated, durable POA that includes health care directives and even living trusts, depending on your circumstances.
Whether you are in excellent health or ill, it is recommended that you have an estate plan before age 55. You can also set aside assets for charitable purposes at this stage of your estate planning.
Here are the steps for charitable giving with an estate plan:
- Make a bequest to a charity that is near and dear to your heart.
- Choose a predetermined portion of your property to donate.
- If the estate plan is implemented, the money will go to the cause of your choice.
Real estate tax liability planning
The last thing you want to worry about is estate plan taxes affecting your family after you die. Once your gross estate, property and other assets are transferred, they will be taxed when they reach a certain threshold. This is often called a death tax or estate transfer tax.
In 2022, your family generally won’t have to file an estate tax return if your gross estate less than $12 million – And every year this number will increase. If your assets do reach the threshold and you want to reduce it, you can donate some of your assets to charity, give them to your surviving spouse, or distribute the assets to friends and family while you are still alive.
Benefits of estate planning
Estate plans are about more than wills and end-of-life decisions – careful estate planning offers many other benefits. These include:
- Tax cuts and debts for their loved ones with gifts and marriage trusts
- Charity from a portion of your assets after death
- Easy wealth transfer for small business owners to their family, friends or co-owners
- Cover your own funeral costs to save loved ones
- Can save your family from probate, which can be an expensive process
Common mistakes in real estate planning
Estate planning mistakes can happen to the average person, especially if you’re trying to do it all yourself. The biggest mistake someone can make when creating an estate plan is not hiring the right representative for their property.
Another common mistake is forgetting to update your will or power of attorney during your lifetime. If you have some property bequeathed to a specific beneficiary who has since died, confusion or legal battles may arise after your death.
For example, let’s say you asked that your property be divided equally among your children, but one of them dies. When you die, their spouse or children may claim that they deserve a share of your estate. If you don’t clarify your estate plan by specifically naming your loved ones, the resulting confusion can cause a family rift.
Frequently asked questions about estate planning
When it comes to the basics of estate planning, you may have more questions. Fortunately, we’re here to help answer some frequently asked questions.
How expensive is estate planning?
The cost of hiring an estate planning attorney to draft a will or trust will vary depending on your needs and location. These can range from $1,000 to $10,000+ for more complex estates.
If you have a larger estate, the value of your will can increase significantly. If you have a simple estate and very few assets in your name, an estate plan may be cheaper to complete.
What are general estate plan documents?
Every estate plan must consist of a will or trust, a power of attorney, health care directives, guardian and beneficiary designations, and a letter of intent.
Budget for your estate plan today
Now that you know the ins and outs of what an estate plan is, when to start planning one, and the documentation you need for both your family and your attorney, you can take the next step in your estate planning journey.
How do you start? considering investments Remember that preparation is key to your estate plan. Check out ours retirement planning calculator or net worth calculator to determine how much you will leave to your family after your estate plan is in place.