These essential tasks take the mystery and stress out of making an estate plan.
Creating an estate plan can be emotionally difficult and expensive. But by doing so, you’ll have a plan for what you want to occur if you become incapacitated, how you want your assets distributed after your death, and how you’ll continue to care for people who depend on you and your income.
“It’s common for people to think that only older or wealthy people need an estate plan,” says Susan Olson, a California-based financial advisor and partner at Abacus Wealth Partners. But every adult should develop an estate plan, regardless of age and financial or relationship status.
The most important thing is to just get started on your estate plan, rather than delaying the task. “It doesn’t have to be perfect the first time around,” says attorney Clint Coons, founder of Anderson Business Advisors. It’s always possible to update your estate plan, “but having something is better than nothing,” he says. These straightforward steps will walk you through the main to-dos.
1. Break down the jargon.
Before you jump into action, familiarize yourself with the basic components of estate plans and what each one does:
Will and (optional) trust. These documents establish how you want your assets disbursed.
Beneficiary designations. On many financial accounts and other assets that carry a financial benefit (i.e. life insurance policy or pension) you can list who will receive the asset after your death.
Directives and power of attorneys. Directives outline your preferences if you are incapacitated, while powers of attorney assign someone the ability to make decisions (financial, medical, or both) if you cannot make them yourself temporarily or permanently.
Life insurance. A policy can help provide for your dependents and help cover expenses, debts, and funeral costs.
2. Compile an inventory.
Make a list of your assets—including your financial accounts, life insurance policies, real estate, and possessions—in an asset inventory template or spreadsheet so everything is in one place. Your account statements are a good starting point since they will tell you the value of assets or balance of liabilities (e.g. payments owed on a car or mortgage), says Grace Peng, a Phoenix-based financial planner at Prudential.
3. Determine if you require a professional.
The DIY route may be an option for people who are in a simple financial situation, Coons says. Companies such as Legal Zoom, Rocket Lawyer, and Quicken WillMaker & Trust, can be a budget-friendly way to handle the basics. At Legal Zoom, an estate plan bundle that includes a last will, a living will, and financial power of attorney documents costs $179.
An estate planning attorney can cost up to a few thousand dollars, but hiring an experienced professional offers several advantages. These attorneys will steer you through the process, offer tax guidance, and ensure that your estate plan accomplishes what you want from it. “There are so many things an estate attorney will think of that the software won’t cover,” Olson says.
4. Write your will.
“Everyone needs a will,” says Olson. Even people in their 20s likely have assets (such as a car or savings account) or debts (such as student loans).
The document details how to handle your assets—whether you want them to go to family, friends, or charitable organizations—and names an executor, the person who is responsible for ensuring that all of your instructions are followed. If you have children, you can also name a guardian for them in your will.
A legal will reduces the likelihood of family discord or protracted, expensive legal battles. If you die without a will, the state will determine who gets your assets, and that might not match your expectations, Olson notes.
Smart Tip: Depending on your state’s laws, your will may need to be signed by witnesses and notarized. During the coronavirus pandemic, many states are allowing video-based notarization. If that’s not the case in your state—or if witnesses must sign in person—follow social distancing best practices (for instance, wear masks, keep six feet away from witnesses while signing, and avoid sharing pens).
5. Set up a trust, if needed.
A trust is another way to handle the transfer of assets to beneficiaries. Think of it as a type of holding area. You transfer items for yourself to the trust, and, after your death, the trustee (the person you appoint to manage the trust) distributes the assets per your instructions. The most common variety is a revocable or living trust, which can be updated while you are alive.
With a trust, your estate can be dispersed without going through probate. That’s advantageous, since probate—the court-supervised process of authenticating and following the will’s directives—can be expensive and time-consuming, often taking years to wrap up. “Probate is also a public process; by having a trust, things can be settled in private,” Olson says.
Avoiding probate may sound appealing but “setting up a trust is complicated,” Olson says. Often, the decision as to whether or not to create a trust comes down to the complexity of your finances and size of your estate.
"Having a trust in place simplifies things when you die,” Olson says. But even if you have a trust, you’ll still need to create what’s known as a pour-over will to handle any assets you may neglect to move into the trust, says Coons. This type of will allows you to name your trust as the beneficiary of any assets or property you forgot to include in it. You may also need a will to establish guardianship of your children and specify funeral arrangements, which cannot be done in a trust.
6. Ensure you have enough life insurance.
There are many reasons to consider life insurance. “There are costs that come after a person dies,” says Abraham Hazbun, AAA life insurance and annuity specialist. These costs include estate taxes, transfer taxes, funeral arrangements, and so on. Without life insurance, it’s possible for these expenses to deplete an estate, Hazbun says.
People with dependents will want to know that loved ones have the necessary money to pay off the mortgage, cover expenses, send kids to college, and so on—that’s where life insurance can help. And, if you don’t have assets but want to leave an inheritance, “life insurance will let you do that,” Hazbun says.
There are many types of policies, including term life insurance (which lasts a set period of time, such as when your children graduate) and universal policies (which can provide for loved ones after your death). Your coverage needs and the policy rate will vary depending on your circumstances.
7. Establish health and financial directives.
Estate planning is not solely about what happens after your death—it’s also how you share how you wish doctors to proceed if you’re incapacitated and your end-of-life care preferences. Some tasks to tackle here are:
Create a living will. This document explains your medical wishes if you cannot make decisions yourself (for instance, if you’re unconscious) and “can make it easier for loved ones to make a decision,” Olson says.
Establish a healthcare proxy or durable power of attorney for healthcare. With this document, you nominate someone to make medical decisions for you in the event that you cannot. “Choose someone who understands your desires and has the capability to follow through,” Coons advises—healthcare decisions can be quite emotional. Together, a living will and healthcare proxy are referred to as an advanced medical directive.
Set up a financial durable power of attorney. This designates someone to make financial decisions—such as paying your bills or selling your home to cover medical expenses—if you are incapacitated, says Coons.
Smart Tip: You can access every state’s healthcare directive forms and instructions here.
8. Double-check your account beneficiaries.
When you set up an account—such as a 401(K) or a life insurance policy—you’ll often be prompted to add beneficiaries. “Naming account beneficiaries is the easiest way to clearly state who should be taking over an asset,” Peng says.
Be aware that the person listed as an account beneficiary will override what’s in your will, says Olson. Once a year, confirm who is listed and update beneficiaries during major life changes. For most accounts, you can make this update online. You can also add contingent beneficiaries, individuals who will inherit the asset if your primary beneficiary is no longer alive.
9. Get organized.
If you don’t share account log-ins and the locations of important documents, your family will have a challenging task ahead of them. Opt for the organizational strategy that feels easiest and most intuitive so you actually use it, and update the information annually. Regardless of what you choose, make sure to let a few trusted people (your executor and family members, for instance) know where to locate documents, safe keys, binders, and log-ins.
Create a binder or folder: You can include account statements, your will, real estate deeds, and so on. “It sounds a little old school, but if you have it in your safe deposit then people need a death certificate to access the safe deposit box,” Olson says. You can get around this by adding the executor to the box so they can access it any time. You can also use a fireproof safe.
Add trusted contacts to accounts: This will allow them to view statements but not make transactions, Peng says.
Store info in the cloud: Many financial firms offer clients the ability to store important documents in the cloud, via the firm’s secure server, Olson notes. Before uploading, check if you can provide trustees or your executor with access.
Create a master password: We all have dozens of logins ranging from email to important bank accounts. Consider adding them to a password manager so you only need to share the master password with a trusted person or keep it in a secure location with your will. Otherwise, you’ll need to store all important passwords in a secure place that the executor is aware of and can access.
10. Stay up to date.
Experts recommend updating your estate plan following big life events, such as births, deaths, new jobs, new homes, and so on. You’ll also want to update it if there are major changes in inheritance law. If you haven’t had a life change, Olson recommends checking in every five years or so.
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