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An estate plan is a strategy for distributing your assets and managing your affairs after death. All adult Americans should have an estate plan to include a revocable living trust, a power of attorney, a healthcare directive, a last will and testament & life insurance.
While there are a variety of reasons why people decide to create an estate plan, here are seven of the most valuable reasons.
Avoid Probate
A probate is the process of validating a deceased person's will and placing a value on their assets, paying their final bills and taxes, and distributing the rest to their beneficiaries. Avoiding probate is by far the most common reason why people seek out the advice of an estate planning attorney. While many have never dealt with probate, they still know one thing: they want to avoid it at all costs.
Reduce Estate Taxes
The significant loss of one's estate to the payment of state and federal estate taxes or state inheritance taxes is a great motivator for many people to put an estate plan together. Through the most basic planning, married couples can reduce or even possibly eliminate estate taxes altogether by setting up a revocable living trust.
Avoid a Mess
Many clients seek the advice of an estate planning professional after personally experiencing or seeing a close friend or business associate experience a significant waste of time and money due to a loved one's failure to make an estate plan.
You May Become Incapacitated
You may think it unlikely that there might be a time when you can't manage your affairs and make financial decisions. However, according to the Social Security Administration, 1 in 4 Americans who are currently 20 years of age will face a disability before they reach the age of 67. No one expects to deal with a medical emergency or incapacity, but if you do, who will have access to your bank accounts and pay bills and income taxes when you can't?
With a power of attorney, you name someone you trust to handle your affairs. You determine what powers they will have, such as paying bills and managing investments, and when your agent has authority to act, such as if you are incapacitated.
You May Get Sick
If you are hospitalized and can't speak for yourself, who will make medical decisions for you? You may assume hospitals must consult with your next of kin, but that isn't necessarily true. You want to make sure you have a say in who can oversee your health care. You should have a power of attorney; someone you trust to talk to medical professionals and make healthcare decisions for you when you can't and a healthcare directive to specify what life-sustaining measures you want taken if you are in a permanent vegetative state or end-stage terminal condition.
Protect Beneficiaries
There are generally two main reasons why people put together an estate plan to protect their beneficiaries: To protect minor beneficiaries, or to protect adult beneficiaries from bad decisions, outside influences, creditor problems, and divorcing spouses. If the beneficiary is a minor, most states have laws that require a guardian or conservator to be appointed to oversee the minor's needs and finances until the minor becomes a legal adult—at age 18 or 21, depending on the laws of the state where the minor lives.
Protect Assets
Asset protection planning has become a significant reason why many people, including those who already have an estate plan, are meeting with their estate planning professional. Once you know or suspect that a lawsuit is on the horizon, it's too late to put a plan in place to protect your assets. Instead, you need to start with an estate plan that will, in turn, protect your assets for the benefit of both you during your lifetime and your beneficiaries after your death.
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