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Your Financial Future: Make time for estate planning

3 min read
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Probably the area of financial planning that people are most hesitant to discuss is estate planning. We are always going to get to it, but we are always busy. Death is a subject we would not like to think about. Legacy planning is very different for a young family or for seniors.

Families with young children and a mortgage can often deal with this subject with a life insurance policy. Life insurance is relatively cheap for young insures. It can replace salary to pay off a mortgage, raise the kids and provide for a college education. The death benefit is usually received tax-free. Many people underestimate the amount of insurance they need. Remember your earnings capacity is your most valuable asset.

For seniors, the situation is much different. Hopefully, they have their debts paid off and have retired from the workforce. They still need income to replace lost Social Security benefits and possible pension benefits. Funding health-care costs and maintaining the desired lifestyle are often goals. Taxes are a big concern, especially if a lot of savings is in qualified money such as 401ks and IRAs.

There are a number of legal concepts that are used in estate planning, including wills and trusts. A will is a legal document that takes effect upon your death. It outlines your wishes, including providing guardianship for minor children. It is often coupled with a power of attorney, which appoints someone to make decisions for you when you do not have capacity to do so.

Trusts provide control over the distribution of assets, privacy, and potential tax advantages. A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways, specifying exactly how and when assets pass to the heirs.

For example, are you concerned that a young adult might fritter away his or her inheritance? A spendthrift trust might be the answer. Instead of an account that allows immediate access to the assets, the trustee of a spendthrift trust dispenses the assets over time.

Additionally, a spendthrift trust typically protects assets from creditors, bankruptcy, divorce and lawsuits.

Is there a need to minimize taxes? An irrevocable trust might fit into your plan. By placing assets into an irrevocable trust, the estate’s value is reduced regarding estate taxes. Besides tax considerations, irrevocable trusts also help protect assets in lawsuits.

You may also decide to create a living trust, which transfers your assets to your beneficiaries and avoids probate. While you can find model documents online, you should work with an estate planning attorney to make sure that they are compliant with Pennsylvania law.

Unfortunately, over the years I have come across people who planned to get to the subject of estate planning but had a major life event take their life before the plan was executed. Also, it is very important to make sure that all your beneficiary designations reflect your desires. Beneficiaries are easy to change while you are alive, but impossible to fix after your death.

A written financial plan should accompany a well-designed estate plan to get the optimal benefits for your family. Do your homework and learn from planning experts to provide best savings of taxes and fees and eliminate as many unpleasant surprises as possible.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

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