Like any other strategy for the future, estate planning is a critical part of life planning. Estate plans are made up of many parts, including wills and trusts, as well as any additional documents or information that will help beneficiaries carry out the requests of the benefactor.
In case you need assistance down the road, make sure your needs are met by understanding the steps to plan your finances — and taking those steps while you’re healthy and of sound mind.
What Is an Estate Plan?
An estate plan is similar to a will but goes more in-depth. Passing away without an estate plan can drag your loved ones into a lengthy and expensive probate process to determine how assets should be distributed. Creating an estate plan is a crucial form of financial planning for you and your family. Some of the most important parts of the estate plan are:
- A last will and testament
- Power of attorney in case you become incapacitated
- Medical directives
- A plan for how kids and dependents should be cared for
- Business succession
What Are the Seven Steps in the Estate Planning Process?
Setting up an effective estate plan means you’ll need to address several different points. This estate planning checklist will help you kick-start building a solid estate plan.
- Create an inventoried list of assets, accounts and documents.
- Designate power of attorney.
- Create wills and trusts.
- Outline directives.
- Make beneficiary designations.
- Learn your state’s estate tax laws.
- Review your estate plan annually.
1. Create an Inventoried List of Assets, Accounts and Documents
Create a list or an inventory of your financial and bank accounts, insurance policies and the contact information for any professionals you work with, such as attorneys, accountants, brokers and financial planners. You also need to make copies of your estate planning documents, your mortgage or the deed to your house and titles to cars and other property.
Keep your list and documents in a secure place — such as in a home safe or safety deposit box — and let family members and executors know where they can access the information on your brokerage accounts, bank accounts or even legal documents if something happens to you.
Sort Out Your Social Media Accounts and Digital Assets
In today’s digital world, you also have to figure out what will happen, after you’ve died, to your digital music library and social media profiles for websites like Facebook, Twitter and LinkedIn. The answer to what to do with your social media accounts and digital assets isn’t black and white.
2. Designate a Power of Attorney
A power of attorney allows you to name someone you trust to make financial and legal decisions for you if you cannot do so yourself. For instance, if you want your spouse to have power of attorney, you can legally designate them to have decision-making ability.
Without a power of attorney, your spouse will have limited authority over the property you own together. If you don’t have a power of attorney, your family members will have to go to court to have someone appointed to manage your finances.
Appoint a Durable Power of Attorney for Healthcare
A durable medical power of attorney, or healthcare power of attorney, lets you name someone to make medical decisions and adjustments to your end-of-life care plan for you if you’re unable to make them yourself. Depending on the state you live in, there might be limitations on who you can designate as your healthcare agent.
As you figure out your power of attorney and durable power of attorney, consider consulting an elder law attorney who can help you figure out details on how to fund a nursing home or what to do if you’ve outlived your retirement funds. Such an attorney can help you navigate elder law, specifically designed to address the needs of senior citizens.
3. Create Your Wills and Trusts
Even after you make a will or trust, be sure to check with your state to find out if the living will and healthcare power of attorney are combined into a single advance healthcare directive document.
Draft a Living Will
Your living will outlines the medical care you would want if you become unable to make your own healthcare decisions. For example, you can specify whether you would want to be kept alive on life support, and for how long.
Draft a Living Trust
The key benefit of a trust is that it allows you to transfer property to your heirs without the probate process, which can be lengthy, expensive and public. If you have just a will, any property that’s only in your name at your time of death will go through probate court to be distributed. But if you transfer your assets to a living trust before your death, those assets can go directly to your family.
4. Write Funeral or Memorial Instructions
You shouldn’t include your final funeral and burial wishes in your will, because wills often aren’t opened and read until weeks after death. You need to specify in a separate document what sort of memorial service you want and whether you want to be buried or cremated.
Be sure that your friends and family are aware of your wishes, and give them copies of this document or tell them where to find it. Also, if you have a deed to a cemetery plot, make sure your family knows where it is.
5. Account For Your Beneficiaries
Specify who should receive your assets and who will be your children’s guardian. Be aware, though, to give clear directives on where all your property and money goes and how it will be allocated to such beneficiaries as a surviving spouse or minor children.
For example, money in retirement plans and pension plans or proceeds from life insurance policies go to the beneficiaries you’ve named for those accounts. You also can’t use your will to leave any property you hold in joint tenancy or property you’ve transferred to a living trust.
Create a Care Plan for Your Pet
Choosing a beneficiary for your pet is an important decision and one you’ll want to discuss with the person you feel is the best fit. If you don’t want your pet to go to a shelter or facility, it’s a good idea to choose backup beneficiaries in case the first choice is unable to take on the responsibility when the time comes. A trust allows you to spell out your wishes, from what kind of food your pet gets to the type of veterinary care it receives.
6. Learn Your State’s Estate Tax Laws
Though most people won’t have to worry about paying estate taxes, estate planning is often a way to minimize estate, inheritance or gift taxes. Here are some things to consider and research while estate planning:
- Federal Level: Only large estates are subject to estate taxes at the federal level. If you think you may have an estate that exceeds the federal limits, you might want to look into a grantor retained annuity trust, or GRAT.
- State by State: Some states have estate taxes. If your estate is valued below the federal exemption amount, the state taxes could still be levied.
- Inheritance Taxes: What your beneficiaries have to pay on their inheritance will also vary by state, as some states tax inheritance and some states don’t.
7. Review the Plan Annually
Creating a comprehensive estate plan is a major undertaking and one that most people are happy to finish. But an estate plan isn’t something you work on once and never look at again. As life circumstances and laws around estate taxes and other issues change, it’s important to reassess your plan at least once each year to ensure your plans will still work.
Final Take: Who Needs An Estate Plan?
Most individuals should be fine with a simple will. But if you have a growing family or more complicated financial affairs, including properties and investments, an estate plan is more comprehensive.
Estate planning involves dealing with complex or detailed requests and a higher net worth of both assets and accounts. An estate plan that includes a living trust could be a good tax strategy for individuals with estates worth more than the exclusion amount. Estate planning now could save time, money and headache for your family in the future.
- What are the five most important estate planning documents?
- The five most important estate planning documents are a last will and testament, power of attorney in case you become incapacitated, medical directives, a plan for how kids and dependents should be cared for and business succession.
- What are some examples of estate planning?
- Some examples of what you'll need to consider when estate planning are creating a last will and testament, designating power of attorney – both legal and medical – and planning for your dependents and pets.
- What is the 5 or 5 rule in estate planning?
- The 5 by 5 rule designates the amount your beneficiaries are able to withdraw from a trust: the greater of 5% or $5,000 per year. This is typically an amount beyond the funds regularly paid out by the trust.
- How do you avoid probate?
- The best way to avoid probate for your loved ones after your death is to transfer your assets to a living trust before you pass. Any property named in a will must go through probate before it is distributed to your beneficiaries, but assets already transferred to a trust can be distributed right away.
Caitlyn Moorhead contributed to the reporting for this article.
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- IRS. 2022. "Estate Tax."
- LegalZoom. 2022. "Taxes and the Advantages of Living Trusts."
- Mayo Clinic. 2022. "Living Wills and Advance Directives for Medical Decisions."
- U.S. Bank. "5 Potential Benefits of Setting Up A Trust."
- LegalZoom. 2022. "How Long Does Probate Take?"