You don’t have to be rich to need estate planning. Your estate includes everything you own, and it can be any size, which is why it can be worth taking time to plan for what happens to it.

Estate planning is the process of designating who will receive your assets and handle your responsibilities after your death or incapacitation. One goal is to ensure beneficiaries receive assets in a way that minimizes estate tax, gift tax, income tax and other taxes.

Estate planning can help establish a platform you can fine-tune as your personal and financial situations change. The key question to ask yourself is: How do you want your assets distributed if you die or are incapacitated?

• When should you Create an Estate Plan?
• When to Update Your Estate Plan
• Why is an Estate Plan Important?
• How to Create an Estate Plan
• What should be Included in an Estate Plan?

When should you Create an Estate Plan?

Many financial advisors would recommend starting an Estate Plan the moment you become a legal adult, and updating it every three to five years after that.

Read Also: How to Plan Inheritance for Children of Blended Families

The reason for this is because at 18, you are newly responsible for your finances, healthcare (in some states), and power of attorney; and you want to consistently make sure everything is accounted for. However, for most young adults an estate plan is the furthest thing from mind — which is normal. 

But there are a few common life events that warrant prioritizing your Estate Plan that one should never ignore. No matter what your age, consider the following life occurrences as signs to start (or update) your Estate Plan: 

• Savings Account – As soon as you start a savings account, a natural next step is to designate where those funds would go in the event of your death. This will ensure the account can be passed on to a loved one or cause of your choosing.
• Home & Additional Property Ownership -The purchase of a home or other property is a sign to start estate planning, as you most likely want to avoid lengthy probate court proceedings.
• Marriage & Remarriage – Combining assets, no matter how many, is a crucial time to start estate planning. Take time to determine what happens in the event of one spouse’s death, as well as both.
• Travel – At the very least, it is recommended to update your estate plan before big trips. Particularly if you travel for long periods of time or frequently leave the country.
• First child, and each one after – One of the most obvious estate planning triggers is the birth of a child. You need to think about guardianship and financial security in case anything were to happen.
• Inheritance of money or other assets – An inheritance can kick in suddenly, and provide people with more assets to take care of in the midst of a difficult time. Update your estate plan to reflect any additional money or assets you inherit when you can.
• Divorce -If you find yourself divorced, it is critical to update any previous estate plans that were made with your former spouse.
• Grandchildren or births in the family – With new family members to consider, it is a good plan to update your Will or any Trusts to ensure they are taken care of as well.

When to Nominate a Guardian

As you prepare to have your first child, it is always smart to begin thinking about who you would appoint as a guardian for him or her  in the event anything were to happen. This is not a thought most new parents want to dwell on, but it is still crucial to get it into writing. 

Typically, a guardian is named when you create a Will, but there are other options available for those who may not be ready for this process.

For example at Trust & Will, they provide you with state-specific Nomination of Guardian documents to ensure your child is taken care of by a trusted loved one. It is important to remember that these documents will need to be updated each time you have a new child. 

When to Make a Will

The best time to make a Will is essentially as soon as you become a legal adult or reach any of the above estate planning triggers. Unfortunately, many Americans pass away without a valid Will.

This leaves family members in the midst of loss while also being in charge of a number of decisions they may not have considered. A Will can prevent this situation, by allowing you to appoint a healthcare proxy, designate a power of attorney, and specify how your assets and money will be distributed. 

If you happen to already have a Will or own more than $160,000 in assets — it might be time to consider going one step further and create a Trust. 

When to Create a Trust  

If you have more assets, including property or other investments, it may be time to start your Trust. Trusts give you more control over where your assets will be distributed while you’re still living and after death, and can help you avoid probate.

Additionally, creating a trust can help you avoid additional taxes or fees as your assets pass to various beneficiaries. Trust & Will can walk you through the various types of trusts available to ensure you have a comprehensive Estate Plan in place. 

When to Update Your Estate Plan

Estate planning “triggers” are essentially any milestones that increase your wealth or impact how you want your assets distributed after death. Each time you approach one of these life events, make sure these additions are accounted for by updating your Estate Plan.

After all, life can change quickly and it is important to reflect that with proper planning. A good rule of thumb is to revisit and update your estate plan every three to five years. 

Do you have a question about when to start an Estate Plan that we didn’t answer? Reach out to us today or Chat with a live member support representative!

Estate planning is one of the most important things you can do to protect yourself, your family, and your future. The creation of a Will or even designation of a Guardian for your children can go a long way in ensuring your wishes are followed after death.

When you approach one of the above mentioned milestones, it is a good idea to begin considering your options. 

Why is an Estate Plan Important?

While there are a variety of reasons why people decide to meet with an estate planning attorney and create an estate plan, here are five of the most valuable reasons.

Avoid Probate

A probate is the process of validating a deceased person’s will and placing a value on their assets, paying their final bills and taxes, and distributing the rest to their beneficiaries. Avoiding probate is by far the most common reason why people seek out the advice of an estate planning attorney.

While many have never dealt with probate, they still know one thing: they want to avoid it at all costs. This stems from probate horror stories covered by the media or told by neighbors, friends, or business associates.

For the vast majority of people, avoiding probate is a very good reason for creating an estate plan and can be easily achieved.

Reduce Estate Taxes

The significant loss of one’s estate to the payment of state and federal estate taxes or state inheritance taxes is a great motivator for many people to put an estate plan together.

Through the most basic planning, married couples can reduce or even possibly eliminate estate taxes altogether by setting up AB Trusts or ABC Trusts as part of their wills or revocable living trusts.

Also, a variety of advanced estate planning techniques can be used by both married couples and individuals to make the estate or inheritance tax bill less burdensome or completely go away.

Avoid a Mess

Many clients seek the advice of an estate planning attorney after personally experiencing or seeing a close friend or business associate experience a significant waste of time and money due to a loved one’s failure to make an estate plan.

Choosing someone to be in charge if you become mentally incapacitated or die—and deciding who will get what, when they will get it, and how they will get it—will go a long way towards avoiding family fights and costly probate court proceedings.

Protect Beneficiaries

There are generally two main reasons why people put together an estate plan to protect their beneficiaries: To protect minor beneficiaries, or to protect adult beneficiaries from bad decisions, outside influences, creditor problems, and divorcing spouses.

If the beneficiary is a minor, all 50 states have laws that require a guardian or conservator to be appointed to oversee the minor’s needs and finances until the minor becomes a legal adult—at age 18 or 21, depending on the laws of the state where the minor lives.

You can prevent family discord and costly legal expenses by taking the time to designate a guardian and trustee for your minor beneficiaries.

Or, if the beneficiary is already an adult that’s bad at managing money or has an overbearing spouse or partner who you fear will squander the beneficiary’s inheritance or take it in a divorce, you can create an estate plan that will protect the beneficiary.

Protect Assets

Asset protection planning has become a significant reason why many people, including those who already have an estate plan, are meeting with their estate planning attorney.

Once you know or suspect that a lawsuit is on the horizon, it’s too late to put a plan in place to protect your assets. Instead, you need to start with a sound financial plan and couple that with a comprehensive estate plan that will, in turn, protect your assets for the benefit of both you during your lifetime and your beneficiaries after your death. 

You can also provide asset protection for your spouse through the use of AB Trusts or ABC Trusts and your other beneficiaries through the use of lifetime trusts. This can also include electronic assets.

How to Create an Estate Plan

Step 1: Sign a will

We all know that a will is important. You need one to ensure that your chosen heirs will get the assets that you want to leave to them. In your will, you name an executor who will have the power and responsibility to pay your debts and distribute the remainder of your estate according to your wishes.

If you die without a will, your property will pass to your survivors based on your state’s laws of intestacy. In most states, that means that your spouse and your children will split your legacy.

If you are single, your assets will go to blood relatives even if you would have preferred a friend to inherit them. Yet only 43 percent of adults in the U.S. have a will, according to a 2011 Harris Interactive survey.

You can also use a revocable living trust to pass property to your heirs after your death. Unlike wills, living trusts avoid probate, the process by which a court determines that a will is valid. In some states probate is costly and time-consuming.

But even if you create a living trust, a will should still be the cornerstone of your estate plan if you have minor children, because you also use it to name a guardian for them. If you die without a will, a judge will decide with whom your children will live after you’re gone.

You should also safeguard the assets that you leave minor children by creating a trust for their benefit in your will. In it you name a trustee who will follow your instructions for managing the assets that you leave to your kids.

The trustee can be a relative, friend, or professional such as a banker or lawyer. If you fail to establish a trust in your will for your minor children, a court will name a guardian to oversee the property they inherit.

Step 2: Name beneficiaries

It is important to understand that not all of your assets will pass to your survivors through your will, because some types of property do not go through probate.

For instance, if you own a house jointly and your spouse has the right of survivorship (a type of ownership that is spelled out in your house deed), he or she will get your share of the home when you die.

If you open a payable-on-death savings or brokerage account, the cash and securities in those accounts will go directly to the beneficiary that you name on the bank or brokerage house’s forms.

Moreover, your 401(k), individual retirement accounts, and life-insurance policies will pass to beneficiaries you designate in those documents.

If you work with an attorney on your estate plan, show him or her the beneficiary forms that you have filled out in the past; you might find some surprises.

Paul D. Hunt, an estate-planning lawyer in Alameda, Calif., once asked a client why he had listed someone whom he had never mentioned during the planning process as the beneficiary of an account.

Hunt recalls: “I called the client and he said, ‘Oh, that’s my brother. I haven’t seen him in 26 years and since then I’ve been married and have had four kids, so we’d better change that.’ ”

Step 3: Dodge estate taxes

A lot of Americans do not have to fret about federal estate tax. Only about one-half of 1 percent of estates will owe federal estate tax under the current law, which Congress passed on Jan. 1 of this year.

The federal estate and gift-tax exemption is now $5.25 million and will increase with inflation each year. Spouses may combine their exemptions, so married couples can leave or give away $10.5 million without owing any federal estate tax.

Say, for example, that a husband and wife each have $3 million in assets. If the husband dies first and leaves everything to his wife, no estate tax is due. When the wife dies, leaving $6 million to their children, no tax is due because her estate can use a portion of the husband’s unused exemption.

But to use this strategy, the wife must file an estate tax return for the husband’s estate even if no tax is due. The deadline is nine months after the date of death, but the estate’s executor may ask for a six-month extension.

But you should still discuss the topic with your attorney, because 15 states and the District of Columbia impose their own estate tax, some on estates that are too small to owe the federal tax.

Step 4: Leave a letter

Sometimes everything you want to tell your survivors does not belong in your will. If you want to describe what type of funeral arrangements you desire, for example, you can do so in a separate letter.

You can also use the letter to list items of sentimental value that you want certain heirs to inherit. Give the letter to a trusted relative, friend, or your attorney.

Some states do not recognize such letters as legal documents, but your family members and other loved ones are likely to respect your wishes.

Step 5: Draw up a durable power of attorney

Estate planning is not only about taking care of your survivors. A complete estate plan should also insure that your wishes regarding your money and your health care prevail even if you become too sick to make your own decisions.

Create a durable power of attorney (DPA) so someone can manage your money if you are ever too sick to do so. In this document, you name a trusted relative or friend to take charge of your finances when you cannot.

Unlike an ordinary power of attorney, a DPA remains in effect after you can no longer manage your own affairs. If you do not have a DPA and become incapacitated, a relative or friend will have to ask a judge to appoint a conservator or guardian to manage your assets and pay your bills.

Choosing the person who will serve as your financial proxy is often a difficult decision, and sometimes a relative is not the best choice. Consider the case of the socialite and philanthropist Brooke Astor, who gave her son, Anthony D. Marshall, her power of attorney.

She died at age 105. Two years later a Manhattan jury convicted her octogenarian son of stealing millions of dollars from her when she was alive. “I feel sorry for Mrs. Astor,” said Deborah Jacobs, an estate-planning attorney in New York City and author of “Estate Planning Smarts” (DJWorking Unlimited, 2011). “She had one son and she wanted to trust him, but she was wrong to do so.”

One possible solution: Name co-trustees, perhaps a relative and a professional such as a lawyer or financial adviser. Be warned that some financial institutions have their own DPA forms and may be skittish about accepting a document that your attorney prepares.

To head off a potential hassle, talk with your bank’s manager while you are still healthy. Ask him or her to keep the DPA that your attorney draws up on file and fill out the bank’s form if your banker insists.

Step 6: Create an advance health care directive

To maintain control over the type of medical care you receive when you are near death, you should sign a living will and a DPA for health care. (In some states, a health care directive combines the two documents.) With a living will, you state the type of medical procedures that you do or do not want.

In a DPA for health care, you name a health care agent or proxy who makes sure that doctors and other medical professionals carry out your wishes if you are too sick to speak for yourself.

Your attorney should also prepare a so-called HIPAA release form. Without it, privacy regulations in the federal Health Insurance Portability and Accountability Act of 1996 may prevent health care personnel from releasing your medical records to your health care proxy.

Also make sure that your lawyer includes a clause in your living will and health care DPA stating that you give your health care agent the right to receive information about your health status and medical care under HIPAA rules.

Step 7: Organize your digital and paper files

Your executor will remember you more fondly if you organize your estate-planning paperwork and financial records, and store them in a safe yet accessible place. Keep the original documents in your lawyer’s vault or in a bank safe-deposit box or home safe.

Be aware that if your spouse or someone else is not the co-owner of your safe-deposit box, your executor may have to file a petition with the court for permission to open it.

Pull together any of the documents your executor will need, such as the deed to your burial plot; insurance policies; statements from your bank, brokerage house, and mutual-fund accounts; and pension and other employee-benefit information.

Maintain an up-to-date list of your assets, the names and telephone numbers of your legal and financial advisers, and an inventory of the items in your safe-deposit box. Store such documents at home in a locked, waterproof, and fireproof metal box, file cabinet, or safe.

Do not forget about your digital assets, such as an online stock-trading account. “Keep a separate list of your accounts and passwords and put it in a safe-deposit box or a vault, or give it to a person you trust,” David A. Shulman, an estate-planning attorney in Fort Lauderdale, Fla., said.

And finally, review your estate plan at least every five years. Make sure all of your documents still reflect your desires, and that your beneficiaries and financial and health care proxies are still willing and able to serve.

In addition, you should revisit your estate plan if Congress revises the estate-tax law or whenever there is a major change in your life, such as a birth, death, marriage, or divorce.

What should be Included in an Estate Plan?

Here is a list of items every estate plan should include:

1. Will/trust
2. Durable power of attorney
3. Beneficiary designations
4. Letter of intent
5. Healthcare power of attorney
6. Guardianship designations

In addition to these six documents and designations, a well-laid estate plan also should consider the purchase of insurance products such as long-term care insurance to cover old age, a lifetime annuity to generate some level of income until death, and life insurance to pass money to beneficiaries without the need for probate.

Does your estate plan measure up? Let’s examine each item on this checklist to make sure you haven’t left any decisions to chance.

Wills and Trusts

A will or a trust may sound complicated or expensive—something only rich people have. That is an incorrect assessment. A will or trust should be one of the main components of every estate plan, even if you don’t have substantial assets.

Wills ensure property is distributed according to an individual’s wishes (if drafted according to state laws). Some trusts help limit estate taxes or legal challenges. However, simply having a will or trust isn’t enough. The wording of the document is critically important.

A will or trust should be written in a manner that is consistent with the way you’ve bequeathed the assets that pass outside of the will.

For example, if you’ve already named your sister as a beneficiary on a retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary), you don’t want to bequeath the same asset to a second cousin in the will because it could lead to a will contest.

Not to mention that both individuals could become bitter toward each other (and you) during a legal battle.

Durable Power of Attorney

It’s important to draft a durable power of attorney (POA), so an agent or a person you assign will act on your behalf when you are unable to do so yourself. 

Absent a power of attorney, a court may be left to decide what happens to your assets if you are found to be mentally incompetent, and the court’s decision may not be what you wanted.

This document can give your agent the power to transact real estate, enter into financial transactions, and make other legal decisions as if he or she were you.

This type of POA is revocable by the principal at a time of his or her choosing, typically a time when the principal is deemed to be physically able, or mentally competent, or upon death.

In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases, it might make more sense to have another family member, friend, or a trusted advisor who is more financially savvy act as the agent.

Beneficiary Designations

As noted earlier, a number of your possessions can pass to your heirs without being dictated in the will (e.g., 401(k) plan assets). This is why it is important to maintain a beneficiary—and a contingent beneficiary—on such an account.

Insurance plans should contain a beneficiary and a contingent beneficiary as well because they might also pass outside of a will.

If you don’t name a beneficiary, or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge who is unaware of your situation, beliefs, or intent is unlikely to make the same decision you would have made.

Note: Named beneficiaries should be over the age of 21 and mentally competent. If they aren’t, a court may end up getting involved in the matter.

Letter of Intent

A letter of intent is simply a document left to your executor or a beneficiary. The purpose is to define what you want to be done with a particular asset after your death or incapacitation. Some letters of intent also provide funeral details or other special requests. 

While such a document may not be valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will is deemed invalid for some reason.

Healthcare Power of Attorney

A healthcare power of attorney (HCPA) designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity.

If you are considering executing such a document, you should pick someone you trust, who shares your views, and who would likely recommend a course of action you would agree with. After all, this person could literally have your life in his or her hands.

Finally, a backup agent should also be identified, in case your initial pick is unavailable or unable to act at the time needed.

Guardianship Designations

While many wills or trusts incorporate this clause, some don’t. If you have minor children or are considering having kids, picking a guardian is incredibly important and sometimes overlooked.

Read Also: How to Avoid Financial Nightmare during Divorce

Make sure the individual or couple you choose shares your views, is financially sound, and is genuinely willing to raise children. As with all designations, a backup or contingent guardian should be named as well.

Absent these designations; a court could rule that your children live with a family member you wouldn’t have selected. And in extreme cases, the court could mandate that your children become wards of the state.

Finally

There is more to estate planning than deciding how to divvy up your assets when you die. It’s also about making certain your family members and other beneficiaries are provided for and have access to your assets upon your temporary or permanent incapacity.

A will is a great place to start, but it’s only the beginning.