01Step #1 - Calculate Your Net Worth
The very first step in building a good estate plan is to determine your net worth. It's relatively easy to make a quick calculation of your net worth by adding up rough estimates of the values of all of your assets - including bank and investment accounts, personal property (jewelry, collectibles, cars, boats), retirement plans (401ks, IRAs), death benefit of life insurance, business interests, monies owed to you, oil and mineral rights, and real estate - and then subtracting from this total all of your liabilities - including credit card debt, car and other personal loans, and mortgages:
Once you've calculated your net worth, you will need to figure out if your estate will be liable for federal estate taxes. You will also need to know if your state assesses its own separate estate tax and/or inheritance tax:
- Overview of Current Federal Estate Tax Laws
- How to Calculate the Gross Value of Your Estate
- What Value of an Asset is Used for Estate Tax Purposes?
- How to Calculate Your Estate Tax Liability
- Which States Still Collect a State Estate Tax?
- State Estate Tax and Exemption Chart
- Which States Collect an Inheritance Tax?
- State Inheritance Tax Chart
- Understanding the State Estate Tax Exemption Trap
Even if you have determined that your estate won't owe any federal estate taxes, your estate may very well owe state estate taxes and/or inheritance taxes since most of the state estate tax and inheritance tax exemptions are much lower than the federal exemption. There are also many other financial reasons why you will need an estate plan aside from estate tax issues. Aside from this, your personal situation should be examined to determine if you need an estate plan to take care of you if you become incapacitated and your family after you die.
02Step #2 - Assess Your Financial and Family Needs for an Estate Plan
Even if the value of your estate isn't near the state and/or federal estate tax limits, you will still need to look at other financial reasons why you will need an estate plan. Probate can be very expensive and time-consuming in many states, and yet it's really easy to avoid. Aside from this, if you own one or more businesses, have significant retirement assets, or will be expecting a large inheritance, then you will need an estate plan to ensure that your property (1) can be managed by someone of your choice in case you become incapacitated, and (2) goes where you want it to go without any interference from a probate judge:
- What is Probate?
- How Much Does Probate Cost?
- How Long Does Probate Take?
- 4 Easy Ways to Avoid Probate
- Estate Planning for Your Financial Situation
- How to Plan for Exiting Your Business if You Become Disabled or Die
And, regardless of your net worth, you will still need to assess your overall need for an estate plan by looking at your family situation. If you have minor children or a blended family, or if you're single, or if you own homes in two different states, then you will still need an estate plan to ensure that your assets (1) can be managed by someone of your choice in case you become incapacitated, and (2) go where you want them to go and without any interference from a probate judge:
- Top 5 Reasons for Estate Planning
- Estate Planning for Your Family Situation
- You're Young, Do You Need an Estate Plan?
Once you determine your overall need for an estate plan, be it for financial or family reasons, or both, the next step is to find and hire a qualified estate planning attorney to help you create your estate plan.
03Step #3 - Find and Hire a Qualified Estate Planning Attorney
Estate planning is complicated enough without trying to go it alone. You will need the help of an experienced estate planning attorney to walk you through all of the choices that you will need to make in creating a good estate plan that will actually work for you and your loved ones when it's needed.
Remember the old saying, "You get what you pay for?" Do-it-yourself, homemade wills are a bad idea because one wrong or missing word can change the entire meaning of a Last Will and Testament or Revocable Living Trust or invalidate the entire estate plan, and not observing the appropriate formalities when signing your estate planning documents can also invalidate them. Aside from this, the laws vary greatly from state to state with regard to the form and function of estate planning documents:
The only way to insure that a Last Will and Testament, Revocable Living Trust, or other legal estate planning document will work when it's needed is to find and hire a qualified estate planning attorney:
- What is an Estate Planning Attorney?
- Do You Need to Hire an Estate Planning Attorney?
- 7 Tips for Finding an Estate Planning Attorney
- 6 Questions to Ask a Prospective Estate Planning Attorney
- Are Your Estate Planning Attorney's Fees Reasonable?
Note that if you work with a team of professional advisors, such as an accountant, banker, insurance agent, and/or financial advisor, then this is the point in the estate planning process to get them involved:
- The Team Approach to Estate Planning
Once you've located and hired a qualified estate planning attorney, the next step is to create your estate plan. This consists of determining if you need a will-based or trust-based estate plan and then creating a plan for what happens in case you become mentally incapacitated as well what happens after you die.
04Step #4 - Determine if You Need a Will or a Revocable Living Trust
Once you've hired an experienced estate planning attorney, the next step is to determine if you need to go beyond a simple Last Will and Testament and set up a Revocable Living Trust. With the help of your estate planning attorney, you will be able to weigh the pros and cons of using a Revocable Living Trust in your particular situation:
- What is a Last Will and Testament?
- What is a Revocable Living Trust?
- Wills vs. Revocable Living Trusts - What Do You Need?
- Do You Really Need a Revocable Living Trust?
- How Does a Revocable Living Trust Avoid Probate?
- Pros and Cons of Revocable Living Trusts
- Benefits of a Revocable Living Trust
- Revocable Trust Myths
- How to Keep Your Estate Plan Private
Once you've determined if you're going to incorporate a Revocable Living Trust into your estate plan, you will need to create a plan for what will happen to you and your property if you become mentally incapacitated.
05Step #5 - Create a Plan for What Happens if You Become Mentally Incapacitated
Disability planning is an important part of any estate plan, and yet it's often given less attention than planning for what happens after someone dies. Without a good disability plan, your assets may end up in a court-supervised guardianship or conservatorship and, in turn, your loved ones will lose control of you and your property:
- What Happens if You Don't Have a Disability Plan?
- What is Guardianship or Conservatorship?
- How to Avoid Guardianship or Conservatorship
- How Much Does Guardianship or Conservatorship Cost?
- What Does a Guardian or Conservator Do?
- Essential Documents for Disability Planning
- How Does a Revocable Living Trust Avoid Guardianship or Conservatorship?
Once you've designed a good disability plan that will keep you and your property away from a court-supervised guardianship or conservatorship, the next step is to create a plan for what happens to your loved ones and your property after you die.
06Step #6 - Create a Plan for What Happens After You Die
Once you've designed a good disability plan, the next step is to create a plan for what happens after you die. This will include deciding who will inherit what and when they'll get it. Only you can decide if you want to leave your estate to family, friends, and/or charity. Once you decide who, you will need to make a plan for when they'll get it.
Aside from this, if you're married, then you will need to understand the elective share laws or community property laws of your state regarding how much your spouse is entitled to inherit because in 49 states and the District of Columbia you can't completely disinherit your spouse unless he or she waives all inheritance rights in a prenuptial or postnuptial agreement (Georgia is the only state that doesn't have an elective share law). In addition, you and your attorney will need to determine if estate tax planning should be part of your plan through the use of AB Trusts or ABC Trusts:
- How to Make a Plan for Your Personal Effects
- What Are the Options for Paying Minor Beneficiaries Their Inheritance?
- What Are the Options for Paying Adult Beneficiaries Their Inheritance?
- Benefits of Creating Lifetime Trusts for Your Spouse and Other Beneficiaries
- Can You Disinherit Your Spouse?
- What is Community Property?
- Can You Disinherit Your Children?
- What is an AB Trust?
- What is an ABC Trust?
You will also need to think about your funeral arrangements (burial or cremation?) and make a plan for where the cash will come from to pay your final expenses, including the estate tax bill if your estate is taxable at the federal and/or state levels:
- 4 Tips for Making Your Funeral Wishes Known to Your Loved Ones
- Needs and Uses of Life Insurance in Estate Planning
- What is an Irrevocable Life Insurance Trust?
- Which of Your Beneficiaries Will Bear the Estate Tax Burden?
- Where Will the Cash Come From to Pay Your Estate Tax Bill?
- Who is Responsible for Paying a Deceased Person's Bills?
Once your disability and death plans are in place, you will need to decide who to put in charge of carrying out your wishes.
07Step #7 - Choose Your Fiduciaries Wisely
As part of putting your estate plan together, you will not only need to decide what should happen to you and your property if you become disabled and what should happen to your property after you die, you will also need to decide who should be in charge of carrying out your wishes.
Selecting the right people as your estate planning fiduciaries is probably more important than deciding who gets what and when they'll get it. Why? Because if the people you've chosen don't want to or simply can't serve, or if the people you've chosen do a bad job, then your beneficiaries will be unhappy and important decisions will be left up to a judge. In other words, all of that good money that you spent on your estate plan will have been wasted. It is also important to note that you can choose different people or institutions to fill different roles and multiple people or institutions to serve together, such as two people and an institution to manage finances and one person to make health care decisions:
- What is a Fiduciary?
- Pros and Cons of Appointing Co-Fiduciaries
- Pros and Cons of Appointing Institutional Fiduciaries
- How to Choose a Personal Representative for Your Will
- How to Choose a Guardian for Your Kids
- How to Choose a Successor Trustee for Your Revocable Trust
- How to Choose a Health Care Agent for Your Advance Medical Directive
Once you have your foundational estate plan in place, including a disability plan, a death plan, and who will be in charge of carrying out your wishes, the next step will be to determine if you need any advanced estate planning.
08Step #8 - Assess Your Need for Advanced Estate Planning
Once you've created a good foundational estate plan to take care of you and your property if you become mentally incapacitated and to take care of your loved ones after you die, you will need to determine if you need any advanced estate planning.
Sometimes your estate planning attorney will integrate advanced planning with the foundational estate plan, but I've found that many people are so overwhelmed by the initial estate planning process that they can't even begin to focus on advanced planning. If this happens to you, then you will need to come back to your attorney to discuss your need for advanced estate planning to protect your assets, reduce your estate tax bill, meet your charitable goals, and/or create a lasting family legacy:
- What is Advanced Estate Planning?
- What is Asset Protection?
- How to Plan for Exiting Your Business if You Become Disabled or Die
Once you have your foundational estate plan in place and your need for advanced estate planning has been addressed, if your foundational estate plan includes a Revocable Living Trust, then you will need to fund your property into the trust.
09Step #9 - Fund Your Revocable Living Trust
If you've made it this far and decided to use a Revocable Living Trust as the foundation of your estate plan, then you will need to get your assets titled into the name of your trust and update the beneficiaries of your life insurance policies and retirement accounts to coincide with the provisions of your trust. If you don't do this very important step, then all of the hard work that you put into the first eight steps will have been for nothing:
- What Does it Mean to Fund a Trust?
- What Are the Procedures for Funding a Trust?
- What Happens to Assets Left Out of Your Trust?
- How to Fund Bank and Investment Accounts
- How to Fund Personal Effects
- How to Fund Real Estate
- How to Update Beneficiaries of Life Insurance Policies
- How to Update Beneficiaries of IRAs and 401ks
- How to Update Beneficiaries of Health and Medical Savings Accounts
Once your trust is funded, which realistically could take a few weeks to several months to complete, unfortunately, you won't be completely done with your estate plan. Why? Because day in and day out things will happen to you and your loved ones that will have a direct impact on your estate plan, and so you will need to keep on top of your plan to ensure that it will still work the way you expect it to work as the years go by.
10Step #10 - Review and Update Your Estate Plan
Once you've completed steps 1-9, unfortunately, you won't be done with your estate plan. Why? Because things will happen day in and day out that will have a direct impact on your estate plan. In other words, the estate plan that you create today will be the perfect plan for you and your loved ones at this given point in your lives. But next week, or next month, or next year your life will go through a multitude of experiences, both good and bad, that will make today's perfect estate plan not so perfect tomorrow.
For example, you could get married or divorced; have or adopt children; buy or sell a business; retire; move across the state or country; win the lottery; lose your spouse or other loved one due to an illness or injury or inherit a small fortune from a family member or friend. Aside from this, both state and federal estate and gift tax laws can and will change. All of these things will have a direct impact on your estate plan, and so you will need to keep on top of these things in order to keep your estate plan up to date so that it will continue to work as you expect it to work as the years go by:
- How Often Should You Review Your Estate Plan?
- 6 Reasons to Update Your Estate Plan
- Will Your Estate Plan Work When It's Needed?
- Will Your Old Estate Plan Still Work Today?
Don't be lulled into a false sense of security once your initial estate plan is in place. Estate planning is a life long process, not a one shot deal, and your plan needs to change as your life and the laws change:
Be sure to review and update your estate plan yearly, every few years, or on a more frequent basis - as often as you and your estate planning attorney determine is appropriate for your situation - otherwise your perfect estate plan for today will only be worth the paper it's written on tomorrow.