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Estate planning isn’t something that people tend to give a lot of thought to, but it’s an essential part of financial planning. Although many people think estate planning is just for “wealthy folks,” it’s actually for everyone. The fact is that life is unpredictable, and your loved ones will be glad if the unthinkable happens and you spent the time and effort in advance.
A survey found the majority of respondents believed estate planning was important, but only one-quarter had taken any action. If you pass without an estate plan, chances are the state may determine the disposition of your assets, and it may not do what you would have wanted.
What Are Things to Consider?
Here are some things to consider about estate planning:
You Have Flexibility
Many people put off estate planning because they’re not sure of everything yet. But remember that nothing is set in stone; you can change your will and other documents as circumstances or your preferences change. Many times it’s better to get a plan out there and revise it later than to wait for the “perfect time.”
Review Your Beneficiaries
You may already have a will from years ago. Is it still up to date? You may also have multiple bank accounts, investment accounts, and life insurance policies. Are the beneficiaries still who you want? If not, schedule time to update those. Otherwise, your beneficiaries may have to go through a lengthy and expensive probate process that could easily have been avoided with a little proper planning on your part.
Consult a Professional
There are DIY websites and software products that make it tempting to go it alone. But estate planning laws and documents can be complex, and if you try to do it on your own, there’s a good chance that you won’t be doing what you think you are, or that the forms you created won’t be accepted by the courts. Furthermore, the laws vary between states. An estate planning professional can help you navigate the legalities.
They can also help ensure there are no gaps in your plan. Estate planners are trained to consider various scenarios and to help ensure every eventuality is covered. What if your beneficiary is no longer available – is there a contingent beneficiary? What if someone is alive, but incapacitated? The law is different in each situation.
An estate planning attorney or advisor can also help you streamline the planning process. Looking at everything you need to do at once can seem overwhelming. A pro can help you go through the steps in a logical order.
Take your time when choosing an estate planning consultant. They need to understand your family dynamics and your preferences, and not try to fit you in a mold. Every family’s situation is different, and to properly document your wishes, the professional needs to take the time to get to know your family’s circumstances.
What is in an Estate Plan?
An estate plan typically includes these documents:
- A will or trust
- Power of attorney
- Advance healthcare directive
- Medical power of attorney
An advance healthcare directive and medical power of attorney together make up what is sometimes called a living will.
If you own a business, you will also need a business succession plan. Without a business succession plan, in the event you become incapacitated, your business could lose its ability to pay employees, vendors, and creditors, leading to legal fees and penalties. Yet a survey found that fewer than 25% of private companies reported having a formal succession plan in place.
Will vs. Trust
A will is a legal document that specifies how your assets are to be distributed to beneficiaries after you pass. It may also specify other things, such as who becomes the guardian of your minor children and the disposition of your remains. A trust is a document that transfers the assets that you select to a trust account while you are alive, to be managed by another person called a trustee. You can have a will, a trust, or both, depending on your situation and needs.
Advantages and Disadvantages of a Will
The advantages of a will are:
- It’s simple to create and update
- You can specify the disposition of your assets and beneficiaries in as much detail as you want
The disadvantages of a will are:
- Your beneficiaries still have to go through probate, which can take weeks or months
- Your assets are subject to estate taxes
Advantages and Disadvantages of a Trust
The advantages of a trust are:
- Avoids the probate process – assets pass directly to your beneficiaries
- The trustee can manage your assets on behalf of your beneficiaries if you become incapacitated
- Gives you more control over when and how your assets are distributed – for example, you can hold an inheritance until a beneficiary turns 21
The main disadvantage of a trust is that it’s more complex and expensive to create and maintain than a will. You also need to review and update the trust annually.
Trusts can be revocable or irrevocable. A revocable trust can be changed or reversed at any time, whereas an irrevocable trust cannot. Because a revocable trust can be reversed, you retain ownership of your assets, so creditors can go after them, and they are subject to estate taxes. With an irrevocable trust, the trust account takes full ownership of the transferred assets, so they are not within reach of creditors, and you minimize estate taxes.
Power of Attorney
With a power of attorney, you specify who will act on your behalf in the event you become incapacitated and unable to act on your own behalf. You can authorize another person, known as an agent or attorney-in-fact, to have limited or broad powers to make legal decisions about your property and finances. Without a power of attorney, a court will appoint a guardian, usually a family member, to make decisions about your property and finances. Other family members will have to petition the court for access to your finances. A power of attorney helps ensure your desires will be followed in the event you are unable to act for yourself.
Living Will
The living will consists of a medical power of attorney and an advance healthcare directive.
Medical Power of Attorney
Like a power of attorney, a medical power of attorney designates another individual to make decisions for you in the event you are unable to make decisions or express your desires. In this case, the decisions pertain to the healthcare and treatment you will receive.
The agent is authorized to work with your healthcare providers and make healthcare decisions on your behalf. The medical power of attorney is only in effect while you are incapacitated and your attending physician certifies you are incapacitated. After you regain the capacity to make decisions, your agent no longer can speak on your behalf.
If you don’t have a medical power of attorney, the law will specify who should make decisions on your behalf. In many cases, that person is your spouse, your adult children, your parents, or your nearest living relative, in that order.
With a medical power of attorney, you can specify:
- Who will make healthcare decisions on your behalf
- Which healthcare decisions the agent can make for you and which they cannot
- When the medical power of attorney is in effect (you can specify an expiration date)
Advance Directive
An advance directive specifies what life-sustaining treatment you are to receive in the event you have a terminal illness or injury (not expected to live more than six months). It provides instructions about whether you will receive food, water, breathing assistance, and other measures to sustain your life.
Your medical power of attorney may also specify these things. If your medical power of attorney or your agent’s decision conflicts with your advance directive, the advance directive will have precedence.
Steps to Create an Estate Plan
Now that you know the main documents in a typical estate plan, here are the basic steps to creating an estate plan:
1. Review your beneficiaries
Consider all of the bank accounts, investment accounts, retirement accounts, IRAs, life insurance policies, and annuities you may have. Review the beneficiaries for each account and ensure they are who you want. Remember that beneficiaries in an account take priority over your will.
2. Create a will
For most people, their will is the document that specifies who should receive their assets (beneficiaries). Think about all of your property and who you would like to receive it.
If you have minor children, in your will you can specify an appropriate guardian for your minor children. You can also name someone to handle your children’s financial affairs until they become legal adults. This may, but does not have to be, the same person as their guardian.
3. Consider a living trust
A living trust is more complex and expensive to set up and maintain than a will, but gives you more detailed control over how your assets are to be distributed, avoids probate, and provides some estate tax advantages.
4. Create a power of attorney
The power of attorney gives another person the power to make financial decisions for you in the event you are unable to decide for yourself.
5. Create a living will
A living will specifies who will make healthcare decisions for you if you are unable to decide for yourself, and expresses your wishes concerning end-of-life care if you become terminally ill or injured. This may be, but does not have to be, the same person you designate in your power of attorney.
6. Consider estate taxes
There are federal estate taxes and also state estate taxes in many states. The minimum estate size for federal estate taxes is $13.61 million in 2024. However, this provision will sunset at the end of 2025. If it’s not extended, the minimum will return to the pre-2017 number, which was around $6 million.
7. Provide for your digital assets
Consider all of the data you have on your computer and phone, and your online accounts, including email, social media, and PayPal. You will want someone to have access to these accounts after you pass and dispose of them according to your wishes.
8. Store all of your estate planning documents safely
In some states, only the original, signed, and witnessed will is legally accepted; copies are not recognized. So you will want to store your estate planning documents in a secure location. The executor of your will and the agents you designate in your living will will need to know where the documents are located and be able to access them. It may not be a good idea to store these documents in a bank safe deposit box, because your executor and agents may not have access to the box.
View this video for more information about estate planning: