Why you should have an estate plan

Developing an estate plan can uncover issues that could surprise

No one likes to consider the prospect of his or her own demise. We all know such an event will occur, but we like to believe it will happen far in the future. While that may be true, there are varieties of calamities that may occur from traffic accidents to suffering a serious illness. We cannot plan for those events, but we can ensure that we have an estate plan in place before such an event happens.

In addition, it is important to remember why we create estate plans. It is not for us, but for our family and our children. By working through all of the details of an estate plan, and crossing our "t's" and dotting our "i's," we can ensure that our heirs receive the maximum benefit from our lifetime of earning and saving.

Lessen the burden on your family

We also lessen the burden and the complexity of the decisions they will have to make. This will provide a great comfort to them. Your estate plan should include your financial planning and deal with advance healthcare issues. A comprehensive estate plan also prevents confusion and the potential for disputes and hard feelings, which can deteriorate into will contests that benefit no one and waste the assets of the estate.

Developing an estate plan allows us to prevent what could otherwise be unforeseen and unfortunate tax consequences. It also can alert us to matters that could be better taken care of sooner rather than later.

If you will have a substantial estate that could approach the federal estate floor of $5.45 million this year, one strategy to reduce the size of the taxable estate is to gift away some of those assets every year. This can be a good way to transfer wealth to someone tax-free and will help reduce the size of your taxable estate.

Trusts and Roth IRAs

Trusts are very flexible legal instruments and they can be used for a variety of purposes, from reducing your taxable estate, because the trust and not you owns the assets of the trust to protecting your children. They can be especially useful if a child has special needs and will require lifetime care. A special needs trust can be created to ensure that they have the assets they need.

You also may need to convert some savings instruments that will have taxable distributions, such as a 401(k), into a Roth IRA, which has tax-free distributions. This may be necessary if you have sizeable 401(k) savings and those accounts will produce sufficient income that you may not receive any benefit of the typical lower tax bracket many experience in retirement.

The most important element of an estate plan is beginning one. Once created, it both provides clarity as to savings or investing strategies your need to undertake and when properly designed, allows the flexibility you may need as your situation evolves.