The Importance of Having an Estate Plan

We get it. It’s something nobody wants to think about, especially your loved ones, who can’t imagine living without you. But estate planning is a necessary part of the financial planning process. It helps ensure that everything you’ve worked so hard to accumulate gets passed on according to your desires in the most tax-advantaged manner possible.

Moreover, no financial plan is truly complete without an estate plan. The ideal financial plan preserves and protects your assets throughout your life all the way through your retirement, helping ensure that you don’t outlive your resources, but it also accounts for your legacy and wealth transfer at the end of your life. Without an estate plan, your assets, whether that be money, real estate, possessions or even precious family heirlooms, could end up in the wrong hands.

Let’s go over some commonly asked questions to make the estate planning process more understandable and easier to approach.

What is an estate plan?

An estate plan is a detailed, documented plan for what will happen to your assets when you’re gone. It’s intended to ease the transition following death by directing the transfer of your things. The most commonly known document in an estate plan is your last will and testament, which specifically lists and designates all of your assets to your beneficiaries. It also names an executor who is in charge of making sure the beneficiaries listed in the last will and testament receive what they are entitled to and that all of your final affairs and financial matters are settled. In the case of minor children, your last will and testament also specifies who you wish to raise your children in the event that both you and your spouse have passed away.

Additionally, an estate plan can contain other documents like trusts, health care directives or living wills, and powers of attorney. Your comprehensive estate plan is essentially a plan for the worst, should you be unresponsive, unable to make a decision or deceased ^[1].

Why is it important for me to have one?

There are many reasons to have an estate plan, the most important of which likely being the bequeathing of your assets to specific beneficiaries. Without proper documentation, the best-case scenario sees the correct distribution left up to chance, the courts and your heirs. The worst-case scenario means all-out war inside your surviving family.

An estate plan can also save your family from unnecessary tax burden. Oftentimes estate plans and financial plans come together to determine the most tax-efficient distribution of your property and accounts. You’ve worked so hard your entire life, both for your family and for yourself. Chances are, you’d love to see that money in the hands of those you love rather than in the pockets of the IRS ^[2].

Aren’t estate plans only for the ultra-rich?

A common misconception is that estate plans are exclusively for those with multiple million-dollar estates, priceless artwork or valuable shares in major companies. But that just isn’t true. In fact, those with fewer assets may have an even greater need for tax-efficient estate planning so that their families are protected during a potentially financially devastating time.

But even the rich are often unprepared. The unfortunate truth is that 67% of Americans don’t have an estate plan ^[3], but anyone with a family or assets should plan for the future, whether you’re handing down the majority stake in a large corporation, a vacation home or the remaining balances of your retirement accounts.

No matter the amount of assets, an estate plan can save your family headaches, time and tears by predetermining ownership before they are thrust into one of the most stressful endeavors of their lives. It’s worth it to strategize in life so that when your time comes, your family can spend their time properly grieving instead of worrying—or fighting—about how to split your belongings.

Things will sort themselves out, even if I don’t have a plan, right?

Well, technically, yes. Things will sort themselves out. But you’ve spent your entire life in the driver’s seat, making decisions that matter for you and your family. If you pass away without an estate plan and legal documents, small decisions are left to your extremely emotional family, and major decisions are left to probate court in what is usually a very costly and lengthy process.

In distributing your assets, courts can often be more expensive and time-consuming than need be. Tack on the fact that the legal system doesn’t understand your family’s history or dynamic, and it becomes a recipe for trouble. As someone who does understand how your family operates, which members deserve which assets and which members are able to be responsible for what they inherit, you can simplify the process by organizing an estate plan while still alive and sound of mind.

How do I start the conversation?

Determining how your family proceeds when you’re gone is no easy task. It can be just as difficult, or maybe even more difficult, for your children who have never been forced to live without you and the support you offer.

In our experience, we’ve found that the earlier the conversation begins, the easier it is to have. It’s always simpler to plan out of luxury than necessity, and estate planning is no different.

Communication is key. Talk to your heirs and loved ones about what your desires are, and ask them about theirs. You may be surprised to find out that it’s the sentimental items they want rather than the expensive ones. By having a clear plan that’s communicated well beforehand, years prior to any eventuality, you can avoid permanent family rifts and resentments later.

How can I get started with my estate plan?

Once you’ve consulted your heirs, or your parents if you are the heir, it’s important to accept that you’ll need help to complete a legally-recognized estate plan.

Ideally, your financial professional and your estate attorney should work together. Your financial professional can bring an estate planning attorney to the table, or work in conjunction with yours. What the financial professional does is find tax-advantaged vehicles and efficient ways to transfer wealth that an attorney may not know about or have access to, while the attorney brings the legal expertise, knowledge of state laws, and ability to generate all the needed legal documents.

Remember that it’s equally important to revisit and review your estate plan periodically, preferably every year. Life continually evolves as you acquire new assets and your family grows and changes.