An estate is a legal entity formed at the time of an individual’s (“decedent’s”) death and consists of all assets. Essentially, an estate equates to an individual’s net worth, which is distributed upon a person’s death. This includes, but is not limited to personal property, real estate, motor vehicles, boats, cash, and other items of value owned by the decedent.
Every adult should plan to do some level of estate planning. Not creating a plan leaves children and/or other beneficiaries facing many problems after a death, including legal hurdles, stress, extra costs, and other complications while simultaneously dealing with their grief.
In this article, we’ll define estate planning, discuss what components you should consider, and steps to take. We’ll also explain how to obtain an employer identification number (EIN) for your estate, so its financial affairs can more easily be put in order.
What is Estate Planning?
Estate planning is assembling all of your assets, outlining your wishes, specifying your directives, naming your heirs, and pulling it all together into a comprehensive plan.
It is common for people to believe only the wealthy need to do estate planning, but this is a fallacy. While a wealthy person’s estate planning might be more complex due to having numerous assets and holdings, almost everyone owns at least some belongings or valuable items they want to leave behind for their loved ones.
Additionally, all individuals should plan to outline their medical directives/wishes. No one likes to think about it, but it’s important to prepare for the possibility of incapacitation from an unexpected injury or illness. Parents will also want to designate chosen guardians for their minor children to ensure they are raised by someone they trust and who will follow their parenting preferences.
Documents typically included in an estate plan include wills, trusts, insurance policies, power of attorneys (POW), healthcare directives, guardianships, and other components. Once complete, your estate plan will make it clearly known how you want your estate handled in the event of your death or incapacitation.
Generally speaking, by age 30, you should at least have a basic plan. Although, you can start as soon as you turn 18 to, at a minimum, stipulate your healthcare directives. You definitely want to have your estate plan in place as you approach your 50s.
Create an Inventory of Assets
One of the first steps you’ll want to take in the process is to create an inventory of your assets, including any tangible and intangible assets.
When planning your estate, think about the types of assets you own, such as homes, land and other real estate holdings, ownership in a business, motor vehicles, boats, motorcycles, cash, bank accounts, retirement accounts, investments, jewelry, coin or stamp collections, art, clothing, ownership in a business, and anything else you own.
It may sound strange, but you also need to list liabilities and debts in your asset inventory. This is because any money you owe will need to be repaid by your estate at some point, even after your death. Having debts and liabilities already identified helps make things easier for your estate’s executor or administrator. This way, they can speed up the process and quickly settle debts before distributing assets to beneficiaries.
Plan for Familial Needs
After you identify items in your asset inventory, you’ll want to think about how to protect them so you can establish a plan to take care of your family after you’re no longer here to do so. To make a plan for familial needs, individuals want to:
● Create their wills
● Establish trusts (be sure to learn about irrevocable, revocable, and all the other different types of trusts)
● Buy a life insurance policy with sufficient funds
● Designate guardians for any minor children (and a backup guardian)
● Make arrangements for any adult special needs children or other relatives being cared for
● Establish a healthcare directive (also known as a “living will”)
● Prepare financial directives to be carried out
● Write out any other special directives
● Select medical and financial power of attorneys (this can be one person or separate individuals)
You might also want to consider consulting with a professional financial planner or attorney to help you plan for your familial needs. This way, you ensure you don’t miss any important details, so your family is well cared for after you’re gone.
Double-Check Your Beneficiaries
Once you have all of your estate planning documents in place, you want to take time to carefully review your beneficiaries to ensure you didn’t inadvertently overlook anyone in your will or trusts.
● Ensure your heirs’ names are properly spelled
● Clearly outline which assets will go to which beneficiary
● Ideally, you want to be very specific, so there is no confusion or conflict when your assets are being distributed.
In addition to your estate plan, you should re-check the individuals you have listed as beneficiaries on your bank accounts, insurance policies, retirement accounts, and any other relevant accounts. You also want to select contingent beneficiaries to inherit specific assets in the event your primary beneficiaries predecease you, and you did not have the chance to update.
Finally, be sure all beneficiary sections are filled in, leaving no spaces left blank in your account paperwork or online profile. If your beneficiaries are not selected, the state will be the entity most likely choosing them during probate. This decision may not be in alignment with your preferences, so be sure you select yourself.
Routinely Review Estate Plans
Remember, life circumstances often change. You might get married, go through a divorce, remarry, or have more children. Take the time to make certain the people you want to take care of after you’re gone are the ones actually listed in your documents and on your accounts.
When beneficiaries are outdated, this can lead to bad feelings and conflict. For instance, if you had a first marriage, but later divorced and neglected to remove your ex-spouse when you remarried someone else, your first spouse would be the beneficiary while your new spouse would not receive any assets or insurance policy money. This is likely not what your wishes would be, so be sure to review everything periodically.
Additionally, as other major life events happen, such as having more children, adopting children, losing a loved one, getting a new job, losing a job, or other changes occur, you will want to review your estate plan.
While you don’t need to check your estate plan monthly, plan to reassess your plans when life changes or at least every 3-5 years. If necessary, revise your plan to accommodate your current situation and ensure everything is up-to-date. Keep in mind, even if your life circumstances do not change, state laws might be added or altered, which might affect your legacy wishes.
Remember to Obtain an EIN for Your Estate
No one wants to think or discuss their mortality, but it’s best to be proactive to preserve your legacy. Upon your death, your estate will become a legal entity, which means it’ll owe taxes and have other obligations.
An important task you can take care of ahead of time if your estate is worth more than $600 is obtaining a tax ID. Also referred to as an “EIN” (employer identification number), an estate needs this number in place to meet legal requirements, along with streamlining the process for your executor and heirs.
An EIN empowers the estate’s executor, administrator, or personal representative to open a separate bank account for your estate so they can assemble assets and pay off any debts or expenses when settling the estate. The tax ID is also required to file a tax return for the estate.
How to Obtain an Estate EIN
To obtain an EIN for an estate, you must file SS-4 “Application for Employer Identification Number” online, by fax, via USPS, or by having the assistance of a professional. Information to include is as follows:
● Decedent’s (yours) first, middle (optional), and last name
○ Note: Be sure your name is an exact match to the IRS and Social Security Administration’s files
● Name of executor/administrator (or personal representative
○ First, middle (optional), and last name
○ Full address (no PO boxes permitted)
○ Social Security number
● The date the estate was established and funded
● Address of the estate
○ Note: if the address changes, submit Form 8822 to update
This can be done after your death, but obtaining an employer identification number for the estate makes things easier for the individual handling your assets.
Estate Planning is an Important Task
Mortality and incapacitation are two difficult topics to think about, but doing so is necessary. Due to this, many people find estate planning to be stressful, complex, and/or an overwhelming set of tasks. As a result, it is common for individuals to procrastinate or inadvertently miss important steps.
Starting early helps to ensure important details aren’t overlooked. For instance, having a will, trusts, insurance, and the EIN in place will help to make certain your final wishes are properly carried out.