No one likes to think about what will happen at the end of their life. But if you want to ensure the best for your dependents and other loved ones, putting a structured plan in place is crucial. For many, this process is overwhelming and emotional. However, learning the answer to, "What is estate planning?" can help offer some peace-of-mind and assurance that you're making the right decision.
What Is Estate Planning?
Most people have at least a peripheral understanding of estates. You may have attended a local estate sale in the past. Or maybe you know someone whose wealthy relative left behind a large estate.
But the concept of an estate is relevant to each and every one of us.
In short, your estate contains all of the assets you possess before debilitating injury or death. Even if you consider yourself less well-off than most, you still have an estate.
So, what is estate planning?
Estate planning involves laying out plans for your estate's future, presumably for after you leave this life. This includes creating a will, something pretty much everyone is familiar with in some capacity. But it can also involve much more than deciding who gets which of your possessions.
In reality, what is estate planning for one person can be far more, or less involved than what someone else experiences.
Estate Planning Terminology To Know
Before diving into the more in-depth aspects of what is estate planning and why you should make it a priority, let's cover some common terms.
You might be familiar with some of these. Maybe you even know exactly what they are. In many cases, though, the average person won't need to worry about these things until it comes time to plan their estate or settle one belonging to a loved one.
An asset is anything you personally own that has some form of monetary value. This includes property and straight cash, savings accounts, and financial investments.
There are two types of asset ownership you should be familiar with:
Sole ownership is pretty straightforward, applying to assets that are in your name only.
Joint ownership means two or more individuals legally own a single asset. This could range from a married couple to completely unrelated persons.
Your will is a document that dictates the management of your estate following your passing.
In most cases, a will includes designations for things like:
If someone has no will at the time of their death, distributing their assets falls to their state's government. While the state will ensure your assets go to your beneficiaries, your loved ones have no say in how this distribution occurs.
Even with a valid will in place, your estate is still subject to a probate process overseen by the courts.
The probate process involves settling your will and distributing your assets to the designated beneficiaries.
Technically, this process exists to protect your estate and beneficiaries in a legal capacity. Without this process, it would be much more difficult to ensure your family follows your will's instructions.
However, since the probate process takes place in court, it is subject to all of the related fees and inconveniences of any other legal process. And in some cases, the probate process can take a year or longer to complete (meaning your beneficiaries can't access your estate).
But with adequate planning, you can avoid putting your loved ones through the legal headache of settling your will.
In essence, a trust allows you to grant oversight of your estate to someone besides the local court judge. Not only can this help ease some stress for your beneficiaries, but it can also ensure they don't need to pay attorney fees and other legal costs throughout the process.
With a trust in place, all of your assets transfer to your beneficiaries privately and immediately.
Understanding The Assets In Your Estate
To gain a better grasp on estate planning and your existing estate, it's important to know what falls under this umbrella. After all, you can't plan out your estate if you don't know what assets it contains in the first place.
While the exact items under each of these categories will vary, at least one of these categories will apply to you and your estate planning process.
Is Money Part Of Your Estate?
Yes, your money is part of the assets in your estate.
Of course, the amount of money your estate contains will depend on your livelihood and lifestyle. But your financial assets can be easier to tackle than your property or business interests, at least when first starting out.
Cold, hard, cash is one example of a financial asset included within your estate. However, some other common examples include:
Regardless of how you intend to allocate these financial assets, you should account for all of them when planning everything out.
Let's Define "Property"
Your physical property is also a major part of your estate. Yes, this includes land and real estate. But it also includes your clothing, collectibles, furniture, and anything else you own.
Sometimes, property is handed over to the chosen beneficiaries, and that is all it takes to settle the estate. Other times, property is sold or auctioned off in exchange for liquid cash.
Is It Your Business?
If you own majority interest in any businesses, then you should not only have a plan for your business assets, but also for who will take over control of the company's operation going forward.
Depending on your exact situation, you might already have a plan in place for your business' future after your passing. However, you should make sure everything is accounted for when establishing your personal estate plan, as well.
If you own interest in a business but have no control or authority, then your business assets will likely behave much like any other financial asset.
The Less Fun Part Of An Estate: About Debt
As you can see, your estate includes all of your positive assets. Unfortunately, it also includes your negative assets.
If you hold any debts at the time your estate plan goes into effect, these negative balances don't just disappear into the ether. Instead, your positive assets are used to pay off this debt before anything else moves forward.
If you have enough liquid cash to pay off all of your outstanding debts, then everything else is pretty straightforward. But if your bank accounts, stock portfolio, and various investments don't cover all of your debts, things can get ugly.
The most common solution in this scenario is to sell off property until the debt is settled.
However, there is one upside to this entire process. If your entire estate is liquidated and your debt is still not paid off, the collection process stops. Your debtors cannot (in most cases) pursue your surviving loved ones to settle the remainder of your debt.
Obviously, though, this process can be difficult and emotionally draining for your family and other loved ones.
How Planning Your Estate Can Protect You And Your Loved Ones
At this point, you might be wondering what is estate planning good for if you have few assets to pass on?
It can be tempting to forego the estate planning process entirely if you don't care what happens to your assets. However, we stand by the belief that everyone should develop a plan for their estate.
Here are a few reasons why:
What Is A Power Of Attorney
Chances are, you sought out an answer for, "What is estate planning?" because you want to protect your loved ones after your death.
Yes, the most obvious use for an estate plan is in the event of one's death. However, it also applies in the event that someone is — whether suddenly or over time — unable to make decisions for themselves.
For this reason, part of planning your estate includes deciding who will make decisions about your health and finances if you are ever unable. That person will have your power of attorney, or POA. Even if you are 100 percent healthy now, there's no way of knowing what will happen in the future.
Considering Dependents, Beyond Childhood
Ideally, we would never need to worry about leaving our dependents on their own. But when it comes to planning for everything life could throw at you, thinking about how these individuals will carry on without you is essential.
Even if your children are all independent adults at this point, you never know when they'll need your help. By planning for these future moments, you can continue to support your loved ones even when you're no longer by their side.
And putting a plan in place is especially important if you have a disabled spouse, children, or others who rely on your for their day-to-day wellbeing.
Not only can a well-planned estate help ensure that your finances are available for this care, but you can also outline your wishes regarding how their ongoing care will occur. This can include who will gain guardianship, if applicable, or where your loved ones will live after your passing.
The Unpleasant Occurrences: About Disinheritance
If you have a strained relationship with family or are afraid your assets will be misused, you might wonder what is estate planning even good for in your situation.
Until now, we've mostly focused on how thorough estate planning can ensure your assets end up in the hands of your loved ones. However, we understand that there are also cases where you might want to keep your belongings out of certain people's hands.
When planning your estate, you can opt to leave your assets to any individual or organization. Not just direct family.
If you feel your assets would be better off in the hands of a cherished charity or other organization, you can address this wish in your estate plan.
Invest In Peace-Of-Mind For The Future
As with any kind of legal or end-of-life preparation, planning your estate can be both logistically and emotionally overwhelming. However, arming yourself with the right knowledge, such as learning the answer to what is estate planning, can make an incredible difference in how you handle this process.
While we might be able to answer basic questions like, "What is estate planning?" we urge you to turn to a trusted lawyer for more detailed information about your estate, will, trust, and other important subjects.
Even if you are hesitant to spend money on a legal professional's help, you'll find the extra peace-of-mind is well worth the cost. At the very least, an experienced lawyer can point you toward more affordable estate planning resources.
What steps have you taken toward planning your estate? Do you have any tips you'd like to share with other readers? Share your experiences in the comments below.