Estate Planning Basics

Estate planning is for everyone, not just for the wealthy or the retired. Everyone will pass on eventually, and to make it easier on those you leave behind, it is important that you have a plan in place for your money and your belongings after your death. Here are some things to consider when planning your estate.

What is your estate?

Your estate is the total value of your assets less any liabilities. Assets include your car, house and any other real estate you may own, bank accounts, retirement funds and investments, life insurance, furniture, and your tangible possessions. Your liabilities include any debts that you accrued over your lifetime, like any balance on your mortgage, credit card debts, or unpaid student or vehicle loans. Any debts held in your name alone will need to be paid from your asset value after you pass away (with some exceptions).

You cannot bring your estate with you when you pass, so you need to have a plan for what to do with it when the time comes.

When should you start estate planning?

Estate planning may be uncomfortable work. However, not planning ahead can lead to problems for those you leave behind. Without a plan in place, you could unintentionally cause strain among grieving family members who would have to decide who gets your belongings, who is liable for your debts, and who will adopt your pet. Having an estate plan may reduce end-of-life expenses. It may also ensure that your liabilities don’t become someone else’s problem and that your assets go to those whom you intend. The best time to start planning for the future is now.

How do you create an estate plan?

There are generally four steps to creating an estate plan, but there are many details involved in each of these steps. State laws around inheritance vary, and estate documents must meet the requirements of applicable law to be valid. A simple will can sometimes be made using an online resource, but it’s often wise to seek the services of an attorney familiar with estate planning to ensure that your documents are drawn up properly.

1. Inventory your assets.

Create a list of everything you own, whether you still owe payments or not. You want to include your house and car; land or other properties you own; valuables and collectibles; and any bank accounts, investment accounts, life insurance policies, retirement accounts, and/or HSAs. From there, add everything up and estimate the total gross value of your estate. Account statements and appraisals will be helpful. For your belongings, a rough estimate of their value will normally suffice.

2. Account for your family’s needs.

You should have a plan in place for all scenarios. If you and/or your spouse were to pass while your children were young, you need to decide who could stand in as a guardian and confirm with them their ability to take on that responsibility. If you were to pass shortly after getting married and buying a home, you need to have a plan in place that will help your spouse continue mortgage payments or pay off the mortgage outright. If you were to pass well into retirement, you are wise to specifically identify your heirs and beneficiaries so that they can to make best use of estate assets and any life insurance benefits.

3. Keep a list.

Keep a list of all of your accounts that have designated beneficiaries (life insurance, retirement plans, annuities, etc.) and revisit your list any time you experience a major life change, like a marriage or divorce, a birth or death, a new job, or the acquisition of property.

Keep in mind that any account or policy with a designated beneficiary is not affected by contradictory statements listed in a will. Be sure to review and update beneficiaries regularly with the organization that is managing your life insurance policy, annuity, or any other account where a beneficiary is listed.

4. Ask an estate lawyer to help you put all your wishes in writing.

There are a variety of documents that you should have on hand to cover varying scenarios:

• Health Care Proxy and Living Will: These documents deal with medical care and what you would like and would not like done in different circumstances if you become incapacitated and cannot express your wishes. A healthcare proxy is a designation of a person or persons whom you will allow to make health care-related decisions on your behalf, while a living will gets into the details of scenarios and treatments.
• Durable or Springing Power of Attorney: This is a designation of a person who can take care of your finances at any point or act on your behalf if you become incapacitated. A durable power of attorney must act in your financial best interest and does not retain any power after your death. A springing power of attorney only becomes effective upon the occurrence of a specific event.
• Last Will and Testament: This document outlines who will receive your assets upon your passing and lists a guardian for any minor children you may have. If you don’t have a will, the state will decide how to dispose of your assets and who will be granted guardianship of your children – and they may not do so in the way you would prefer. In a will, you can also name an executor, or the person who will carry out your end-of-life tasks and the instructions listed in your will.

Note that a will does not dictate what will happen to any assets that are jointly owned. For example, if you and your spouse are both listed on the deed to a home, your spouse will retain ownership upon your death. Additionally, if you say in your will that you want your daughter to receive your life insurance payout, but your life insurance company has your son listed as the beneficiary, your son will get the payout. It is important to update both your account beneficiaries and your will regularly.

What else should you keep in mind?

1. Probate: Probate is the process of determining the validity of a will, executing your instructions, and determining what should happen with any assets that do not have a specifically named beneficiary. Once the probate court validates the will, they will appoint the executor and give them the power to start notifying individuals who are listed in the will, family members, and creditors. If nobody contests the will, debts can be paid and assets distributed.
2. Taxes: Depending on the state, estates may be subject to a state estate tax (paid out of your assets before anything is distributed to your beneficiaries), and potentially a federal estate tax on asset value which exceeds certain thresholds. Income generated by property that is transferred to beneficiaries (e.g., investment accounts) can also generate tax liability for a beneficiary.
3. Living (Revocable) or Irrevocable Trusts: Instead of leaving a will, you can create a trust which holds assets outside of your personal estate. Living trusts are ones to which you – the grantor – can make changes during your lifetime, but contributions to an irrevocable trust shift ownership of assets outside of the grantor’s estate immediately and are potentially subject to gift taxes. Both types of trust are managed by a trustee, who then distributes assets to beneficiaries after the death of a grantor at a time designated by the trust agreement. For instance, you could leave money to a minor child, but not allow them access to it until their 25th birthday. With a living trust, your trustee can immediately take care of your end-of-life affairs and distribute assets without having to go through probate. Note that only your assets can be managed by a trust; you cannot appoint a guardian for your children in this way.
4. Testamentary Trust: This type of trust is created upon your death by your Last Will and Testament and allows you to manage your assets during your lifetime. However, it does not avoid probate or the associated expenses – probate always accompanies the determination of the validity of a will and the carrying out of its instructions.

While estate planning involves only a few basic steps, those steps can become tangled in details. Keeping a journal of your accounts, inventory lists, and action items can be helpful during your process. An Estate Planning Personal Log may also be helpful in letting your loved ones know where important documents are, what assets and liabilities you have, and more. Get started on your estate planning today!