Estate planning is an easy way to make sure all of your assets end up in the right hands after you’re gone. In fact, it’s the only way to guarantee such a thing. And although estate planning tends to be something people wait to do until they’re older, there’s plenty of good reasons to do it now.
Besides the obvious fact of guaranteeing that all of your property and assets end up in the hands of the people and organizations you care about— there’s also the simple fact that every state in the country has a protocol for distributing estates when an estate plan isn't in place. Meaning, your property could end up going to someone you don’t want it to.
You can avoid all of this and gain some extra peace of mind by taking the time to build your estate plan before it's too late. Here’s everything you need to know about estate planning, and how you can come up with the best plan for you and your family.
What is estate planning?
No matter how old you are, chances are you have property that makes up an “estate.” Your estate includes things like your physical property (real estate, cars, jewelry) as well as your monetary investments, plus any funds in various bank accounts. Basically, anything you own that’s worth money is considered to be part of your estate.
Therefore, the estate planning process essentially involves coming up with a plan of what will happen to all of your assets in the event of your death, or if you become incapacitated. Estate planning consists of a variety of steps, such as creating a last will and testament, appointing an executor, preparing for estate taxes, and even purchasing life insurance
. Next up, we’ll go over each of these steps in detail.
Estate planning step-by-step
There are a variety of steps involved in estate planning. While it’s good to consider all of them, even having a few of these items done is a lot better than nothing. Here are all the details on every component of getting your estate plans in place.
Write a will
The first, and possibly most essential part of any estate plan is writing a last will and testament. A will is a legal document that explains what you’d like to happen to your assets (and young children, if you have any) after your death. This document will also outline an executor or trustee, ie. the person responsible for ensuring your wishes are followed after your death.
When someone dies, the appointed executor will receive the will within 30 days, at which point the will is put through a legal process called probate. The probate process certifies the validity of the will and officially appoints the executor named in the document, which legally gives them the authority to carry out the will. The executor can then begin distributing various assets to beneficiaries, as determined by the will.
How to write a will
You can get started creating your will by working with an experienced estate planning attorney or with DIY software. Here are some questions you’ll want to consider before getting started:
- Who will be your beneficiaries? What will each one receive?
- Who will be your executor?
- Who will act as a guardian for your children?
Remember, a will should be very specific about who gets what and exactly what percentage of each thing they get. For example, if you plan to bequeath your house to two people, be sure to specify what percentage ownership each person will have.
And if you haven’t done it yet, now’s a great time to update your financial affairs and make some tough financial decisions regarding your beneficiary designations on your various brokerage or bank accounts. Whether it's your investment account, an IRA
, or some other long-term savings account
, it’s a good idea to have these people named individually with your bank, as well as in your will. You might also consider naming contingent beneficiaries for certain assets. These are essentially second-choice beneficiaries who will inherit your assets if your first-choice beneficiaries are unable to.
Last but not least, be sure to store your will somewhere secure, like in a safe deposit box
Appoint your executor
Once you’ve considered the details of your will, it’s time to appoint someone you trust to carry it out — aka your executor. Not only should this person be incredibly trustworthy, but they should also be fairly organized. In addition to ensuring your assets are distributed according to your wishes, your executor will also be responsible for paying off any debts or taxes that are owed after your death.
Your executor may also have to work with the probate court to sort out various legal documents and address any disputes that arise concerning assets. Since this has the potential to be a very time-consuming job, it’s worth speaking to your would-be executor about the role before appointing them.
Choose a power of attorney
When writing a will, you should also consider appointing a power of attorney. A durable power of attorney is the person who will be responsible for your estate if you become incapacitated. This person will not only have the ability to control your assets while you’re alive but will also be responsible for enforcing your living will (also called an advanced directive), which states your wishes for end-of-life medical care. While many people use one person for both roles, some people may choose to designate a medical power of attorney and financial power of attorney to divide up the responsibilities involved.
Before choosing a medical power of attorney, it’s a good idea to have a conversation with them about your medical care and long-term care wishes should you become sick or in a state of incapacity. You may also want to inform them of the details of your advanced health care directive, which states what protocols medical professionals should or should not take to revive you in life-threatening emergencies.
Prepare for estate taxes
Besides writing your will and appointing an executor, you’ll also want to spend some time preparing for your estate taxes. Because estate taxes can greatly diminish the value of your assets (and may even end up costing your beneficiaries more if their inheritance requires them to pay additional income tax), it’s worth speaking to an estate attorney about how to best prepare based on your estate.
They may advise you to set up a living trust (or a revocable living trust, which can be modified), increase your charitable donations to become eligible for more tax breaks, or even to engage in something called estate freezing— which involves locking in the current value of any property you own and allocating the value of future growth to another person. Because every estate is different, it’s worth working with a professional to find out which estate taxes or inheritance taxes your beneficiaries may be responsible for and if there’s anything you can do to better prepare them.
Consider buying life insurance
Another way to guarantee the financial security of your loved ones in the event of your death is by investing in life insurance or setting up an annuity. Life insurance policies can help cover costs associated with death taxes and expenses, as well as offering an additional source of income for your family. Annuities are regular payments made through an agreement with a life insurance company that effectively liquidate your estate. Depending on the type of life insurance you choose, your loved ones may receive financial support for several years or even for their life after you’re gone.
Why you should start your estate planning early
There are plenty of reasons to start estate planning sooner rather than later, but probably the best reason is to ensure the security of your family members in the event of your death. Having an estate plan in place will guarantee that any minor children and beneficiaries are taken care of should the worst happen.
Another reason to have an estate plan in place is that without one, your state will likely become the governing body that determines what happens to your assets. Instead of having your assets distributed as you’d like them to be, state protocol will dictate what happens to your children as well as your estate. Since this can be a long and messy process, it’s better to have a plan in place that can be enacted according to your wishes.
The cost of estate planning
Estate planning isn’t as expensive as you’d think. The average cost of drafting your will using DIY software is only $150. If you choose to seek out legal advice and work with an estate attorney, you can expect to pay a fee based on the number of hours you work with them. Most estate attorneys charge between $250 - $310 per hour. Some may also charge a flat fee for services rendered.
The bottom line
At first glance, estate planning might seem like something exclusively for people who are either very sick or very old. But in the current age of life-threatening global pandemics, it’s become even more clear just how important it is to have a plan in place for you, your family, and your beneficiaries should the worst unexpectedly occur.