What Is Estate Planning? A Guide And FAQ For Investors

Rob Isbitts Senior Contributor Investor Hub Contributor Group

Estate planning is an often overlooked topic during the financial planning process. Discussing estate planning with others can be uncomfortable and easily avoided, yet this is an important part of financial planning. Every adult with at least a modest net worth or who is in the process of building one should have a solid estate plan. The pandemic and inflation that followed has prompted more Americans to realize the need to have an estate plan in place, for their own security and well-being, as well as for their potential beneficiaries. Read on to learn what estate planning is about, so you can start to determine how it may apply to you.

What Is Estate Planning?

Estate planning includes a “last will and testament” as well as key elements, such as power of attorney, trusts and medical directives (also known as a living will). This process enables a family to ensure their investments and other assets will be protected during disability or illness, and properly distributed after their death while taxes and probate are minimized or avoided.

Key Takeaways

Estate planning is important to complete for most people with financial assets.
There are five key components to consider when estate planning, with a sixth important component if there is a need to provide for underaged children.
Estate planning provides many benefits to both the individual and their beneficiaries. Not the least of these is relieving stress and uncertainty during a difficult time.
There are many options and considerations for every estate. More complex estates may require professional guidance to be sure everything is covered.

The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes’ most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.

Key Components Of Estate Planning

There are five key components to estate planning for the investor: last will and testament, trusts, power of attorney, medical directive and beneficiary designation. If there are also underaged children, then guardian designation is a sixth component that needs consideration so the custody of the children doesn’t become a lengthy and costly court battle.

1. Last Will And Testament
A will is a legal document that ensures property, assets and investments are distributed according to an individual’s wishes. If there is no will, the state decides how property is distributed and this can be a lengthy and costly process (known as probate) for the beneficiaries of the will. A will is also where a guardian designation is made.

2. Trusts
A trust is a legal agreement between two parties. The trustee is the individual or institution managing assets according to the directions of the trustor. Trusts can be used to hold and manage assets should the trustor become incapacitated, and they can also be used to pass on the assets to beneficiaries without probate (a process used to prove the validity of a will).

Trusts can also be used to hold assets for minor children, to be passed on to them at a specific age. With careful planning, trusts can reduce estate and gift taxes. There are several types of trusts, the most commonly used ones are:

Marital Trusts (“A” Trusts): Used to pass on assets to a spouse without incurring estate taxes.
Bypass Trusts (“B” trusts): Used to hold assets for a surviving spouse’s use, but keep them out of the surviving spouse’s estate, passing the assets on to the next beneficiaries without estate taxes.
Charitable Trusts: Creates a legacy of charity, passing on assets or specific assets to an established charity.
Generation-skipping Trusts: Allows assets to be passed on to grandchildren, instead of children, to save the children the estate taxes. The Trustor can still choose to allow the children access to income the assets generate.

3. Power Of Attorney
A power of attorney (POA) gives someone the legal right to act on behalf of the individual setting up the estate plan, in the event they become unable to act for themselves. The POA is able to make financial, legal and health related decisions on behalf of the individual.

4. Medical Directive
A medical directive is how an individual can make sure they receive the medical treatment they wish should the need arise if they are unable to make decisions at that time. The medical directive can be in the form of a document, or another person can be chosen to make these decisions, called a Healthcare Proxy.

5. Beneficiary Designation
Beneficiary designations aren’t necessarily part of an estate plan, but it is a good time to make sure they are up to date. Retirement plans and life insurance plans need to have a designated beneficiary since the assets from these can pass directly to the beneficiary outside of the will.

Benefits Of Estate Planning

There are several key benefits to estate planning for every investor to consider. Beyond protection for the individual’s assets there is also care and provision for the next generation. A solid estate plan will ensure that the estate transfer is as stress-free and cost efficient as possible.

1. Asset Protection
This is an important benefit of estate planning. It doesn’t matter if the assets are large or small, protecting them from being used up in court battles, lawyer fees and taxes is an important benefit of all carefully crafted estate plans.

2. Minimized Tax Liabilities
A well-structured estate plan will include measures like a trust that minimize the tax liabilities for the beneficiaries of the estate. There are several ways to mitigate gift taxes and estate taxes when passing on assets and these would be covered in a solid estate plan.

3. Easier Wealth Transfer
An estate plan–not just a will–can be structured to avoid probate. A complete estate plan will have provisions in place to ensure that wealth and assets are transferred to the correct beneficiaries quickly, smoothly and without losing value to fees and lawyers.

4. Care For Loved Ones
An estate plan is the best way to be sure loved ones and heirs are provided for upon death, and a well-crafted estate plan also ensures less stress and conflict among caregivers and loved ones should the individual be unable to make decisions or care for him/herself due to illness.

The Importance Of Professional Guidance

There are many online tools that can help you set up an estate plan on your own, however, if an individual has several investments and other assets, and/or needs to set up a trust, or is not fully aware of all the estate related laws within their state, it is a good idea to hire a professional to have guidance throughout the process of developing and implementing an estate plan. By hiring a professional, you can be sure that all the taxes, finances and legalities have been taken into consideration and the best possible scenario for the beneficiaries will be implemented.

Estate Planning FAQs

Why Is Estate Planning Important?
Estate planning is important to ensure transfer of wealth and assets to beneficiaries without unnecessary taxation, fees and probate.

Who Needs Estate Planning?
Every adult with any assets should have an estate plan. Even if the estate only consists of a car, a house and a small 401(k), there should still be an estate plan in place.

How Much Does Estate Planning Cost?
The cost of estate planning varies from state to state and also depends on if one has a complicated estate and needs an estate attorney to sort everything out. The fees and billable hours of an attorney can add up quickly, but an individual can mitigate this through careful planning and preparation. A basic will can vary widely from $150-$600, while a complete estate plan can be anywhere from $1,500 to $3,000 or more, since the hourly rate of a qualified attorney can be expensive. Every investor looking into estate planning should do careful research on the laws and requirements for estate planning in their state.

Is Estate Planning Tax Deductible?
As of 2022, the Tax Cuts and Job Act changed the tax laws in the United States, and estate planning fees are no longer tax deductible. However, it’s a good idea to keep this in mind and contact your accountant, as this may change again in the future.

Read Next

Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.