What Is an Estate Plan?

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DEFINITION

An estate plan is a plan for managing assets and wealth during your lifetime and after you pass away. You develop an estate plan according to your financial situation, goals, and your plan for your heirs or beneficiaries.

Definition and Example of Estate Plan

An estate plan is a plan that aims to preserve your wealth for your beneficiaries while also providing protections and benefits. Assets in an estate include real and personal property such as homes, vehicles, bank accounts, investment accounts, collectibles, and other items of value.

Estate planning is the process of developing an estate, often with the help of financial professionals, although you can create a plan yourself. A lawyer, accountant, financial advisor or financial planner, investment banker, or insurance broker are among the professionals who may assist with an estate plan.

The goal of an estate plan is to address how a person's estate is managed during their life and after their death. Estate plans are tailored to the person's needs and goals, so they vary by individual. For example, someone who owns a business might establish a trust as part of their estate plan. The trust could be used to hold assets to fund the business if the owner becomes incapacitated or dies.

Estate planning is not just for wealthy people. Even people with moderate assets can benefit from having an estate plan.

How an Estate Plan Works

An estate plan is designed to help you manage your assets. How your plan works depends on which tools you use. For example, an estate plan may include:

  • A last will and testament: A last will and testament is a basic piece of an estate plan. This written document specifies how you'd like your assets to be distributed among your heirs after you pass away. You can also use a will to name guardians for minor children and appoint an executor for your estate.
  • Trust: A trust is a legal arrangement in which assets are transferred to the control of a trustee. The trustee is charged with managing those assets on behalf of trust beneficiaries according to the instructions of the trust creator.
  • Power of attorney: Power of attorney is a legal document that gives someone else authority to act on your behalf when you're unable to make decisions for yourself. The person who is designated to act on your behalf is your agent, and the scope of their authority is defined by the power of attorney.
  • Living will/advance health care directive: A living will or advance health care directive allows you to specify what kind of health care you would like to receive in situations where you're either temporarily or permanently incapacitated or have been diagnosed with a terminal illness.
  • Life insurance: Life insurance provides a death benefit to your loved ones after you pass away. There are different types of life insurance to choose from, including term, which provides coverage for a set time, and permanent coverage, which provides coverage for your life.

An estate plan can be used to plan for burial and funeral expenses and specify what arrangements you'd like your loved ones to make for those events. You might purchase separate burial insurance in addition to a traditional life insurance policy.

Estate planning can include assets that may not be included in a will or trust. For example, if you have a 401(k) plan at work, an Individual Retirement Account (IRA) and a taxable brokerage account in your name, you could name your spouse as the beneficiary of those accounts.

Accounts with named beneficiaries are not subject to probate. Probate is the legal process through which assets are inventoried by an executor. The executor uses those assets to pay any outstanding debts owed by the estate, then distributes the remaining assets to heirs.

Someone who dies without a will is deemed “intestate” and their assets are distributed according to state inheritance laws.

Benefits of an Estate Plan

Creating an estate plan can benefit you in a number of ways. First, it provides peace of mind. If you have children, for example, a will allows you to name a guardian to care for them if you die.

Estate planning can make the difficult task of managing your finances after your death easier for your loved ones during a difficult emotional time. A will, trust, and other estate planning documents can provide blueprints for what should be done with your assets so your heirs do not have to guess what your wishes were. A clearly defined estate plan can also help to reduce arguments or disputes about your property or assets.

Having an estate plan can also potentially help to minimize estate taxes for your heirs, depending on what documents or tools you include. For 2022, the estate tax exclusion limit is $12,060,000, so this benefit may only extend to wealthier individuals. But it's still worth being aware of if you'd like to preserve as much of your wealth as possible for future generations.

Key Takeaways

  • An estate plan is a plan for managing assets during your lifetime and after you die.
  • A last will and testament is the most basic element of an estate plan. Other elements include a trust, living will, power of attorney, and/or life insurance.
  • Estate planning can benefit people with different estate sizes, not just the wealthy.
  • An estate plan can provide tax benefits to you and your heirs.
  • Creating an estate plan can ensure that your assets are handled according to your wishes.

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Article Sources

  1. Cornell Law School, Legal Information Institute. “Estate Planning.”

  2. New York State Unified Court System. “Last Will and Testament.”

  3. IRS. “Definition of a Trust.”

  4. American Bar Association. “Power of Attorney.”

  5. Mayo Clinic. “Living Wills and Advance Directives for Medical Decisions.”

  6. American Bar Association. “Probate Process.”

  7. IRS. “Estate Tax.”