As a business owner, you always want to run your business efficiently so you can expand and make it successful in the long run. However, more than growth and expansion, you work hard in running your business to achieve your retirement goals, with the hope that you’ll be able to preserve it for your family upon your death or in the event of your incapacity. This is where the idea of estate planning enters the picture.
If you’re hearing about this concept for the first time, keep reading this article so you’ll have a better understanding of the basics of estate planning.
What Is Estate Planning?
Primarily, estate planning refers to a method of planning for your financial affairs at the time of your demise to ensure that your assets are protected in case of incapacity or death. It’s the act of planning and anticipating during your lifetime for the proper administration and disposition of your property following your death, or if you become incapacitated, die without leaving a will, or, if, after your death, you leave no children or heirs who have legal capacity to handle the assets.
In addition, having a detailed estate plan in place can provide you with peace of mind, knowing that the future of your loved ones in the event you pass away or become incapacitated is secure. It can also be used to achieve the following goals:
- Providing financial stability and support for your family
- Protecting your assets against lawsuits by the creditors and other judgments
- Ensuring that all of your assets are distributed according to your express wishes
- Minimizing estate taxes and other financial obligations associated with estate planning
- Ensuring that you choose an individual who can represent and make decisions on your behalf in case of your incapacity or death
What Are The Different Estate Planning Tools?
Now that you have the basic idea of what estate planning is, it’s time to know the different tools you can use to execute your estate plan and make sure everything will be done accordingly.
Here are the common tools used in estate planning:
1. Power Of Attorney
The power of attorney is an estate planning tool that can be used to appoint a particular person to perform certain duties for you. For example, if you’re leaving your property and assets to a trust, you may wish to have a third party appointed as a ‘guardian.’ This can help protect your interests in the future. An important aspect of this tool is that it allows you to select the individual to perform certain activities for you after your death.
However, you should also be aware that a power of attorney doesn’t create any special rights or privileges when it’s being utilized. For example, if you allow an appointed person to make decisions regarding the management of your assets, they must follow the directions given to them by you.
If the appointed person deviates from your instructions, then, you’ll be legally responsible for their actions and decisions. For that reason, be sure to appoint someone who has your best interests at heart. Fortunately, an estate planning lawyer can help guide you through the process so that you can avoid mistakes that can lead to legal issues down the road.
A will is a legal document that describes the way your estate should be settled according to your express wishes. Because of this, it has been considered as one of the most important aspects of estate planning.
Unlike a power of attorney, the will names and designates one or more beneficiaries who’ll inherit all your assets, including your business and other properties. Moreover, this legal document also appoints an executor to administer and distribute your fortune following your death. In short, having a will allows you to have peace of mind, knowing that you can protect all your assets in advance for the benefit of your family.
In addition, creating a will is one of the most important decisions you’ll ever make. Thus, you need to make sure that your will is drafted properly. Fortunately, a professional lawyer can assist you in preparing your will and can advise you on any areas that you may need to consider.
3. Living Trust
A living trust refers to a legal document wherein your assets are put under a trust account. Just like wills, a trust can be set up during your lifetime. While you’re named as the grantor, the person who’ll be responsible for managing your assets for the benefit of the beneficiaries is called the trustee.
Moreover, a living trust has two different types, which are:
- Revocable Trust – This is the most common type of living trust because it can be changed by the grantor at any time during their lifetime. However, when the grantor passes away, the revocable trust will automatically be converted to an irrevocable trust.
- Irrevocable Trust – This type of trust can’t be changed or cancelled by the grantor. Once it’s drafted, the provisions in the trust agreement are final and irrevocable.
4. Life Insurance
Having a life insurance policy can provide you with peace of mind , knowing that your family can survive following your death. However, within the purview of estate planning, life insurance is more than just providing cash through the payment of death benefits because it can be used to get the most out of your wealth and maximize tax efficiency. With this proper estate planning tool, the government can’t take a significant portion of the assets you leave behind when you die.
5. Beneficiary Designations
The distribution of your assets can cause conflicts among your family members, especially if some of them aren’t in favor of the beneficiary designations. Because of this, it’s crucial to update the beneficiaries, especially those who were designated a few years ago. You can do this by choosing heirs who are mentally capacitated and not minors. That way, you can avoid your designations being contested in courts.
There’s no doubt that most people don’t know the importance of estate planning. However, as a business owner who has worked hard for your family’s financial future, you should start creating your estate plan as soon as possible.
Luckily, going through the process of estate planning doesn’t need to be difficult if you know and understand the information discussed above.