Royal baby: Good reminder to draft your will!
When a new baby arrives, parents are overwhelmed by the basics, like sleep patterns, feeding schedules and diaper changing. But. it's also a time when financial matters should come to the fore. In that spirit, I am going to be shameless and use the news of the Royal birth to remind you that a new baby is a perfect time to review the basics of estate planning! Here what you need to consider:
WILL: A legal document that ensures that your assets are passed to your designated beneficiaries, in accordance with your wishes. In the drafting of the will, you will name an executor, the person or institution that oversees the distribution of your assets.
Your will can itemize where every asset will go, or you can draft a Letter of Instruction, which details your wishes as an attachment to your will. A Letter of Instruction can make it easier to change your mind about distributions, without having to redraft the entire will.
For new parents, a will is where you need to name a guardian for your minor children. If you die intestate (without a will,) your state of residence will determine what happens to your estate and who should raise your kids. That potential alone should prod you to get going with the process.
PROBATE: The legal process by which a state court officially appoints the Executor and accounts for the deceased’s property and assets, as well as debts. Probate is a public process, which can be lengthy and costly, but usually goes fairly smoothly, as long as the estate is not contested by any heirs.
HEALTH CARE PROXY: The document that allows you to appoint someone to make health care decisions for you if you lose the ability to make decisions for yourself.
LIVING WILL: Similar to a health care proxy, though in many states, a living will is not a legal document and medical decisions may not be based on it alone. However, it is a way to communicate what types of medical treatments you would or would not want.
POWER OF ATTORNEY: The form that allows you to appoint someone to act as your agent in a variety of circumstances, like executing a trade, withdrawing money from a bank or responding to a tax inquiry.
TRUSTS: Like a will, a trust can be used to transfer assets and detail your wishes to your heirs. (Guardianship can only be addressed in a will.) There are various types of trusts, but the one that is often used to avoid estate taxation for married couples is called a “Credit Shelter Trust”. This type of trust is structured so that each spouse can utilize his or her basic exclusion amount, thereby allowing couples to pass up to $10.5 million federal tax-free to their heirs in 2013. While there aren’t too many people who are subject to federal estate taxes (the IRS said 15,000 estate tax returns were filed in 2010), a gross estate can add up quickly when life insurance proceeds and real estate assets are included. Also, estates may be subject to state taxes, so be sure to check with your attorney to determine whether a trust may be advisable.
Many people prefer to use trusts, even if their total estates are below the tax limit, because assets held within trusts avoid probate. A trust also allows a maximum amount of control over disposition of those assets.
Because these are legal documents, it may well be worth the money to hire an estate attorney to draft them. To keep your costs down, make sure you know how you want your assets distributed and who will be named guardian before you set foot inside the lawyer's office. The whole process often takes only 5 to 10 hours, a relatively small investment of time, considering the importance of the subject.
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