No matter what stage of life you're in, estate planning is a very important consideration. And it takes on even greater significance as you face life-changing events, such as getting married, starting a family, buying a home, getting divorced, and remarrying.
The IRS has not made estate planning easy to understand, but we'll try and break it down into bite-sized pieces. Estate taxes are separate from income taxes and gift taxes. Estate taxes apply upon death; income taxes and gift taxes typically apply during your lifetime (although they can apply upon death in certain instances).
Depending on the size of your estate, you may owe estate taxes. Remember, your estate includes your personal property (cars, clothes, art, etc), your financial assets—checking, savings, investment accounts, 401(k), life insurance proceeds—essentially everything that has your name on it.
A trust may be a living trust, a family trust, or a revocable trust. There are two key reasons that apply to most families for setting up a living trust:
- To avoid probate
- To take advantage of estate tax exemptions that are available (although this can be accomplished in your will as well)
A trust is just one of many estate-planning documents you should consider. There are other advanced estate planning strategies that you can implement, but for starters, you should at least consider the documents below.
- A Will
- A Living Trust
- Guardianship for minor children
- A Financial Power of Attorney
- A Health Care Power of Attorney
You can either hire an attorney—and expect to pay approx. $1,000-$2,500 depending on the complexity of your estate planning documents—or you can purchase do-it-yourself software from various providers, which will cost you significantly less. But, if you decide to take this second option, make sure you're familiar with estate tax laws and that you fully understand what exactly you're implementing.