Estate planning isn’t just for the wealthy. The complexity of an estate plan will certainly vary from case to case, but there are a handful of contingencies that everyone needs to prepare for. Following are 10 reasons why estate planning is important.
1. To Prepare for End-of-Life Healthcare and Incapacitation
It’s a common mistake to focus estate planning solely on what will happen after you die. Transferring assets to your heirs (also known as beneficiaries) is important, but so is the time preceding your death when illness, injury, or senility can render you incapacitated. If a serious car accident leaves you in a coma, how will the doctors know your preferences regarding life-sustaining treatments such as artificial life support and tube feeding? If you have lived a long, healthy life and you’re prepared for a natural death, how will the physicians or emergency responders know that you don’t wish to be resuscitated? The answers to these important questions should be articulated in a living will, also known as an advance healthcare directive, that your doctors and family members can consult if you are ever unable to communicate important healthcare decisions. Without this, your doctors and your family will be left to wonder what you would do, making already difficult decisions even harder.
2. To Nominate Trusted Individuals to Handle Your Affairs
In addition to your living will, you’ll need to designate trusted individuals to handle your affairs on your behalf. If you become incapacitated, you’ll need someone to continue paying your bills, manage your investments, and provide for your dependents. You can empower someone to handle your financial and legal affairs with a durable power of attorney, and you can authorize someone to make important medical decisions for you with a healthcare power of attorney.
A power of attorney will dissolve when you die, so you’ll also need to nominate someone to handle your estate once you’ve passed away. This person will be known as your executor or personal representative, and you can nominate them for the position in your will. If you fail to do this, the court will appoint a third-party administer who should provide unbiased administration, but who may not act in the best interests of your intended beneficiaries.
3. To Alleviate the Strain on Your Friends and Family
Your death will be an emotionally difficult time for your family and friends; don’t make it even harder by leaving them to handle your funeral and burial arrangements alone. If you have specific requests, or if you have the means to pay for the services, make it known in a Letter of Intent attached to your will.
4. To Financially Provide for Your Spouse, Children, and Dependents
If you are the primary breadwinner in the home, your surviving spouse may have a hard time maintaining the standard of living your family has enjoyed. If you and your spouse die together, your minor children and other dependents will be unable to provide for themselves altogether. A proper estate plan should ensure that your family’s needs are provided for in your absence. If the value of your estate isn’t sufficient to cover their needs, consult with a qualified financial advisor about using a life insurance policy to bridge the gap. If you have minor children, talk to an estate planning attorney about using a trust to provide income for them during childhood, and transfer the assets to them when they reach adulthood.
5. To Provide Care for Your Minor Children
In addition to providing financial support for your children, you’ll want to choose a guardian to care for them if both you and your spouse pass away. If you fail to do this, the court will assign a guardian. If there is no next-of-kin willing to take the children, your children will be placed in foster care. To avoid this, choose a trusted family member or friend to serve as the primary guardian, and indicate a secondary or alternate guardian who will care for your children if the primary guardian is unable to do so. Speak with these potential guardians ahead of time so they have the opportunity to accept the responsibility, as they have the right to decline even if you nominate them in your will.
6. To Avoid Probate
While many haven’t personally experienced probate court, most people understand that it can be a long, costly process that should be avoided as much as possible. An uncontested will usually takes about 4 – 6 months to transfer property through informal probate, but a contested will could take several years depending on the complexity of the situation.
In Arizona, small estates can completely bypass probate court if the estate has less than $75,000 in personal property, and less than $100,000 in real property. If you qualify, simply fill out a non-probate affidavit and submit the document to the Superior Court of Arizona.
If your estate is too large for the state’s small-estate exception, you can still position your assets to avoid probate. Retirement accounts (e.g. IRA, 401k), accounts held in joint tenancy, accounts with transfer-on-death (TOD) or payable-on-death (POD), real property held in joint tenancy, and life insurance death benefits, will all automatically pass to the beneficiary listed on the account when you die. Probate is not required to transfer these assets. For assets that are subject to probate—individual accounts, personal property, and real property held in the decedent’s name or as tenants in common—you can transfer these assets to a trust during your lifetime. When you die, the assets held in trust will skip probate and transfer directly to your beneficiaries.
7. To Minimize Estate Taxes
In 2016, individual estates worth more than $5.49 million and joint estates worth more than $11 million are subject to estate taxes. This tax, also known as a death tax or an inheritance tax, can be as high as 40% depending on the value of your estate. While this has the potential to erode what you can transfer to your heirs, you can minimize your exposure to the estate tax with proper estate planning.
8. To Leave a Legacy
You don’t have to have a large estate to leave a legacy. Many parents and grandparents choose to establish a small trust to pay for their posterity’s higher education, or for the purchase of their first home. In both cases, even the smallest contribution can have far-reaching rewards for your loved ones. You can also send a sizeable donation to your favorite charity, or you could establish a charitable trust to make donations to good causes for years after your death.
9. To Protect Your Assets From Creditors and/or Lawsuits
Should you ever find yourself party to a judgement against you from a creditor or lawsuit, your personal assets may be in jeopardy. This can be especially worrisome for business and property owners. A single negligence suit could wipe out your entire life-savings, just as the bankruptcy of your business could allow creditors to lay claim to your personal assets. An estate planning attorney can help you transfer assets into a trust that would be shielded from creditors or lawsuits.
10. To Prepare for Business Succession
Lastly, those who own a family business and wish to pass the business to an heir can face significant complications and crippling taxes. Without a good succession plan, your heir could be stuck with a massive tax bill that would jeopardize the company’s financial future. If you jointly-own a business with one or more partners, you will also need to consider a succession plan for when your business partner dies. If you don’t want your partner’s family to take over their stake in the business, it may be wise to take out a life insurance policy on your business partner that would allow you to buy-out their share should they die unexpectedly.
Call our Estate team at (480)467-4325 to discuss your case today.