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What Is Estate Planning, and Why Is It Important?

What is estate planning, and why is it important?

Estate planning isn’t just for the ultra-wealthy, nor is it something you should put off until your golden years. Unfortunately, most people associate estate planning with end-of-life documents like wills and trusts. This may explain why so few Americans have an estate plan. In fact, a recent LegalZoom.com survey found that 62% of Americans don’t have a will–despite the rise in estate plans due to the Covid-19 pandemic. 

Indeed, a comprehensive estate plan helps ensure your assets are distributed according to your will when you die. In addition, it can help minimize wealth transfer taxes and protect your loved ones–especially those who depend on you financially. However, proper estate planning also ensures your wishes are honored if you become incapacitated. 

Given the many reasons estate planning can benefit you, your family, and your wealth, no financial plan is complete without it. 

5 Benefits of Estate Planning

#1: An Estate Plan Protects You and Your Assets During Your Lifetime 

If you become mentally or physically incapacitated during your lifetime, you may no longer be able to earn money or make decisions for yourself. The estate planning process includes provisions that address these risks to protect your family’s lifestyle and assets. 

For example, disability insurance can help provide for you and your family if you’re no longer able to work. In addition, it’s helpful to legally designate a healthcare proxy or power of attorney and financial power of attorney who can make decisions on your behalf if necessary. Otherwise, this responsibility may go to someone who doesn’t have your best interests in mind. 

#2: Estate Planning Allows for Efficient Distribution of Your Assets 

Without a living will or trust, your state’s probate laws will guide the distribution of your assets. The right legal documentation can save your loved ones time and frustration while honoring your intentions. 

To avoid potential conflicts among family members, it’s best to update your estate planning documents as your financial situation and family dynamics change. For example, review your designated beneficiaries on investment accounts and insurance policies regularly–and especially after a major life change. In addition, make sure your will and associated documents reflect your current wishes. 

#3: Proper Estate Planning Can Help Minimize Wealth Transfer Taxes 

There’s no way to predict what tax laws will look like in the future. Nevertheless, it’s safe to assume the IRS will want its share of your estate when you transfer it. 

If you plan to leave significant wealth to your loved ones when you die, proper estate planning is key. Wealthy families may benefit from certain strategies to minimize taxes on transferred wealth, including life insurance, Roth IRA conversions, lifetime gifting, and trusts.

For more details, check out our recent blog post: 4 Estate Planning Strategies to Minimize Taxes on Transferred Wealth

#4: An Estate Plan Can Help Protect & Preserve Family Wealth 

As people accumulate wealth, they often become the targets of frivolous lawsuits and in some cases, extortion. That’s why proper asset titling is a key component of an effective estate plan. A well-thought-out asset titling strategy can minimize your exposure to taxes and ensure your wealth transfers efficiently. It can also shield your assets from predators and creditors attempting to capitalize on your hard-earned wealth. 

Similarly, insurance can also be an important component of your estate plan. For example, life insurance and umbrella insurance can provide funds to preserve your estate or protect your wealth against a variety of legal challenges.   

#5: Estate Planning Helps Facilitate and Continue Your Legacy

Legacy planning–how you want others to remember you–is an important element of the estate planning process. For example, many people choose to donate money or assets upon their death to causes they supported during their lifetime. They may achieve their charitable goals by setting up a family foundation, contributing to a donor-advised fund, or establishing a philanthropic trust.

You may also use the estate planning process to have honest discussions with your family about the family’s wealth. In addition, you can educate younger generations to be better stewards of the wealth they eventually inherit.  

To protect your family and wealth, start planning asap

While estate planning can be an emotional process, it can also help your family avoid many of the challenges associated with settling an estate. If you’re a beneficiary of sudden wealth or have accumulated significant wealth during your lifetime, it’s best to start planning as soon as possible. 

There are many financial and legal complexities inherent to estate planning. Therefore, it’s best to seek help from a trusted financial advisor or estate planning attorney. If Sherwood Wealth Management can help you preserve your wealth and protect your family’s future, please schedule an introductory consultation