When you hear the word “estate,” chances are it conjures up images of someone super wealthy – big house, fancy cars, sails to the South of France.
The reality is that everyone has an estate. Sure, yours might be smaller than the uber rich. However, over the years, you’ve probably accumulated a bunch of stuff – a house, a car, retirement accounts, art collections, cash, and more. And, all of this personal property makes up an estate.
In the past, having a large number of assets might expose your family to owing taxes when you die. With the new tax law, however, the likelihood of that happening is slim. The law now temporarily exempts up to $11.2 million for individuals and $22.4 million for married couples. Those figures are set to alter when the tax bill changes in 2025.
Even though estate taxes clearly don’t need to be at the forefront of most people’s minds, it doesn’t mean there aren’t other things to consider. There are still many other financial planning moves to help ensure your family is more comfortable — emotionally and financially — if you were to die.
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Take stock of what’s actually in your estate
Death is never a fun topic to think or talk about. That said, it’s imperative that you make decisions about your estate (aka your stuff) while you’re alive. Ultimately, setting explicit wishes for who gets what will ease the burden on your family members when you pass away.
Your estate includes:
- Money in savings accounts, retirement accounts, and investment accounts
- Real estate
- Life insurance where you’re the owner/policyholder
- Revocable or irrevocable trusts
- Business interest
- Art, jewelry, furniture and other collectibles
When you hold these assets in your name, they are a part of your estate and their value is included in estate tax calculations upon your death. The IRS requires that a final tax return is filed in your name once you pass and it is on this final tax return that any estate assets are disclosed. The executor (the person you’ve named to manage your finances after you pass) of your estate will account for any items that are in your estate when you pass.
We’ve determined that most of us won’t be subject to estate taxes until at least 2025 when the new tax bill is set to expire, or a new administration comes into office. That doesn’t mean that you shouldn’t still work to protect the assets that you’ve worked so hard for to ensure they pass to the family members or friends that you would like them to in a timely fashion.
This brings us to…
Create a will
Everyone should have a will. Whether you’re single with few assets or married with multiple kids, you’re never too young or too old to have a will in place. While creating a will not keep your family from probate when you pass, it will serve as your “voice” once you do. A will instructs an executor on how you’d like your assets distributed – everything from your prized cookbook collection to your artwork and clothing and everything in between.
Companies like Willing, LegalZoom, and Tomorrow.me all offer simple, affordable ways to get a will in place. It’s never a bad idea, though, to hire an attorney to review the documents created to make sure you have crossed your t’s and dotted your I’s.
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What is probate and ways to avoid it
“Probate” refers to the legal process where a deceased person’s estate is properly distributed to heirs and designated beneficiaries. It’s also the time where any of your debts are settled with creditors. (Spoiler alert: most of your debt isn’t forgiven if you die.) In probate, the courts will decide what to do with your assets and figure out who gets what. And, this process can be lengthy and costly and often can take up to a year to complete.
Want to make your loved ones’ lives easier? Put plans in place to expedite the process.
Not all assets that you have will go through probate, and some states allow you to pass along a certain amount of assets probate free. Assets like life insurance, annuities, and retirement accounts almost always pass on to the beneficiary outside of probate as well as assets held in a living trust and those owned in joint tenancy.
The probate process is generally handled by the executor of your will, which is someone you would have set up previously. If you haven’t named an executor in your will, the court will appoint someone to handle your estate, most likely a close relative.
One way to avoid your assets going through probate is to set up a revocable living trust. The way a living trust works is… your assets are held within the trust while you’re alive. You can access them or change beneficiaries at any time. Once you die, all the assets in the trust are transferred to a trustee who then distributes them to your beneficiaries according to your wishes. Most people use a lawyer to create a revocable living trust. However, there are some online services available, such as Willing, LegalZoom, Rocket Lawyer, and Tomorrow.me.
Consider term life insurance
Life insurance serves as a financial safety net for your loved ones. And, term life insurance offers an affordable way to accomplish that. A healthy 35-year-old woman could buy a 20-year, $500,000 Haven Term policy, issued by MassMutual, starting at about $19 per month.
The payout from a policy (called a death benefit) can be used by your loved ones to help cover expenses like:
- The mortgage
- Shared debts
- Utilities and phone bills
- College for the kids
Typically, the death benefit is transferred to your beneficiaries cash-free. It also can usually skip probate and other unnecessary hangups if you’ve correctly designated beneficiaries. Life insurance could be included in your estate tax calculation, though. Again, if you, like most people, are below the estate tax thresholds then it’s probably a non-issue.
Plan now for the future
While the idea that you have an estate might feel like a stretch you right now, having a plan in place can reduce headaches during a trying time. The more stuff, or assets, you collect during your lifetime, the more complicated and expensive it might be for your heirs when you pass. Setting up a will and a living trust can ensure that you get your stuff to the person you want to it to go while also keeping your assets outside of probate and potentially free from any estate tax. These steps will save your heirs time and money in the long run.
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Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER® professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.
Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.