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- Estate planning directs how your assets get distributed if you die or are incapacitated.
- An estate plan checklist includes a will, powers of attorney, and account beneficiary designations.
- Using an estate planning lawyer ensures your plan meets all legal requirements and stays updated.
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It’s easy to see why estate planning is so often neglected – even by people who are financially savvy in other ways. Thinking about life after your death can be uncomfortable. However, it’s one of the most important things you can do.
Estate planning isn’t just for the ultra-wealthy, either. If you have property, investments, anything of value, you need an estate plan. If you have family or dependents of any kind, you need an estate plan.
Yet, only 32% of American adults have a will or other estate planning documents, according to Caring.com’s 2020 Estate Planning and Wills Study, because they simply haven’t gotten around to it or believe they don’t have enough assets. That hesitation can cause problems down the road.
No matter how much or how little you have, estate planning determines the future of your belongings, your money, and your family after you die. It can also ensure you have a say in who makes decisions about your health and finances while you’re still alive.
Here are the estate planning basics you need to know.
What is estate planning?
“Estate” is simply a fancy word for your stuff. So an estate plan inventories everything you have, from car to home, from bank accounts to life insurance policies. And then it outlines in writing what you want done with them. It becomes your voice beyond the grave, letting you direct who handles your affairs and inherits your assets.
The major elements of an estate plan state, clearly and definitively:
- Who gets what when you die
- Who should execute your wishes
- Who will handle your affairs if you become incapacitated
Why is estate planning important?
Suppose you pass away without a will, the most basic (and some would say, most important) estate-planning document. In that case, your assets can get tied up in probate, a time consuming and potentially costly legal process in which the court ensures your final debts are paid, and assets are distributed according to state law. It can also cause disagreements among your heirs as they fight over who gets what.
Then there are federal and state estate and inheritance taxes. Although they often target ultra-high-net-worth individuals, they can impact six-figure estates too, especially on the state level. There are ways to avoid these “death taxes,” ensuring your property passes onto your heirs without the government taking a big slice of it first. But you need an estate plan to execute these moves well in advance of your demise.
What are the basic documents for estate planning?
Many people think estate planning is essentially drafting a will. It’s a good start, but it is just one aspect of a comprehensive estate plan. Here’s an overview of the basic documents you need.
- Last will and testament. A will details where you want your assets to go after your death and names an executor who will ensure they get to the right people or charities. I can also specify whom you want to serve as guardian of your minor children.
- Durable power of attorney. A durable power of attorney designated someone to act on your behalf, legally and financially, if you’re unable to handle your own legal and financial matters. If you don’t have a durable power of attorney, your family members may not have the authority to sign checks, file tax returns, collect your government benefits, manage your investments and handle other financial transactions if you become incapacitated. They’ll have to ask a judge to appoint someone to manage these tasks, which can be time consuming and expensive.
- Health care power of attorney. A health care power of attorney appoints someone to make medical decisions on your behalf if you become incapacitated. This can include choosing which doctors treat you, deciding which tests to run, whether you should have surgery or certain medications or therapies.
- Living will. A living will provides instructions on the medical treatment you do and don’t want if you can’t communicate these decisions on your own. It relieves your family members from having to make difficult decisions about your care if you are terminally ill, in the late stages of dementia, seriously injured, in a coma, or near the end of your life. It can address things like the lengths medical professionals should go through to keep you alive, pain management, and organ donation.
- Beneficiary designations. When you purchase a life insurance policy or open a retirement account, you’re typically asked to complete a beneficiary designation form. This form names the person or persons who will inherit the proceeds when you die. Beneficiary designations override any instructions for these accounts set out in your will, so it’s important to review and update them regularly to ensure they’re distribution upon your death matches your intent.
Other important documents for an estate plan
Some other estate planning documents can come in handy, depending on your circumstances.
- Living trust. A living trust can work as a tool for avoiding the probate process – that is, filing a will. You set up the trust, and place the assets you want to bequeath inside it. When you die, the trust distributes the assets as per your wishes. If you have a lot of assets, a trust can help you and your heirs avoid estate and inheritance taxes.
- Digital asset protection trust. What happens to your e-mail accounts, text messages, cloud-based storage accounts, websites, and social media accounts when you die? You can’t give them away in your will because these digital assets may not be solely owned by you but by a tech company. A digital asset protection trust can help you legally transfer domain names, social media accounts and other digital assets to your heirs upon your death.
- Letter of intent. You may want to leave information or instructions that don’t belong in a will for your heirs. This is where a letter of intent comes in handy. You can leave funeral and burial instructions, details about financial accounts, contact information for your attorney and financial advisors, where your executor can find titles, deeds, tax returns, birth certificates, and other important records. A letter of intent doesn’t carry the legal weight of a will, but it can be helpful to your loved ones.
What are the main steps in estate planning?
OK, you have a sense of what an estate plan entails, paperwork-wise. How do you go about creating those documents, and going about estate planning in general? Here are the three fundamental steps to get you started creating an estate plan that addresses your needs and wishes.
1. Get help from an estate planning attorney
Creating an estate plan may seem like a daunting task, but you don’t have to handle it all on your own. In fact, estate planning should never be a DIY project.
But if you want it done properly, you need to call in a pro.
While you can find a lot of information and fill-in-the-blank estate planning forms online, trying to save a few hundred dollars in up-front costs can end up costing your heirs thousands later on. That’s because most states have very specific requirements that must be met for your will and other estate planning documents to be valid. If these requirements aren’t met, if the language isn’t correct or the wording is imprecise, your instructions could be thrown out and your affairs handled according to state law.
That’s why it’s important to work with a qualified attorney or financial planner to create your estate plan. If you don’t already have someone to help you, ask friends, family members, or other financial professionals you work with for a referral.
An estate planning attorney, also known as a trust and estates lawyer, also stays up to date with changes in tax laws and other legislation that could affect your assets and how you dispose of them. Working with other professionals, like accountants and money managers, they can help you develop estate-planning strategies. And also ensure your plan is reviewed regularly.
2. Identify guardians for minor children
If you have minor children, part of the estate planning process involves selecting one or more guardians for those children. If you don’t name a guardian, the court will decide who will raise your children, and you can’t assume the judge will automatically appoint the person you think would be the best choice.
When selecting guardians, many people get hung up on timing. For example, a grandparent might be a good guardian for their toddler right now but might not be the best option a decade later, when the child is a teenager. However, your guardian selection isn’t set in stone. Think about who would be the best person if something happens to you in the next two to three years. You can select new guardians at any time as circumstances change.
3. Take inventory of what you own and owe
Make a list of your assets and debts, including your financial institutions’ names, account numbers, and names of contacts there. Keep this list, along with copies of your will and other important estate planning documents in a secure location. You might also want to give a copy to the executor named in your will or make sure they know where to find them in case anything happens to you.
The financial takeaway
Estate planning is an important step in ensuring your legal and financial affairs will be handled when you die. It also makes life easier for your loved ones by drastically reducing the stress, expense, and red tape involved in handling your estate.
Drafting a will is just one component of an estate plan. If properly done, a comprehensive plan includes plenty of others, including powers of attorney, health directives, and beneficiary designations for your bank and brokerage accounts.
It might feel overwhelming to handle all of these tasks. You don’t have to handle estate planning on your own – in fact, you shouldn’t. With the help of a qualified estate planning lawyer, and other financial professionals, the process can be a lot more manageable.
It probably won’t be the most pleasant project. Contemplating your own mortality never is. But a comprehensive estate plan can at least provide peace of mind.