When they hear the term “estate planning,” many people immediately think that this doesn’t apply to them because they aren’t “rich.” But you don’t have to be wealthy to have an estate.
The fact is, if you own anything — a home or other real estate, automobile(s), investments, checking and savings accounts or life insurance, for example — you have an estate. Estate planning is simply the process of planning in advance how your possessions will be distributed to your heirs after you die.
Why It’s Important
So why is estate planning so important? Simple: If you don’t plan your estate, your assets will be distributed according to your state’s probate laws. This may or may not coincide with your actual wishes for how you’d like your estate to be distributed to your loved ones.
For example, if you’re married and have children, your state might require that your spouse and children all receive a share of your estate. If your children are minors, the court will control their share, which might not leave your spouse with enough money to meet his or her living expenses. And if you and your spouse both die in an accident at the same time, the court will appoint a guardian for your minor children without your having input in the selection.
But estate planning is about more than just ensuring that your possessions are distributed in the ways that you want them to be. It also should name a guardian for your minor children and who will manage their inheritance; detail how you’d like to be cared for if you become disabled; arrange for the transfer of your business when you die, become disabled or retire; and specify how life insurance will be used to provide for your family if you die unexpectedly.
And it should do all of this while minimizing taxes, court costs and legal fees. In addition, an estate plan can also include provisions for passing your values onto your heirs — things like your philosophies regarding education and work ethic, for example.
Taking the First Step
The first step in estate planning for most people is to create a last will and testament and a living will. These are separate documents that serve different purposes. A last will and testament details how your assets are to be distributed to your heirs when you die. A living will, meanwhile, details how life-sustaining medical treatment decisions would be made if you were to become incapacitated and unable to communicate them yourself.
Along with a living will, you might also consider having an attorney draft two other documents. A durable power of attorney names someone to handle your routine financial affairs (like bill paying) if you become incapacitated, while a healthcare power of attorney would become effective if you are incapacitated, but not terminal or in a vegetative state. Together, these three documents comprise your advanced healthcare directive.
A revocable living trust is another important estate planning document. This is because, while a last will and testament provides instructions for the distribution of your assets, it doesn’t necessarily enable the assets to avoid probate — a potentially expensive and time-consuming process. Probate files are also generally open to the public, which eliminates privacy with regard to your estate.
Including a revocable living trust as part of your estate plan will enable your assets to avoid probate. This will prevent the court from controlling your assets, ensure maximum privacy of your estate, and centralize all of your assets in one comprehensive plan. And you can change the trust whenever you like if your family’s circumstances change over time.
Another benefit of estate planning is that it forces you to get all your financial records and files in order. Through the process of estate planning, you will locate all of your important documents, titles and policies and get them organized and centralized in one secure place (such as a fireproof safe or bank safety deposit box). You can also review your insurance and retirement account beneficiary designations and look for possible errors or other items that need to be updated.
Get Started Now
If you haven’t done any estate planning yet, all of this might seem a little overwhelming. Start off slowly — concentrate on your last will and testament and living will first. Then work on the other components of your plan over the next year or two as your time and budget allow.
For most people, it’s wise to hire an attorney to draft these estate-planning documents for you. There are plenty of do-it-yourself websites for creating basic wills — but unless your financial situation is extremely simple, you will likely benefit by working with a professional who can make sure your plan is designed to best meet your overall estate planning objectives.