Why You Need an Estate Plan
January 29, 2014
- Young or old, wealthy or not, use our estate planning tips to help make things easier on your loved ones during a time of grief.
- Start your estate plan with our simple, four-step process.
- Without an estate plan, the fates of your assets and your loved ones may be decided by attorneys or the government—so even if you have a modest estate, it's still a good idea to take care of the basics of estate planning.
You've worked hard to build your assets—your investments, your home, your treasured possessions—and to provide a level of financial security for your loved ones. Doesn't it make sense to work just as hard to protect those assets for your heirs?
That's the primary goal of estate planning—to help protect, preserve and manage your estate at your death or during incapacity. Some people see no need for estate planning until they reach a certain age. Others believe that it's only for the wealthy. But in truth, it's wise for everyone to start the estate planning process as early as possible.
When there isn’t an estate plan in place, attorneys or state officials can make important decisions on your behalf. The state could decide who will care for your minor children. Disputes could arise between your loves ones. Taxes and legal fees could eat away at your estate, and distribution of your assets could be delayed at a time when your heirs need them most.
So why doesn't everyone have an estate plan? Aside from a natural reluctance to face our own mortality, some people are put off by the belief that estate planning will be complicated, time-consuming and costly. But setting up an estate plan doesn't have to be complex.
Estate planning can be as simple as updating the beneficiaries of your insurance policies and retirement accounts. It may involve adding one or more heirs as co-owner of your home, bank and brokerage accounts, or other assets. To make sure all of your wishes are carried out, you'll need to draft a will and perhaps establish one or more trusts, but even these activities can be handled in a few brief meetings with an estate attorney.
Why you need an estate plan
An estate plan lets you accomplish these crucial objectives:
- Ensure that your assets go to the people you choose, not those the state chooses.
- Specify who will care for your minor children.
- Defuse potential family conflicts over your assets.
- Minimize estate taxes and other transfer taxes.
- Avoid the costs, publicity and delays of probate.
- Help ensure that you and your affairs will be taken care of as you wish if you become incapacitated.
Even if your estate is modest, take care of the basics:
- Tell loved ones where to find your important documents including a list of your accounts, assets and insurance policies.
- Draft a will and final letter of instructions.
- Establish durable powers of attorney and health directives in case of incapacity.
- Update your account titling and beneficiaries.
- Consider funding a revocable living trust with your titled assets along with a "pour-over" will to ensure other assets avoid a costly probate process.
Most people can meet their estate planning goals with this simple, four-step process outlined below.
1. Take inventory of your assets and liabilities. List the value of your home and other real estate, cars, jewelry, artwork and other physical assets. Gather recent statements from your bank and brokerage accounts. Make a list of all insurance policies, their cash values and death benefits. Finally, list all liabilities, including mortgages, lines of credit and other debt.
2. Define your estate planning goals. Answer the following questions before you meet with an estate attorney. This can save you significant time and money.
- To whom do you want your assets distributed, and in what proportions?
- If these heirs aren't living at the time of your death, whom do you wish to name as successor beneficiaries?
- Whom do you want caring for your minor children?
- What do you want to put aside for your children's ongoing care and education?
- Who should manage your affairs if you become incapacitated, and distribute your assets upon your death?
- Who will make health care decisions on your behalf if you become incapacitated?
3. Have an estate planning attorney draft your documents. Laws regulating estate settlement vary from state to state, so we strongly recommend that you meet with an experienced attorney to prepare your estate plan. An attorney will review your objectives and explain the tools—wills, trusts, powers of attorney and more—you can use to help accomplish your goals. Many of these documents are fairly standard in format, which can substantially reduce the cost of developing your plan.
4. Follow through on your plan. If you set up a trust, fund it promptly. If you fail to do so, the agreement won't take effect, and your assets may not pass to your beneficiaries as you'd intended.
Simple strategies to consider
Convert to a Roth to reduce your taxable estate
Individuals can convert a traditional IRA to a Roth IRA regardless of income. Converting all or part of a traditional IRA into a Roth IRA could be a useful estate planning technique if you think you won't need your traditional IRA for your own expenses.
Although your Roth will still be included in your gross estate, there are no required minimum distributions, allowing the account to grow larger than it otherwise might under the traditional IRA rules. Also, your heirs will be able to take withdrawals free of income tax.
What's more, the income tax you pay on conversion will reduce your gross estate. In effect, you're making a gift by prepaying the income tax on behalf of the beneficiaries without it really counting as a taxable gift.
Tip: A Roth conversion could also be good for situations where there's no taxable estate, because those heirs would have no future income tax deduction available for previously paid estate taxes anyway.
Reduce your overall estate with charitable gifting
A charitable remainder trust (CRT) allows you or a beneficiary to receive taxable income for some time, after which the trust gets distributed to charities of your choosing. It’s primarily used as a strategy to reduced estate and income taxes. A testamentary charitable lead trust (CLT), on the other hand, is typically more appropriate for estate planning purposes, rather than as a lifetime income strategy. At death, a portion of your estate is placed into the testamentary CLT, reducing your gross estate. The charity you choose receives an annuity for a period of years. At the end of the term, your heirs receive the remainder interest.
Keep these basics in mind
We've highlighted just a few of the many estate planning ideas available. As you consider these and other transfer strategies, keep a few basics in mind. First, don't be seduced by what someone else did. It's your estate, so begin and end with your personal goals. Be sure to work with a qualified estate planner who's up-to-date on the latest statutory, regulatory and judicial developments. Or consider consulting a CPA (for tax-efficient strategies) and an estate planning attorney (to draft the legal documents). And last, be wary of strategies such as big valuation discounts or "tax-free" offshore deals—as the saying goes, if it seems too good to be true, it probably is.
Talk to us about estate planning. Call 866-232-9890 or visit a branch near you.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review a strategy for his or her own particular situation before making any decision.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA and/or attorney.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic, political or tax conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.