What is estate planning, and why is it important?
This article takes you through everything you need to know about estate planning, including how much it costs, who needs it, and how to get started.
Summary
Estate planning involves getting your affairs in order and deciding how you want your assets to be distributed.
While we may not want to spend much time thinking about the inevitable, it’s advisable to set aside time to prepare for one of life’s only guarantees.
Lack of communication is one of the most common mistakes surrounding estate planning.
A financial advisor can help you create a plan that works for both you and your family.
What is estate planning?
Estate planning involves getting your affairs in order and deciding how you want your assets to be distributed in the event of your death or if you become unable to make your own decisions.
But what does your estate include?
Simply put, your estate comprises everything you own. This could include property, vehicles, personal belongings, and financial accounts and products such as your 401(k), life insurance, and investment portfolio.
For many people, the value of their estate can add up. This means there will be a lot to distribute among your loved ones and beneficiaries when you pass away. To ensure this is done following your wishes, it’s best to plan ahead.
While most people leave this process until later in life, it’s never too early or late to start.
Why is estate planning important?
While estate planning may seem morbid, it is hugely beneficial.
Developing an estate plan means you can:
Detail exactly who you want to give your assets to and make your wishes legally binding.
Get reassurance that your affairs will be in order after you’re no longer here, dodging messy disputes or drama.
Be savvy about how your family will inherit your estate and reduce their tax burden.
Ensure your insurance and retirement account beneficiaries are up-to-date and in line with your wishes.
When planning for the future, it’s wise to get expert advice. A financial advisor can help you create a plan that works for both you and your family.
What are the common mistakes in estate planning?
One of the most important elements of mapping out your estate and final wishes is having some tough conversations.
Lack of communication is one of the most common mistakes surrounding estate planning.
Tell your loved ones your plans and explain why you have made your decisions. While it may not be the cheeriest conversation, it will help make the process smoother when the time comes.
Do I need estate planning?
Deciding whether to create an estate plan is a personal choice. However, it’s worth remembering that estate planning is important, regardless of your net worth or how many assets you own.
However, the majority of Americans don’t have a plan in place.
According to Caring.com and YouGov, in 2020, less than one-third of Americans had one or more key estate planning documents such as a will, power of attorney, and a living will.
Without these documents and a sufficient plan in place, you could be creating a huge headache for your loved ones down the line.
An estate plan removes any uncertainty or debate around your final wishes. On the legal side, it also reduces the probate process – administering a will or the estate or someone without a will.
Estate planning is also not just for when you pass away. Should something happen and you can no longer make your own decisions, your estate plan will come into effect.
While estate planning is often a neglected part of life planning, it can benefit most Americans looking to safeguard both their and their families' futures.
How do I start estate planning?
Estate planning can involve multiple tasks and is widely dependent on the value of your estate and how you wish to manage it.
If you’re embarking on this journey, one of the first things you need to do is take stock.
List your investments, retirement accounts, insurance policies, outstanding debts, valuable items (both financial and sentimental), real estate, and any other assets you can think of, and decide what you would like to happen to these assets.
You should also consider who you want to handle your affairs if you can no longer do it. This can involve assigning an executor of your estate and your power of attorney and healthcare proxy should you need someone to make decisions for you if you cannot.
One of the most crucial elements of estate planning is creating a will. This legally binding document should contain all your wishes and clearly state what happens to your assets after your death. It will also name the person in charge of your estate – your executor.
Some people also opt to include a trust as part of their planning. This lets you put conditions on how you want specific assets to be distributed.
You specify an individual, the “trustee,” to oversee how the assets you leave are managed for particular beneficiaries. For example, if you have young children or older relatives who cannot manage their own affairs, a trust will help them.
As you can see, estate planning can be complex and arduous, so getting professional help from a financial advisor and lawyer is recommended when drawing up your wishes.
How much does estate planning cost?
While it is possible to create your own estate plan, it’s recommended that you get professional, expert help to ensure your plans cover all eventualities and are legally sound.
When working with a professional, prices can vary.
Reports suggest it can be between under $1,000 for a standard will and up to $10,000 for more complex estates. However, it’s worth noting that not all experts use the same pricing structure.
How much you pay will depend on your professional’s fee structure, with some choosing hourly, flat, or contingency fees.
Several factors can also influence the price you pay. These include the complexity of your assets and what legal documents you require. If you have a complex estate with multiple assets that need more documentation and governance, estate planning will become more expensive.
How are life insurance policies helpful in estate planning?
Life insurance ensures your loved ones are protected financially when you’re gone.
In exchange for premium payments from you, usually made monthly or annually, your chosen life insurance provider pays out a lump sum to your family or beneficiaries when you die.
When you use life insurance during your retirement and estate planning, the benefits are considerable.
One of the biggest advantages of these policies is that compared to other insurance contracts, there are minimal limits on what your family can choose to spend the money on. This can be extremely important when it comes to estate planning.
Payouts can support your loved ones after your death, helping with anything from funeral costs and outstanding medical bills to covering inheritance and estate taxes and outstanding debt. It’s also worth noting that payouts are tax-free.
Get expert financial advice
If you need help with estate planning, it's important to seek expert advice.
A good place to start is Unbiased. Here, you can get matched with an independent SEC-regulated financial advisor who can ensure you’re getting the most out of your current plan and are on course to achieving your retirement goals.
Answer a few simple questions and Unbiased can find your perfect financial professional.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.