No one likes to think about death, but estate planning is one of the most important things you can do for yourself and your loved ones. If something happens to you, it’s crucial that your estate is handled in a way that reflects your wishes and minimizes taxes and legal fees.
There are many estate planning tools available, but which ones are right for you? In this article, we will discuss five of the most common estate planning tools and how they can help you save money.
What is an Estate Planning Tool?
Estate planning tools are devices or methods that help people manage their estate. This includes everything from setting up a will to creating irrevocable trusts. Estate planning tools can help you save money by minimizing taxes and legal fees, and ensuring that your estate is handled according to your wishes.
Estate Planning vs. Taxes
Usually, people confuse these two concepts and interpret them as one. But they’re not the same. Here we highlighted some key concepts on taxes for you to differentiate them.
Tax planning is a set of methods that reduce the taxes you pay on your assets and income. You can achieve this through different strategies that can help you minimize the amount of income that is exposed to taxation in the first place and maximize tax breaks. But how?
There are various solutions to help you minimize income taxes. You can defer the taxes on unrealized investment gains, go for Opportunity Zones, or set up a CRT (Charitable Remainder Trust). However, if you go for the last one solution, we suggest you previously evaluate the potential return on investment with a Charitable Remainder Trust calculator, to make sure its worth it given your situation.
On the other hand, you may also want to reduce your taxes on already realized income, like bonuses or your salary. For that, you’d better go for CLATs, or Charitable Lead Annuity Trust. Though they differ from CRUTs, they can be helpful for your future charitable donations.
The 5 Most Common Estate Planning Tools
1. Wills
A will is probably the most common estate planning tool. It is a document that allows you to designate who will inherit your estate and how they will receive it. A will also allows you to name an executor, who will be responsible for handling your estate after your death. Wills can be simple or complex, depending on your needs. They are usually drafted by attorneys, but there are also many online options available.
2. Trusts
A trust is a legal arrangement in which one person (the trustee) holds property for the benefit of another person (the beneficiary). There are many different types of trusts, but all of them have one thing in common: they allow you to pass on your estate without going through probate. Usually, trusts are complicated to understand and establish, so the best is receive some legal advice before setting them up.
3. Living Wills and Health Care Proxies
A living will is a document that allows you to state your wishes regarding medical care if you become incapacitated. A health care proxy is a document that allows you to appoint someone to make medical decisions for you if you cannot make them yourself. These documents are important because they ensure that your wishes will be followed even if you are unable to express them yourself. Its complexity will depend on your specific needs.
4. Retirement Accounts
One of the best estate planning tools available is a retirement account. When you die, the money in your retirement account passes directly to your beneficiaries, bypassing probate entirely. This means that your loved ones will not have to wait months or years for the money to be released from the account. In addition, retirement accounts are generally exempt from estate taxes.
5. Life Insurance Policies
A life insurance policy is a contract between you and an insurance company in which the company agrees to pay a certain amount of money when you die. Life insurance policies can be used as estate planning tools in two ways: first, they can provide financial security for your loved ones if something happens to you; second, they can be used to pay estate taxes
Conclusion
There are many estate planning tools available, but you’ll determine which one is right for you. Wills, trusts, living wills, health care proxies, retirement accounts, and life insurance policies are all great options for estate planning. Each tool has its own benefits and drawbacks, so it’s important to choose the one that best suits your needs.
