Six Reasons Why Estate Planning Must be a Key Part of your Retirement Plan

Both retirement planning and estate planning are the means to a happy and secure future. You work hard all your life and build assets to secure your retirement and ensure financial safety and security for your loved ones. However, you seldom give thought to what will happen if something unfortunate happens to you. Likewise, while most people understand the importance of a sound estate plan, only a few people take a step forward in this direction. According to a recent survey by Caring.com, the number of 35–54-year-olds with a will has reduced from 37% in 2019 to 22.5% in 2021. Only 44% of the people above 55 years have a will in 2021. In 2019, this number was 60%. The study also reported that even after the COVID-19 pandemic, the number of people with estate plans has not significantly changed since 2020. Although one out of the three participants said that COVID-19 made them understand the importance of estate planning, over 31% of these people still did not have an estate plan.
Contrary to general belief, estate planning is not only for the ultra-wealthy or old. Instead, a comprehensive estate plan is beneficial for everyone, regardless of age, marital status, or net worth. If you want a say in what happens to everything you own after your demise or if you wish to prevent any feud over wealth in your family after your passing, then it is likely that you need an estate plan, irrespective of how much or how little you have. Estate planning is for everyone, and its importance is undeniable.
Financial advisors recommend keeping estate planning at the top of your retirement plan. Estate planning helps you decide how to dispose of your assets when you die, and while this might not be a conversation you want to have, it is an important one. Moreover, an estate plan not only provides guidelines for what happens to your possessions after death, it also incorporates directives (medical and financial) if you become physically or mentally disabled. It also ensures that your loved ones get a well-prepared legacy with assets that have been optimally passed on.
Here are the top six reasons that justify why is estate planning important and why it should be a key part of your retirement plan:
-
A comprehensive estate plan helps you to plan for your needs:
You have no control over the events that impact your life, but you can surely prepare to tackle them efficiently, negating or reducing their impact. Most people think estate planning is only helpful after their demise. However, many do not realize that the benefits of estate planning accrue even if you become incapacitated or cannot make decisions for yourself. Estate planning is a means to an end. With a comprehensive estate plan in place, you can be better prepared to face adversities in the future, such as disability, financial incapacitation, etc. Moreover, estate planning also gives you complete control over how your assets are passed, distributed, and used after your death. This means that you can plan your needs when alive and also determine who will take decisions on your behalf when you are unable to do so. You have the opportunity to ensure your financial assets are handled as per your wishes, even in your absence. For this purpose, you need to compile your legal documents and list your directives in your estate plan. In such matters, it is beneficial if you create a living trust. A living trust will allow you to place your assets in a trust for your benefit during your lifetime and then transfer them to your designated beneficiaries after your passing.
You will need to specify a trustee or a durable power of attorney who will take over the trust. This person will take financial and legal decisions on your behalf if you are seriously ill or physically or mentally incapacitated. After your demise, the trustee will be responsible for distributing the estate assets as per your specifications. This will help you bypass probate, which is mandatory in general estate-related matters. Further, it is also advisable to mention your medical directives. This particular part of your estate plan will spell your preferences concerning medical care in situations when you cannot make decisions on your own. You can also have a separate power of attorney for medical decisions or place a healthcare proxy, a Health Insurance Portability and Accountability Act (HIPAA) release, or a living will. The estate can fund your medical expenses under the guidance of your power of attorney. But if you are not comfortable with the notion of assigning a power of attorney, you can always limit their power.
-
Estate planning protects your beneficiaries:
One of the key benefits of estate planning is that an estate plan allows you to transfer your assets to your beneficiaries outside of probate. Probate is a legal process that settles estate matters. After the death of a person, assets have to pass through probate unless you have a very small estate or a sound estate plan to transfer your assets outside of probate. If you die without creating a will (an important document in estate planning), the court will decide who gets your assets. This implies that you will have no control over determining how your assets are distributed after your death. Probate and court proceedings involve excessive paperwork at high costs. The process of probate is a long one and can go on for years. The court accounts for your assets and allows the creditors to make the first claim. Thereafter, potential heirs are notified to file a claim. This is followed by court proceedings. Hence, it is beneficial to create a foolproof will as part of an estate plan and avoid probate at all costs. To create a will, take inventory of your assets and decide the beneficiaries along with the distribution of assets amongst the said beneficiaries. Then, draft the will and specify the beneficiaries with their estate share, guardians, trustees, etc. As a rule of thumb, you should draft the will when you are in the best of health and in a sound state of mind. Ensure there is no ambiguity in the will. Also, select an executor of the will, who will be in charge of reading your will and executing it as stated. The executor will distribute assets, pay off debts, taxes, etc. You can choose your bank, family member, friend, or attorney to be the executor.
-
An estate plan shields your minor or young children:
The importance of estate planning is unparalleled when it comes to protecting the future of a minor. Even though there are fewer chances that you will die young, it is still critical that you prepare for the unthinkable. You can shield the future of your minor, disabled children, or kids who need more attentive care due to health issues by drafting a will in your estate plan. Name a guardian in the will who would be willing to take on the responsibility of your children in your absence. Ideally, the guardian should be a responsible and trustworthy person. It is also advisable to deliberate the matter with the concerned person before designating them as a guardian in your will. You can mention the authority and rights of the guardian against your estate. You can also leave aside a part of your estate or a specific sum for the guardian as reimbursement of expenses sustained in taking care of your children.
-
Estate planning reduces taxes for your heirs:
Retirement planning and estate planning, if done well, can help you reduce the tax liability for you and your heirs. While efficient retirement planning minimizes your tax burden in the present, an efficient estate plan ensures you create the least possible tax burden for your beneficiaries. Typically, federal and state estate taxes substantially lower the value of your estate before distribution. For 2021, estates with a value of up to $11.7 million are exempt from federal taxes. However, some states levy taxes on estates with a lower value too. Few states also charge inheritance taxes to be borne by the beneficiaries. To lower estate taxes, you can use estate planning strategies, such as create an A-B trust (joint trust for married couples to minimize estate taxes), sponsor education for your children or grandchildren, donate to charitable organizations, etc. You can also lower estate taxes by giving lifetime gifts to your spouse and children, making conditional wealth transfers to custodians of your minor children, setting up an irrevocable trust, and investing in private annuities. Charitable donations can also minimize the estate taxes on your children in the future. You can transfer a portion of your wealth to registered charitable institutions through a trust. You can take advantage of the estate freezing tactic that locks in the current value of your estate and the corresponding tax liability. This limits the estate taxes as the future estate growth associates with a different individual responsible for paying taxes, which will be considerably lower. You can nominate your spouse, children, or grandchildren to get the future estate worth. One of the main benefits of estate planning with this method is that you can estimate your tax dues upon death and then accurately plan for your income taxes.
-
An infallible estate plan eliminates family feuds:
Apart from probate, family feuds are another factor that highlights the importance of estate planning. If you fail to draft a will or create a holistic estate plan, there are high chances of a feud between family members concerning the distribution of the estate’s assets. One sibling might feel they deserve a larger share of your wealth, while an ex-spouse could raise a claim for the estate too. Such internal strife can get intense and even land your estate under the purview of the court of law. If you do not want your lack of estate planning to be the cause of family turmoil, make sure to create an explicit estate plan that includes a clear will. You can mention who will control your finances and assets if you become mentally or physically incapacitated or in the case of your demise. You can also write who gets what, in what percentage, under which circumstances, and at what age. This will help you ensure that your estate is handled and distributed as per your desires and the people you want to benefit from your estate receive their full dues. For instance, if one of your children has been more proactive in taking care of you during tough times, you can think of rewarding them with a slightly larger share of the assets than their siblings. However, to make sure your estate plan is executed as you want, create a comprehensive will. You can specify the share of assets assigned to each beneficiary and name the guardian for your children and pets. Sign and date your will in front of at least two witnesses. Keep the will in a secure place and inform your attorney about the same. Experts recommend revisiting your nominee details and updating your will over the years to make sure it aligns with your current desires.
-
Estate planning enables future generations to receive inheritance:
Every family has unique wealth transfer goals that ultimately aim to preserve family values passed on through generations. As you plan to pass on the fruit of your labors accumulated over the years and generational wealth to your children, you should prepare the future generations to be effective stewards of the family wealth and legacy. The objective is to encourage the beneficiaries to be transparent and take active participation in estate management affairs. Tell your family about your different assets, retirement accounts (such as a 401(k), an IRA (Individual Retirement Account), etc.), insurance plans, medical directives, etc. The future generation should also be aware of any loans and financial liabilities that might require them to step up and face the brunt. The benefit of estate planning is that it encourages involvement and creates a learning environment for the beneficiaries. Moreover, you can use estate planning as a medium to teach your children the intricacies of business and how to handle it successfully in your absence. Whether you choose to talk to your children yourself or ask your financial advisor to do so, open and honest communication can lower the chances of family disputes and conflict, thereby helping in preserving the estate.
To summarize
These reasons establish the importance of estate planning in protecting your autonomy, keeping your assets secure, and ensuring that your family is financially secure. Estate planning is a complex process, but the earlier you begin, the more prepared you and your family are to face different challenging situations in the future. If you wait until you are old or incapacitated, it might be too late to make a plan. Moreover, if you do not create an estate plan, you will forever lose the opportunity to leave a legacy of your will for your children. The legal complexities and probate could further hamper the passing on of your estate. In more complicated matters, it can take years before the family gets the estate benefits. So, it is better to begin estate planning as soon as possible, even if you have a limited number of assets. If you are unsure where to start or find estate planning too complicated, consider working with a professional financial advisor who can help you create an efficacious estate plan, giving you peace of mind about your financial affairs.