What Is Estate Planning?

Estate planning is the process of deciding how your assets will be managed and distributed after you die or become incapacitated. Without an estate plan, there’s no way to guarantee that your assets will be transferred to the people or organizations you select, or in the most tax-efficient way.

If you share assets or heirs with a spouse or significant other, it’s important to work together to manage estate planning for unmarried couples or for married couples.

Here are some things you should consider when it comes to planning your estate.

 

Understanding Estate Planning

With estate planning, you create legal documents that will communicate your wishes after your death.

Through proper estate planning, you can:

• Make sure your heirs receive your assets in a way that minimizes their tax burden.
• Protect children who are minors by designating a guardian.
• Document your wishes for your funeral and final resting place.

Estate plans might need to include some or all of these six important documents:

1. Will or trust. A will helps to ensure that property is distributed according to your wishes. A trust is a legal entity that can hold ownership of your assets and transfer them to beneficiaries after your death.
2. Durable power of attorney. A legal document that names the person you want to manage your finances and property if you become incapacitated.
3. Beneficiary designations. Many accounts, such as 401(k) retirement accounts and life insurance policies, can pass to your heirs without being included in your will—but you typically need to designate a beneficiary for this to happen.
4. Letter of intent. A letter of intent is a letter that you leave for your heir or executor, explaining your wishes for a particular asset, your funeral or other important directives.
5. Medical power of attorney. A document that names another individual who can make healthcare decisions for you in case you become incapacitated.
6. Guardianship designations. Couples who have minor children should consider designate a guardian for their child or children in case of their death.

 

Who Needs an Estate Plan?

Estate planning isn’t just for wealthy people; everyone has an estate and needs a plan for how it will be handled after they are gone. Building an estate plan is important for married, unmarried, and same-sex couples, as well as singles.

 

What Happens if You Do Not Have an Estate Plan?

If you don’t create your own estate plan, your assets might end up in probate court where a judge will decide how they will be distributed under state law. The probate judge might not make the same decisions you would make for your family, and probate costs may take up a significant portion of your estate.

The process will vary based on your state, as each state has its own probate laws. In California, for example, probate is notoriously lengthy and expensive.

In other words, failing to have an estate plan can be time consuming and expensive for your loved ones.

 

The Difference Between a Will and a Trust

A will only takes effect after you die, but a trust takes effect while you are living. A will goes through probate court to have your property transferred to your heirs, but assets held in a trust are distributed to beneficiaries in accordance with the trust documents without going through probate. And while a will becomes part of the public record, trusts are private.

 

The Estate Plan Process

Creating an estate plan doesn’t have to be difficult, but it does require time and reflection.

To get started, consider following these steps:

• List all your assets, including real estate, bank accounts, and insurance policies.
• List all your debts, including loans and credit cards.
• Make a copy of the lists for each beneficiary.
• Review your retirement accounts and make sure the appropriate beneficiaries are named.
• Review your insurance policies and annuities, and make sure beneficiary information is updated.
• If possible, convert bank accounts to joint accounts, as they will revert to the joint owner rather than going through the probate process upon your death. If you have accounts for which there is no joint owner, add a transfer on death designation (TOD) to ensure the account will transfer to the person you designate upon your death without probate.
• Work with a financial planner or estate planner to help you make financially optimized decisions and prepare legal documents appropriately. These documents should include a will, durable power of attorney, medical power of attorney, and letter of intent.
• Review your plans regularly and make changes as needed.

Writing your Will

Now that you have organized your assets, it is time to write a will. Your will should include your wishes for all financial assets, including sentimental items, as well as plans for minor children and pets.

Importantly, you need to meet with an attorney to make sure your plan is properly documented and is legally sound. You may also wish to include estate planners and wealth planners in the process to help you navigate the financial complexities of creating a will.

Appointing Your Executor & Granting Power of Attorney

Once you’ve outlined your wishes, you will want to appoint someone to execute your will and be responsible for the actions outlined by your will. This person is known as an executor, or the person who will take care of distributing your assets after your death.

You’ll also need to name an individual to whom you will grant power of attorney to make decisions in your stead in case you become incapacitated. You may choose to name one person for durable power of attorney, who will handle financial matters, and another person for medical power of attorney, who will handle healthcare matters.

Consider creating a living will at the same time as the documents mentioned above. In this document, you can provide specific instructions for treatments, pain management and other healthcare decisions to follow should you become incapacitated.

Creating a Revocable Trust

Even if you have a will in place, your estate may have to go through the probate process unless all your assets are set up to automatically transfer to another individual, such as through joint ownership or TOD designation.

Assets can also avoid probate if they are held in a trust. Many couples choose to create a trust to hold most of their assets because they can specify how assets in the trust will be distributed, and their heirs can avoid the probate process.

The most common type of trust is a revocable trust. This is a trust that is flexible, meaning you can change the terms of the trust or revoke the trust entirely at any time during your lifetime. In contrast, an irrevocable trust cannot be changed.

Speaking with an estate planner can help you decide what type of trust is best for your situation.