The Basics of Estate Planning

Out of college, first career job, on your own – estate planning isn’t a big concern, nor should it be. However, when you start accumulating assets, a spouse and children, your life has more value, perhaps emotionally and definitely financially.

So what do you need to lay the groundwork for your estate? The fundamentals aren’t complex. Nor do you need to have everything in place from the word “go.” By understanding these essentials and their place in your future, you’ll have more of your financial life under control, for both yourself and your survivors, when that day comes.

Life Insurance

Ah, insurance. We all know that it’s good for us, yet we know that it’s a field full of oversell, loopholes and scams. The secret here? Keep it simple.

Whole-life insurance plans are best for the young. By all means, sign your children up to simple whole-life plans for affordable coverage that will have some cash value one day. When you reach adulthood, even in the early stages, term life insurance that covers the period where you have dependents, say 20 to 30 years, is probably a better way to go. The principle is simple. If something happens to you, your loved ones aren’t going to suffer from your lost income.

While everyone’s situation has its own unique twists, a rule of thumb calculation for the amount of life insurance coverage goes like this:

  1. Add up the number of people in your home
  2. Multiply that by five
  3. Multiply that by your annual salary
  4. Subtract your net worth

That’s a basic, minimum ballpark amount. It may vary in your case to account for other insurance policies or financial circumstances, but it’s enough to get the conversation started. You’ll have a reasonable number in mind, so that if you run into an agent who offers an amount substantially lower or higher, you’ll know it’s time to ask questions.

A Will

To simplify the passing of your estate with minimal complications, a will is an essential, yet simple, document. These aren’t hard to set up, though there are some state-to-state procedures, so it’s a good idea to get local advice.

The most important things to consider and record in your will are straight-forward. Choosing an executor is crucial, since you’re trusting them to deal with your estate once you’re gone. The next question is who will get your assets and how these will be divided if you have more than one inheritor.

You may have certain heirlooms that you want assigned. This is separate from portions of your assets, or it will be if you spell it out in your will. If you don’t assign heirlooms, then the antique books you promised to your niece could be sold as part of valuing your estate. To obtain the books, she’d have to purchase them at market value.

If you have dependent children, your will should include custody arrangements too.

Other Considerations

If you have only a will and adequate life insurance, you have the essentials in place for your estate. However, as with many things, the more thought and planning you do, the more likely you’re prepared for any outcome.

For example, power of attorney transfers to your spouse by default, when you’re incapacitated and can’t conduct business for yourself. If you’re single or if you don’t want to put this burden on your spouse, you can name a third-party as your agent.

Living wills provides health care directives for situations where you’re unable to express your wishes. This could cover resuscitation, life support or organ donation. This is particularly important if you feel strongly about any of these issues.

Finally, if you have a financial life that’s more complex that a single bank account, keep and maintain a master financial document. Include accounts, account numbers, assets, debtors, and anything else that can assist closing out your estate.

There’s much more to estate planning from a tax perspective, but most of that depends on having an estate to distribute. These points will help you get to the next state of the estate planning game.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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