It’s a common misbelief that estate planning is only for the wealthy. While the affluent class has more assets, wealth management is crucial regardless of how much money you have. Whether your estate is worth a billion dollars, a few hundred thousand dollars, or somewhere in between—you must have a solid plan to protect your assets.
Estate planning, at its core, is all about determining how your assets can be preserved, managed, and distributed after you die. It also helps set up plans if you become incapacitated and unable to manage your finances in the future. An individual’s assets may include properties, stocks, cars, pensions, life insurance, antiques, and even debt. An estate plan ensures your assets go to the proper beneficiaries and preserves family wealth.
Besides financially safeguarding your loved ones when you’re no longer around, an estate plan minimizes inheritance tax and expedites the transference of assets. By making your final wishes clear, the state cannot interfere with the division of your estate. Therefore, your wealth stays within the family and gives you control over who can access it even after your death.
Following these estate planning strategies can prevent you from losing any money and guarantees the safe division of your assets.
1. Draw up a will
When it comes to wealth management, you must choose your estate plan wisely. Although this may vary depending on your health, wealth, or number of dependents, certain must-haves like a will are crucial for it to be viable. Many people fear writing a will and delay it either because they find the process too complicated or believe it’s something only for the rich. However, a will is vital for every estate plan regardless of how substantial or insubstantial your assets are. It is a legal document that clearly lists how to distribute each of your assets in the event of your death. In the absence of a will, a probate court decides how to divide your assets. Due to this, your wealth may get allocated in a way you didn’t wish to.
You can draw up your own will, but seeking advice from a professional is highly sensible and beneficial. The more details you add to your will, the fewer chances of confusion about distributing your assets. You must also regularly review and update your will to ensure it’s still relevant and appropriate according to your current wealth and estate.
2. Have a power of attorney
Designating a power of attorney (POA) is essential for acting on your behalf when you can’t do so yourself. If you lose the mental capacity to manage your business or finances, the appointed power of attorney can handle them and offer you an element of protection. When a power of attorney is not present, a court can decide what happens to your asset. The court’s decision may go against your wishes, but no legal document will be available to protect you from it.
A POA is a legal but revocable document. This document will give the agent the power to make financial transactions, manage real estate, and make other legal decisions in your place. Most people choose spouses as powers of attorney. Although it’s a personal choice, it may make more sense to select friends or family members who are more financially savvy.
3. Name your beneficiaries
A beneficiary is an individual, or individuals, who will inherit the money present in these accounts after you die. When setting up your bank account, naming a beneficiary might seem redundant. However, it’s so much more than that. It’s a legitimate designation that directs your account holder on how to release the funds. Since your beneficiary designation holds the most importance, even more over your will, you must review it whenever you have a significant life event.
For many people, much of their holdings are kept secure in tax-advantaged retirement accounts like a 401(k) plan. In cases where no named living beneficiary is present, all the holdings in your retirement account can end up in probate court. It will then be up to strangers to decide how to divide your assets in a long, messy, and costly procedure.
4. Set up a trust
If you have a substantial estate or are worried your heirs will be careless with what they inherit, you can establish a trust to address this problem. Appointing a trustee to distribute your wealth ensures the smooth transference of your assets and can even bypass taxes. There are several kinds of trusts, each personalized to meet specific needs or goals:
- Revocable trust
Living or revocable trusts can be modified or canceled. You can keep any income you may earn from the assets placed in this trust and have control over them. When you die, these assets will directly go to your named beneficiaries without the need of a probate court. However, they will still count as a taxable estate.
- Irrevocable trust
It works like a revocable trust, except it can’t be changed or canceled without a beneficiary’s consent. Once you transfer assets into this trust, they no longer remain part of your estate and therefore aren’t taxable.
- Charitable remainder trust
This type of trust facilitates a fractional tax deduction for contributing to the trust. You can continue receiving income when you’re still alive. But at the end of the trust’s term, the remaining assets get divided among the charities or non-profit organizations you name.
5. Educate and communicate
Often, estate plans aren’t successful because the next generation is woefully unprepared to handle their inheritance. They waste or mismanage their assets or fall victim to scams and bad investments. You must ensure your children have basic knowledge regarding the wealth you’ll leave behind to mitigate this problem. Teach them how to manage, spend, and accumulate money to keep them from feeling overwhelmed when they do inherit it.
No matter how meticulous your estate planning is, without the heirs understanding your intentions for it—all the planning will be for nothing.
While some estate planning strategies are easy to execute, others require financial professionals and attorneys to ensure accuracy and precision. But regardless of the process, you must start now to keep your assets from falling into the wrong hands and prevent others from making decisions about your wealth.