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Estate Planning 101

blurry photo with a wood house in foreground to symbolize estate planning

Estate planning is an essential aspect of financial management that often gets overlooked.

Author: Martin Lundgren

As financial advisors, we understand the significance of addressing the “what,” “why,” and “how” of estate planning for both individuals and families. But, perhaps you could use a little additional clarification. 

From trusts to medical directives and taxes to worst-case scenarios, we’re exploring the fundamentals of estate planning. We’ll examine estate planning’s necessity and the various considerations to help you shape a sound financial future. Our goal in this article is to emphasize the importance of early planning to secure your financial legacy and protect your loved ones.

Why Do You Need Estate Planning? 

As the New York Times put it, there’s more to estate planning than just the will. From the complexities of probate to the risk of family disputes, there are many reasons why you need estate planning. 

Understanding What Estate Planning Is

Let’s back up. Estate planning is the proactive process of managing and distributing one’s assets in the event of incapacitation or death. Forbes refers to it as “one of the most important things you will do during your lifetime.” Estate planning encompasses considerations such as wills, trusts, medical directives, and tax planning. It aims to ensure that your wishes are carried out, your loved ones are provided for, and potential conflicts are minimized. 

Estate Planning: Family vs. Individual Considerations 

Estate planning needs differ between individuals and families. There are unique aspects and considerations for both scenarios, which is why it’s so important to tailor your estate plan to your specific familial and financial circumstances.

  • Individual Estate Planning 

Individual estate planning involves the unique circumstances and preferences of a single person. Key considerations include creating a will to specify how assets are distributed and designating beneficiaries for financial accounts and life insurance policies. You also want to establish medical directives to outline healthcare preferences. 

For individuals, the focus may also extend to appointing a power of attorney for financial and healthcare matters. This ensures that trusted individuals can make decisions on your behalf if they become incapacitated. Additionally, tax planning can optimize the distribution of assets and minimize potential tax liabilities.

  • Estate Planning for Families 

Estate planning for families requires a more intricate approach, considering the dynamics and needs of multiple individuals. One primary consideration is the appointment of guardians for minor children in the event of both parents’ incapacitation or death. Trusts become instrumental tools for families, providing mechanisms to manage and distribute assets over time, especially when minor children are involved. 

Coordinating the estate plans of family members, addressing potential conflicts, and ensuring clear communication about inheritances are essential aspects of family estate planning. Family-oriented considerations also extend to strategies for minimizing estate taxes, preserving wealth for future generations, and fostering a seamless transfer of assets.

While individual and family estate planning each has unique aspects, there are shared considerations, including:

  • Addressing end-of-life care preferences
  • Preparing for unforeseen medical emergencies
  • Staying informed about changes in tax laws

Both individuals and families benefit from regularly reviewing and updating your estate plans to reflect changes in personal circumstances, financial status, and legal regulations. Ultimately, the overarching goal of estate planning is to secure a stable and well-thought-out financial legacy while providing for the welfare of loved ones.

Trusts vs. Advance Directives 

Trusts and advance directives serve distinct but equally important roles in the estate planning process. Trusts address financial aspects of estate planning. On the other hand, advanced directives concentrate on healthcare decisions.

  • What exactly is a Trust?

A trust is a legal arrangement that allows an individual, the trustor, to transfer assets to a trustee. This person manages and distributes those assets according to the terms outlined in the trust document. Trusts are versatile tools that can help avoid probate, provide for minor children, and control the timing and conditions of asset distributions. They are particularly valuable for individuals seeking to manage and protect assets during their lifetime and ensure a seamless transfer of wealth to beneficiaries upon death.

  • How are Advance Directives Different than Trusts?

As plainly and arguably obviously stated by the AARP, every adult should have an advance directive to help explain the type of health care they wish to receive in case of emergency or simply plan ahead. 

Advance directives — documents including living wills and durable powers of attorney for healthcare — focus on healthcare decisions. A living will outlines preferences for medical treatments and end-of-life care, specifying wishes regarding life-sustaining interventions. A durable power of attorney for healthcare designates a trusted person to make medical decisions on behalf of an individual if they become incapacitated. 

Advance directives provide a roadmap for healthcare providers and loved ones to follow. They ensure that your wishes are respected and your medical care aligns with your values and beliefs. If you’d like to dive deeper into this subject, the Mayo Clinic has a great resource.

How Can Estate Planning Help With Navigating Estate Taxes? 

Estate planning helps navigate estate taxes by strategically utilizing exemptions, deductions, and gifting strategies. By taking advantage of the estate tax exemption, employing trusts to remove assets from the taxable estate, and implementing strategic gifting, individuals can minimize tax liabilities and ensure a more efficient transfer of wealth to heirs. In essence, estate planning is a proactive approach that aims to optimize tax outcomes, preserving family wealth for future generations.

Worst-Case Scenarios and Preparing for the Unthinkable

Estate planning helps prepare for worst-case scenarios by clearly stating your preferences for medical care and asset distribution. It’s hard for many to talk about, but most folks have a strong stance on whether they’d want to be kept alive or let go if the unthinkable happens to avoid fates like that of Terri Schiavo. Not to make light of her story or those like her, but here’s a reason to support doing your paperwork.

Through documents like living wills and powers of attorney, you can express your healthcare wishes and appoint trusted decision-makers to ensure that even in difficult situations, your choices are respected. Just like how Taylor Swift predicts her daughter-in-law will kill her for the money in Anti Hero, estate planning can address financial concerns by outlining how assets should be distributed — and who they should be distributed to — reducing the likelihood of family disputes and providing a clear legal framework for asset transfer. 

What to Know About Pour Over Wills, Trusts, and Tax Planning 

A pour over will works in conjunction with a trust by serving as a safety net to ensure that any assets not explicitly transferred to the trust during an individual’s lifetime are directed into the trust upon their death. In the will, you designate the trust as the ultimate beneficiary of any remaining assets to avoid probate for those assets and streamline the distribution process according to the terms outlined in the trust.

Regarding tax planning, using a pour over will with a trust is a way to optimize the transfer of wealth and minimize potential tax liabilities. By facilitating the transfer of assets directly into the trust, you—or rather, your trustee—can avoid the fees and delays of probate. Also, when structured appropriately, trusts can be used in tax planning to reduce the taxable estate. 

Place Estate Planning in the Hands of Someone You Trust

Selecting the right professionals to assist in estate planning is vital! It’s your legacy, and you need someone who will be there (and, importantly, still be alive and working) when the time comes. A trusted attorney is indispensable, and including your financial advisor can ensure that your documentation remains current and aligned with your financial goals.

Estate planning is a complex process that requires careful consideration and professional guidance. Northern Lights Advisors provides financial planning and investment management services as a fiduciary, fee-only, Registered Investment Advisor (RIA) firm.  As financial advisors, we empower clients to make informed decisions, secure their financial legacies, and provide peace of mind for themselves and their loved ones. 

In a future article, we’ll take a closer look into Washington state estate laws, as Washington has specific estate laws that differ from federal regulations. If you’d like to talk more about estate planning from a financial perspective, schedule a meeting with a Northern Lights advisor today.

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.