What is Estate Planning?

August 25, 2023
Estimated Reading Time: 4 Minutes
Estate planning is the process of organizing and making decisions about the disposition of one's assets and liabilities after death, as well as making provisions for potential incapacity. It's a comprehensive approach to ensure that a person's wishes are carried out, their loved ones are provided for, and unnecessary taxes and legal fees are minimized. Below are the main components and instruments often involved in estate planning:
  1. Will: This is a legal document that details how you want your assets distributed upon your death. It can also appoint guardians for minor children.
  2. Trusts: These are legal entities you can create to hold your assets. Trusts can help reduce estate and gift taxes and distribute assets to heirs without the cost, delay, and publicity of probate.
  3. Durable Power of Attorney (DPOA): This authorizes someone you trust to act on your behalf if you're unable to do so. This could be due to illness, injury, or other incapacitating factors.
  4. Healthcare Power of Attorney: This is similar to a DPOA, but it specifically allows someone to make medical decisions for you if you're incapacitated.
  5. Living Will or Advanced Healthcare Directive: This document outlines your wishes concerning medical treatments in cases where you're unable to communicate your desires.
  6. Beneficiary Designations: Assets like life insurance policies and retirement accounts often allow for beneficiary designations. The beneficiaries you name will inherit these assets directly, outside of the probate process.
  7. Guardianship Designations: If you have minor children, it's essential to choose and document guardians for them should something happen to you and the other parent.
  8. Estate and Gift Taxes: Understanding the potential tax consequences of your estate and making plans to minimize these taxes can be a significant part of estate planning.
  9. Business Succession Planning: If you own a business, you need to determine what happens to it upon your death or incapacity.
  10. Letter of Intent: This is a document left to your executor or a beneficiary, providing specific instructions on what you want done with a particular asset after your death or incapacitation.
  11. Digital Estate Planning: With the rise of the digital age, it's essential to consider what will happen to your online assets, like social media accounts, digital photos, or cryptocurrencies.
  12. Funeral Arrangements: Some people also incorporate their wishes for funeral arrangements into their estate planning to alleviate the burden on their loved ones.
The primary goal of estate planning is to provide peace of mind for individuals and families that their financial wishes and healthcare desires will be met. Given the complex nature of many of these instruments and the ever-changing nature of laws related to estates and taxes, it's generally recommended that people work with qualified legal professionals when planning their estate.

When Do You Need an Estate Plan?

Almost every adult can benefit from some form of estate planning, regardless of the size of their estate. However, the depth and complexity of the plan can vary based on individual circumstances. Here are some situations when you might especially consider implementing or updating an estate plan:
  1. When You Become an Adult: Once you turn 18, you should at least have basic estate planning documents in place, such as a healthcare directive or power of attorney.
  2. When You Accumulate Assets: As soon as you start to acquire significant assets, whether it's a savings account, investments, real estate, or other valuables, it's a good idea to outline your wishes for these assets upon your death.
  3. Marriage or Partnership: Merging lives means making joint decisions about assets, debts, and other financial matters. A plan can help ensure both parties' wishes are met.
  4. Birth or Adoption of a Child: Parents should have a will to designate guardians for their children should anything happen to both parents. You might also consider creating a trust for the child's inheritance.
  5. Starting a Business: Business owners often need special provisions to ensure the smooth transition of business assets and operations if they die or become incapacitated.
  6. Divorce: The ending of a marriage often necessitates changes to estate planning documents, especially when it comes to beneficiary designations and power of attorney assignments.
  7. Changes in Financial Situation: If you experience a significant change in your financial situation—whether an increase or decrease—it's a good time to reevaluate your estate plan.
  8. Retirement: This life stage often triggers a reevaluation of finances and asset distribution, making it a suitable time to either establish or reassess an estate plan.
  9. Tax Laws: Tax laws related to estate and gift taxes change occasionally. It's essential to revise your estate plan when these changes could impact you.
  10. Changes in Personal Wishes: If your feelings change about how you want your assets distributed or who you want making decisions for you if you're incapacitated, it's time to update your estate plan.
  11. Moving to a Different State or Country: Legal rules concerning estate planning can vary significantly between jurisdictions. If you move, you should review and potentially revise your estate plan.
  12. Aging and Health Concerns: As you age or if you face significant health challenges, you might want to reevaluate your estate plan to ensure it aligns with your current situation and wishes.
  13. Death of a Beneficiary or Trustee: If someone named in your estate plan passes away, you'll need to update your documents to reflect this change.

Remember, estate planning is not a one-time event but an ongoing process. Life changes, and as it does, it's crucial to ensure that your estate plan aligns with your current circumstances and wishes. Even if you don't think you have "enough" assets to warrant an estate plan, having even a basic plan in place can provide peace of mind and prevent potential legal challenges or disputes after your death.

Reach out to Chicago Partners Wealth Advisors to determine how an estate plan can fit into your wealth management strategy.

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