Older people often contemplate their mortality and worry about what will happen to their loved ones once they pass away. On the other hand, younger people rarely find themselves thinking of death. But no matter how old or young you are, it’s in your best interest to have a strategy for when you pass away.
It may seem daunting, but with proper guidance and effort, you can make a legal plan to benefit your loved ones in case something happens to you. Here are a few tips to help your family avoid legal issues after your death.
- Make a Plan
The initial and most crucial step is to make a legal estate plan, and you should take this step sooner rather than later. Making an estate plan timely gives you complete authority to choose your beneficiaries and decide how your assets will be divided among them.
Many married couples delay making an estate plan, incorrectly thinking that all their property will pass to their surviving spouse under intestacy laws. However, that’s not true. When a legally binding estate plan is not formed, the state gets to decide how the assets/possessions will be distributed and who will be the executor of your estate. Your assets can be inherited by people you never intended to give them to, while your closest loved ones are left with nothing.
To avoid this, you can draft a Will or create living trust that outlines who gets what and appoint an executor of your choosing. Remember that a child under 18 cannot receive any property directly from your estate. So, appoint a guardian to oversee the property and hold it for the minor until they reach the age of 18.
- Account for the Unexpected
An estate plan outlines the steps to be taken after your death. But what if an injury or a disease leaves you incapacitated? Including a financial power of attorney in your estate plan is always prudent, naming someone who will act on your behalf regarding all your finances. More importantly, name a healthcare power of attorney who will be responsible for making all the decisions regarding your medical treatment.
If you wish that no extraordinary measures are taken to prolong your life should your prognosis for recovery becomes hopeless, you should state that in your living will. If you fail to name a power of attorney, your loved ones will be compelled to go to court before a guardian can be appointed – which can be a long and expensive process.
Also, mention alternates to executor and trustee in your estate plan. It’ll help your loved ones in case a person is unwilling or unable to play their role by preventing a guardianship proceeding from being initiated.
- Keep Updating with Time
You may think that estate planning is something you need to do once in your life and then forget about it. In contrast, estate plans must be updated periodically to account for changes. Since legal instruments like trusts, Wills, and powers of attorney are drawn according to state laws, they need to be revised if you move to a different state.
A birth or death in the family also requires you to make the necessary inclusions and exclusions to ensure that everything is divided fairly. If you separate from your spouse, you will want them removed; if you marry or remarry, you will want your new spouse to be taken care of after your death.
If one of your beneficiaries marries, you may also want their spouse to be included in your will. Sometimes, state or federal law amendments also warrant changes in your estate plan. So, revising your estate plan is viable whenever you, your family, or the laws experience a significant change.
- Keep Income Tax in Mind
When left to heirs, certain assets may result in unintended income taxes for them. When a 401(k) or an IRA are passed down to an adult child, they can be subject to required minimum distributions (RMDs). These can greatly impact the tax your beneficiary owes, as money will have to be deducted from the accounts every year.
Since the RMD is taxed as ordinary income on top of the current income of the beneficiary, it can lead to them being taxed at the highest marginal tax rate. If your beneficiary earns a good amount of money, their tax amount will be so high that this inheritance will actually cost them money. So, keep such crucial factors in mind during estate planning.
- Maintain Sufficient Liquidity
Liquidity includes the assets of your estate that are readily available to your chosen executor in cash form or can be quickly converted to cash, like a cheque. It’s not only critical to ensure asset liquidity in life but also after death.
For your state to be split among your beneficiaries, it needs to have a sufficient amount of liquidity so that your debts and other liabilities can be settled easily. One way to ensure enough liquidity is to get a life insurance plan to help pay off your debts and split your wealth.
For business owners, liquidity ensures that their heirs have enough cash to keep the business afloat immediately after their demise.
No matter your age or how healthy and fit you are, forming a legally binding estate plan is worthwhile. It names the beneficiaries of your estate and outlines how your assets will be divided among them. An executor who will oversee that the estate plan is followed should be named. This step is unavoidable because, in the absence of an estate plan, the state decides who inherits your property. And its decisions might not align with your wishes.
Powers of attorney for your financial and medical decisions must be drawn up in case an injury or illness leaves you incapacitated. It’s wise to keep updating your estate plan if you marry, divorce, remarry, have a child, or lose a child. Also, know that some of your assets may lead your beneficiaries to owe higher income taxes, compelling them to seek legal advice to find a way around it.
Lastly, maintain sufficient liquidity in your estate so your debts and taxes can be easily paid after your death. If you keep these essential tips in mind, you can draw up a good estate plan that accurately carries out your wishes.