Estate Planning Essentials

Have a plan for your assets after you’re gone

 An older couple sits on the couch having a discussion.
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Estate planning can give you control over your legacy while offering privacy and security. No matter if you’re rich, poor, young, old, or anything in between, having a well-developed plan for what happens to your assets can give you peace of mind that your loved ones will have financial security no matter what happens to you.

The most successful estate plans factor in several considerations. For example, they might include name who inherits your retirement accounts provide directives for your medical treatment if you become incapacitated.

Learn more about essential strategies to keep in mind when you develop an estate plan. That way, you can shape your documents to meet your goals and provide for your loved ones in the way you want.

Key Takeaways

  • An estate plan can give you peace of mind that your loved ones will have financial security after your death.
  • Estate planning can address who controls your finances and makes medical decisions when you’re injured or ill.
  • Consult an estate planning attorney to review what documents you need to develop your estate plan and help prepare documents for you.
  • Once you make an estate plan, notifying your loved ones about any responsibilities they may have as a result.

Why Is Estate Planning Important?

An estate plan is vital to helping you use your assets to provide for your loved ones in the event of your death or incapacity. When you don’t have an estate plan, financial decisions about your money, medical care and other issues may not be made in the way you would like. Not having a plan can cause a burden on your friends and family, especially if they have to manage your finances without knowing your wishes.

Consulting with an estate planning attorney can help you get the most out of your estate plan by ensuring you complete the correct documents.

Death

You may not want to think about your death, but it’s practical to set a plan in place to prepare for it. A will is one common tool used to specify where your wealth goes after you die. If you don’t create a will, your state’s laws dictate what happens to your assets along with other decisions, and the results might not match your wishes.

For example, you may want to pass your assets on to people outside your family, or you might want to name specific guardians to care for minor children.

Incapacity

An estate plan can also ensure someone can make the financial decisions for you if you’re unable to manage your finances because you’re injured or sick. For example, you might become unconscious, be medicated, or simply lack the energy to communicate or take action. Without help, your bills may go unpaid or insurance policies can lapse.

Who Is Estate Planning For?

It’s a common misconception that estate planning is for rich people and those with children. “Estate planning is for everyone,” Pam Horack, CFP and founder of Pathfinder Planning, told The Balance in an email.

Horack said people of any income and single people also need to establish plans for what happens to their estate when they die or become incapacitated.

“If you are single, you need to designate beneficiaries for your accounts and [perhaps] name someone to care for your dog,” Horack said. “If you are married with a family, this is the only place you can designate your best friend rather than your brother to take care of your children.”

An empty nester may want to leave specific items to their nieces or nephews instead of their children. Or an aging senior may want to leave money to their church.

An estate plan can dictate what happens with online accounts such as social media accounts, websites you own, email accounts, or other digital assets.

Estate Plan Essentials

An estate plan prepares you to deal with some of life’s most challenging situations. “The plan is the detail of what happens to your money and property when you are gone,” Horack said.

The list of essentials below are some of the most common factors that shape estate plans. Depending on your financial situation, you might not need to include them all; or other strategies not listed here might make better sense for you. Again, discuss your goals with an estate planning attorney.

Last Will and Testament

A will, a common foundation of an estate plan, is a legal document that provides instructions for handling assets in your estate after death. Your will can name who will receive cash, investments, homes, vehicles, valuables, and other items.

A will does not necessarily address all your assets. For example, if you name a beneficiary on a retirement account or a life insurance policy, the will does not dictate who receives those funds—the beneficiary designation does.

Wills can accomplish more than distributing property. For example, a will might:

  • Name an executor or personal representative to handle your estate
  • Designate guardians for minor children
  • Establish and fund trusts

Once the will is drafted, tell someone you trust where to find your estate planning documents.

Trusts

A trust is a legal arrangement in which a trustee holds assets for a grantor for the benefit of a beneficiary. So instead of holding assets in your name, you can hold them in a trust. Trusts are helpful for estate planning because they can help keep your assets out of probate, which can be a time-consuming and expensive process. A trust can also set detailed rules on when and how beneficiaries receive their inheritance.

Not everyone needs a trust, but they can be especially useful in complicated situations, Jeff McDermott, CFP and founder of Create Wealth Financial Planning, told The Balance in an email.

“Trusts can also handle special situations, like a beneficiary with special needs or a beneficiary with poor money habits that needs conditions around their access to inheritance,” McDermott said.

A trust can enable someone else to manage your finances if you’re incapacitated. By naming a successor trustee, you allow that person to act on your behalf. A successor trustee can pay your bills and manage your accounts.

Finally, trusts can provide privacy. A will is a public document after it’s filed with the court. Likewise, if you’re incapacitated, anyone who wants to manage your affairs must go through the courts to get control of your assets. In contrast, a trust can eliminate the need to create public records.

Insurance Protection

Life insurance can play a key role in estate planning. A life insurance policy often pays a tax-free death benefit to beneficiaries, and the death benefit might be substantial. Those funds can replace the deceased’s income, pay off debt, ensure that children can afford education, and more.

“Determining how much life insurance you need to replace your income if you pass away is an important part of the estate planning process,” McDermott said.

An insurance agent or a financial planner can help you determine how much insurance you need and what types of policies may be appropriate.

Financial Power of Attorney

A power of attorney (POA) is a legal document that gives someone the right to manage legal and financial affairs for you. They can pay bills and invest money on your behalf in a variety of situations.

You might want a POA in your estate plan to empower someone to make major life decisions, including about your health care or finances, when you can’t.

Health Care Directives

A thorough estate plan includes a specific plan for getting you the treatment that you would want when you’re unable to make or communicate decisions, no matter how old you are. Without proper health care directives, you might not get the treatment you’d like.

You can either articulate your heath care wishes in a written document or assign someone to make decisions for you.

  • Living will: This is a legal document that states your medical treatment preferences. For example, you might specify that you do not want to be kept alive via a feeding tube. Depending on your state, these documents may be called “advanced care directives” or “medical directives.”
  • Health care proxy: This is a person you authorize to make medical decisions for you. So, for example, a person you assigned as a heath care proxy could direct a doctor not to use a feeding tube on your behalf.

If you assign a health care proxy in your estate plan, make sure they are aware of their responsibility. Discuss your health care treatment preferences with them as soon as possible so they understand the treatment choices you’d want.

Beneficiary Designations

With financial accounts such as IRAs and 401(k)s as well as with life insurance policies, you can designate a beneficiary to receive your assets after your death. This way, funds can pass to your beneficiaries without going through the probate process. The result is a relatively fast and easy transfer of assets after death.

Beneficiary designations on things such as retirement accounts supersede any instructions in your will or trust. That’s because assets that go to a designated beneficiary generally do not become part of your estate or trust. They go directly to the beneficiary.

Once you choose your designated beneficiaries, periodically review your choices to make sure they remain your preferences. “I usually ask clients to verify beneficiaries once a year and revisit the full estate plan with their attorney every five years or so,” McDermott said.

Make a Plan for Your Assets

By considering the common essentials as you shape your estate plan, you can better reduce the financial and emotional impact of your death or incapacity on your loved ones.

Once you establish the right estate plan for you, review and update it periodically. Life events such as births, deaths, marriages, divorces, or changing health issues can affect your goals and priorities.

Horack recommended revising your state plan every five years to make sure they continue to align with your goals. “Your finances, health, or family status may change dramatically in this time frame,” Horack said. “Also, states update laws and federal tax rules are amended. … Be sure your documents reflect these changes.”

Frequently Asked Questions (FAQs)

What is the role of an executor in estate planning?

An executor, also known as a personal representative, administers an estate after someone dies. That person follows instructions in the will (and state laws) to pay bills, file taxes, sell property, distribute assets, and more.

How much does estate planning cost?

A standard estate plan can cost anywhere from a few hundred dollars to several thousand dollars. Online services are the least-expensive option, but they’re not customized to your needs. You might save money if your employer offers a legal benefit program that includes estate planning. Consult with an attorney to review the most cost-effective options for your situation.

What documents do you need for estate planning?

Some of the most common documents include a last will and testament, power of attorney, living will, and health care proxy. Some people also need one or more trusts. Insurance policies could also have a place in your estate plan. The specific documents required depend on your circumstances.