What is Estate Planning?
Estate planning is a general term for the process of establishing directives for what you want to happen to your finances and who will be the guardian of your children when you die. A will also does these things, but in a more limited capacity. Estate planning is a comprehensive approach that often includes a will in addition to other documents to ensure there are no issues with disbursement, legal challenges, or family disputes.
What is a Will?
A will is an important component of estate planning, but does not cover all the aspects a good estate plan will. A will allows you to say where you want your assets to go after you die, and who you would like to be the guardian of your children. You will also have to name an executor of your will who will oversee the distribution according to your instructions.
The downside of wills is that they still have to go through probate where a court oversees the process and ensures everything is validated. This costs money and can take a long time (sometimes several months). Wills also become public record when you die, so everything in there, including all the details of your wealth, will be available to anyone who requests access.
What are the Benefits of Estate Planning
Everyone’s estate plan will differ based on their individual needs, but in general you can benefit from using one for the following reasons:
Reduce Taxes: It’s nearly impossible to avoid taxes all together, but you may be able to reduce them with a thorough estate plan that includes a family LLC, a charitable trust, or by leaving your assets to your spouse.
Provide for family: Both wills and estate plans account for leaving assets to your family, but estate plans can help your loved ones avoid probate which can be costly and time consuming. By using a living trust as part of your estate plan you can also help reduce family in-fighting by clearly laying out who the beneficiaries are of all your assets.
Save on attorney and court fees: If you only draw up a will, your family will have to go through the court process of probate in which they’ll have to pay attorney and court fees. Furthermore, if there are any disputes between beneficiaries or those who think they should be beneficiaries, this will result in further court battles and more money. By using an estate lawyer to build an estate plan, your wishes and instructions will be airtight.
Privacy: Probate is a public process which means that once you die, the contents of your will are available for anyone to know. This includes details about your wealth, property holdings, business holdings, and any investment account information you included. If, in addition to a will, you use an estate plan, you can mostly avoid probate and maintain your and your family’s privacy.
Peace of mind: When you’re nearing your final days, the last thing you want to worry about is if your legal paperwork is clear and complete. By drawing up an estate plan while you are still of sound mind and body you can rest easy knowing your family will be taken care of, and that you’ve taken steps to reduce the burden of your death on them.
Benefits of a Will
Using a will also reaps many of the benefits that an estate plan does, like avoiding family disputes, providing peace of mind, and providing for your loved ones, but in general a will is less binding and easier to contest after your death.
Names a guardian: Wills allow you to name a guardian (or a couple) of your minor children after you die.
Less expensive: There are a number of online will-writing programs that are relatively cheap to use and can serve the purposes of a very simple estate. Estate plans on average will cost between $2,000 and $5,000.
Easy to set up: Estate plans usually require working with an estate lawyer and it can be a lengthy process. Wills are generally more straightforward and quicker to set up.
Will vs Estate Planning: What’s the Difference?
Both wills and estate plans allow you to name beneficiaries, assign a guardian for minor children, and provide financial directives after you die. They are both legally binding if prepared properly, though they will differ in their execution.
There are, however, some key differences you should be aware of:
- A will is simply a legally binding document.
- An estate plan is also legally binding but is more of an umbrella term and usually includes a will. Additionally documents might be:
- Living trust
- Power of attorney
- Healthcare power of attorney
- Named beneficiaries
- List of important documents
- An estate plan can go into effect immediately after it’s signed while you are still living, whereas a will isn’t valid until you die.
Which is Best for You: Estate Planning or a Will?
Many financial advisors will tell you to opt for an estate plan in lieu of a will. If you are at all concerned about how your assets will be distributed after you die, if you have complicated property or business holdings, or if you have children from a previous marriage you want to name as beneficiaries you should consider an estate plan.
On the other hand, if you have a very simple estate with only one or two beneficiaries, a will may be enough for you. Whatever you decide, try to get the advice of a qualified estate planning attorney who can recommend the right path and help you write up your plan if you choose to employ them further.