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Why Estate Planning Is So Important and Why You Need a Will

Why Estate Planning Is So Important and Why You Need a Will

When most people hear the term, financial planning, they think about saving for retirement. And for a good reason, as retirement planning requires a long-term strategy and sound financial advice. But there’s another vital component: estate planning. It’s an uncomfortable truth that we are all going to die, and if you’re not financially prepared for this eventuality, your loved ones could suffer.

What Is Estate Planning?

Estate planning has several components, but the overall goal is the same – to ensure that when you die, your assets are transferred to your loved ones in an organized and tax-efficient manner, per your final wishes.

Who Benefits When you Create a Plan for Your Estate?

I’ll get into this further a little later, but understand that you aren’t the one meant to benefit when you make an estate plan. Sometimes people put off planning for their estate because they don’t see the immediate benefit. As humans, we struggle to consider things that seem so far away. Or maybe it isn’t. That’s the thing. We never know how much time we have.

With that in mind, it’s the people you love the most; your spouse, children, and other loved ones who will benefit because you decided to take the time for estate planning. Trust me, after you’re gone, they’ll be grateful that you did.

Why You Need an Estate Plan

There are several benefits to creating a plan for your estate and a few significant risks if you fail to do so. Here are some of the main reasons why you need an estate plan.

1. Allows You to Name Your Beneficiaries

Included in a will are the beneficiaries’ names who will inherit your assets after you’re gone. You have the final say as to who gets what. If you don’t have a will, the courts will decide for you, and their decision may not align with your wishes. Your assets can include your home, a secondary residence, investments, vehicles, and other valuables.

2. Simplifies the Estate Transfer Process

Your will is like a roadmap for your estate. It provides a clear set of directions for what needs to happen. It determines who will administer the estate (executor), who will receive your assets (beneficiaries), and who will care for any minor children you leave behind. Without this set of directions, it’s left to family members, lawyers, and the government to sort things out. That’s a recipe for disaster, not to mention the amount of time involved. Some estates take years to settle just because there was no will.

3. It Protects Minor Children

If you’re a parent with minor children, you should decide who will care for them if you’re gone. Without clear direction, the result could be multiple parties fighting over who should raise your kids, with the courts making the final decision.

4. It Addresses Estate Income Taxes

You’ve heard the saying that there are two guarantees in life: death and taxes. When you die, the federal government considers your assets, such as stocks, bonds, and real estate, have been disposed of, and your estate representative will be required to file a final income tax return.

With solid planning, you can arrange to transfer your assets in such a way as to minimize the income tax burden. There are several ways you can do this, and it’s something that is taken into account when you’re completing an estate plan.

5. Reduce Final Expenses

In addition to filing a final income tax return, your executor will need to pay final expenses when you die. Included are funeral and burial costs, executor fees, probate, and legal fees. A good estate plan can set aside money for these expenses in advance and arrange assets in such a way as to minimize probate fees.

The Risks of Not Planning for Your Estate

If you don’t have an estate plan, your beneficiaries won’t benefit in the ways I’ve listed above. Instead, your loved ones could face any or all of the following:

  • High probate costs
  • Unnecessary lawyer fees
  • Family disputes
  • The wrong people named as caregivers for minor children
  • Your wishes not being followed
  • A lengthy estate settlement process

Why Do I Need a Will?

Your will lays out how you want your assets divided when you die, including naming your executor, the person assigned to represent your estate. As I mentioned earlier, a will is like a set of directions for your estate representative to follow.

Having a valid will makes the entire estate process easier to follow. Many people have their will prepared through a lawyer, but you can make your own using an online service like Willful or Canadian Legal Wills. An online will can suffice for most Canadians, but always remember, there is no substitute for the professional advice a lawyer can provide.

With any of the following situations, i.e., you own a business, rental property, assets in a foreign country, or have a blended family, you should have your will prepared by a lawyer.

What Makes a Will “Legal”?

Most of us have heard stories about people who wrote their last will on a napkin in a restaurant, and it was legally valid. But can that happen?

Three components that make a will legal. You must write it in sound mind, it needs your original signature (cannot be electronic), and it must be witnessed by two people, neither of whom will benefit from your estate.

So, a handwritten will can be perfectly legal. However, whether or not it would withstand being challenged in court by disgruntled heirs is another story.

Where Should I Keep My Will?

You should always keep your will in a secure location, like a safe in your home or a safety deposit box where you bank. If a lawyer prepared your will, they would likely keep an original copy at their office. Finally, it would be best if you always informed family members or your executor where your will is stored, in case they need to retrieve it suddenly. No one benefits from a missing will.

Tips for Naming an Estate Representative

Your estate representative, or executor, is the person tasked with carrying out your final wishes, as listed in your will. That’s why you should name someone you trust and who is up to the job. Here are some other things to consider before naming your executor.

  • You can name more than one person as an executor.
  • Make sure your executor lives in a location that allows them to carry out their duties. For example, don’t ask your brother or sister who lives full-time in the US to manage your estate in Canada.
  • Consider family harmony when naming your executor. What are the chances that your choice will cause a rift in the family? While you can’t ultimately prevent disputes from happening, choose an executor who can communicate effectively with other family members.
  • You can appoint a lawyer or financial professional to act as your estate representative, which might come in handy if you are worried that naming a family member might cause a dispute. There is a cost involved, however.

What Is a Power of Attorney (POA)

A complete estate plan includes a power of attorney document, but ironically, it’s only good while you are alive. All POA documents become null and void as soon as the donor passes away.

When you appoint a person, or group of persons, to act as your power of attorney, you are giving them the authority to make financial and property decisions on your behalf, should you be unable to do so. Circumstances could range from travel outside of the country to an accident or illness that leaves you physically or mentally incapacitated.

Tips for Naming a Power of Attorney

Here are some best practices to follow when drafting a Power of Attorney document.

  • Inform the person you are naming as your POA to ensure they are willing and able to act in that capacity.
  • Consider whether you want to have one or more persons as your attorney. Each scenario has its pros and cons.
  • If your financial situation is complicated, i.e., you own a corporation, hold foreign property, or have an extensive investment portfolio, you may be better off paying a professional to act as your attorney. They have the expertise to deal with more complex financial matters.
  • Make sure your power of attorney document lists the restrictions, if any, you wish to impose on your attorney.
  • Review your power of attorney document from time to time to make sure it remains relevant and allows your attorney to act on your behalf appropriately.

What Is a Living Will?

A living will or medical directive is a legal document that outlines what end-of-life medical treatment you want to receive should you not be in a position to communicate with doctors. You can include instructions on pain management, organ donation, and the conditions under which you want to be kept alive.

Funeral Planning

Planning for your funeral is yet another component of a solid estate plan. There are a couple of ways you can do this. You can pay for your pre-pay for your funeral while you’re still alive and make arrangements for your funeral service.

Do you wish for your remains to be buried or cremated? What songs do you want to be sung at your funeral service, and who will deliver the eulogy? These are all things you can decide ahead of time, removing the guesswork from family members who will be grieving their loss.

Final Thoughts on Estate Plans

In my opinion, the most crucial aspects of an estate plan are your will and power of attorney. And while I haven’t touched on it in this article, life insurance policies are another important consideration.

If you don’t have either of these things in place, this is where you need to start. But before meeting with a lawyer or making an online will, I recommend that you sit down with your spouse or partner and make some of the big decisions: who gets what, who will your executor be, who will care for your children. You will feel much better once you do.

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