What is an estate plan? (easy to understand explanation)

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Creating an estate plan ranks low on the list of people’s favorite past times. But with a good understanding, the process can be made much simpler. In this blog we’ll talk about what an estate plan is, what goes into making one, and why having a will does not satisfy this need.

But before we get into it… We are financial advisors in Morristown, NJ, providing financial advice for New Jersey residents as well as folks across the country. Before we get started, you may want to check out these financial planning blogs we’ve written:

Filing your tax return: traps to avoid

Retirement Account Contribution Amounts – 2024 changes!

Am I saving enough?

Do I have to pay taxes on an inherited annuity?

Let’s get into it!

What is an estate plan, actually?

It may sound fancy – but don’t be intimidated. An estate plan is nothing more than a roadmap for what happens to your assets should die or become incapacitated. It’s a way of making sure that what you want to pass on to your heirs gets into the right hands, at the right time. An estate plan may indicate the intended recipients of any assets you have, whether they be physical or intangible. A business, artwork, cars, houses, investment accounts, and patents – all of these are included in the realm.

An estate plan may include the following components:

  • A will to specify the intended recipient(s) of your assets
  • A trust to hold your assets
  • A power of attorney, which awards another party the right to make legal decisions for you
  • A healthcare proxy, which outlines how you are to be cared for if you are unable to make medical decisions for yourself
  • Instructions for who is to care for your children in your place, should it become necessary
  • What were to happen to a business you own
  • How you would draw income if you were to suffer an incapacitating disability

What is the difference between a will and an estate plan?

This is a question we get quite often. Why do I need to bother creating a whole estate plan? Isn’t a will good enough?

A will is an important part of an estate plan but the two things are not the same.

A will governs what happens to your assets after you die. However, it does not account for anything that happens up until that point.

Let’s suppose that you were unfortunately a victim of an accident and tragically become mentally incapacitated. Would you want a perfect stranger or someone who doesn’t have your best interests at heart to be given control of what happens to you? That’s where an estate plan comes in.

How to create an estate plan

So you’ve decided you need an estate plan? Follow these steps.

#1 Find a good estate attorney

You could go the do-it-yourself route, but this is an important legal matter. There could be serious consequences for you and your beneficiaries if the documentation is not set up exactly as needed.

How do you find a good estate attorney? Ask for recommendations from friends you trust, your financial advisor, or your CPA. You also may consult with your local estate attorney society; many have directories that you could refer to.

It’s useful to note that estate taxes and laws vary by state. Make sure your attorney is licensed to practice in the state where you live and/or have interests, and that he or she is intimately familiar with the ins and outs of the legal code.

#2 Figure out what your goals are

You’ll save yourself a lot of time (and money, if your attorney bills by the hour) if you can gain a clear understanding of what your goals are. The following questions are important in the genesis of your estate plan:

  • What do you want your legacy to be?
  • Who do you want to inherit your assets, and why?
  • If you weren’t able to care for your kids, who would you wish to do so?
  • What do you wish your final days to be like?

It’s also important to collect information about your valuables. What assets will you be passing on, and who is the intended recipient? The list may include items such as:

  • Real estate
  • Cars
  • Boats
  • Jewelry
  • Artwork
  • Investment accounts
  • Insurance policies
  • Checking and savings accounts
  • Family heirlooms
  • Inheritance you may receive in the future

#3 Meet with your attorney and/or team

Once you have compiled all the information in steps one and two, it’s time to meet with your estate attorney. Other team members such as your CPA and financial advisor may be included as well.

The estate attorney will work with you to determine which estate documents and structures make sense. These may include:

  • A will
  • Healthcare proxy
  • A trust (or several trusts)
  • Power of attorney

#4 Monitor for changes

After the estate plan is created, you should receive a copy. You should store it away safely, but don’t forget about it forever!

Any changes in life position are cause for the estate documents to be updated. This may include divorce, birth of a child, change of state of residence, etc.

And that’s about it!

How much does an estate plan cost?

We have typically seen an estate plan, when created by a high-quality attorney, cost $2,000 to $5,000 depending upon the complexity. Large estates employing advanced techniques typically incur substantially higher costs.

If you choose to do it by yourself, there are options such as LegalZoom or Trust&Will. However, we advise you to proceed with caution if choosing to forgo working with a professional, as the legal consequences may be serious if there is an error.

Revved up about your estate plan (yet)?

We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about creating an estate plan that jives with your plan to retire in New Jersey or elsewhere, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.

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