What is an Estate?
The term “estate” can summon the idea of royalty, acres of property, and millions of dollars in assets. In fact, the first Google result for the definition of an estate is “an extensive area of land in the country, usually with a large house.”
As a result, the idea of “estate planning” doesn’t seem applicable to most of us. But this definition is limited and misleading.
Your estate and estate plan include all of your assets and how you want to dispose of them, specifying wishes for your healthcare, and naming guardians for your children and other dependents.
All of us have an "estate." It’s up to us whether we want to control our estate or allow the courts and laws to decide our affairs.
What is Estate Planning?
Estate Planning is far more than splitting up your money when you die. Estate Planning means identifying an executor of your estate, specifying how assets will be distributed, naming guardians for your children, establishing healthcare directives, and more.
Your estate plan makes your wishes for all of these items known. So in the event of the unthinkable, your loved ones are not in the position of making these decisions on your behalf.
Do I need an Estate Plan?
Although the complexity of estate plans will vary based on age, assets, dependents, and more, if you are over age 18 you should consider an estate plan.
Specifying healthcare directives should you become incapacitated is one example of estate planning that applies to every adult.
And regardless of your wealth or lack thereof, identifying a guardian for your children is integral for all parents.
Estate Planning Documents
An estate plan will include documents such as wills, powers of attorney, and trusts, as well as taking actions to title and name beneficiaries for assets and insurance policies. Again, the complexity of estate plans will vary based on your circumstances.
Below are common components of an estate plan and their purposes.
A Will specifies your wishes for:
- the distribution of your property
- the executor of your will
- guardians for your children and/or dependents
- final burial arrangements
In addition to specifying your wishes, a will also serves the valuable role of identifying your assets. With your assets clearly identified, your loved ones do not need to spend time and emotional energy tracking your assets down in the event of your passing.
While a Will specifies wishes to be carried out after your passing, a Living Will specifies medical wishes while you are still alive.
In a Living Will, you may specify wishes related to medications, whether you would want to be put on life support, the extent of medical interventions, and more.
This document allows you to make these decisions before they would need to be made and avoids putting your loved ones in the position of making these decisions on your behalf.
Durable Power of Attorney
A Durable Power of Attorney (POA) identifies someone that is authorized to act on your behalf if you become incapacitated.
On your behalf, a POA may sign legal documents, make financial and healthcare decisions, and decide other personal matters as necessary.
As an alternative to a standalone Will, you may use a Trust in conjunction with a will to specify conditions for the distribution of your assets.
A Trust is especially valuable for those with minor beneficiaries. In this case, assets may be placed in a Trust until a beneficiary reaches a certain age or is deemed capable of managing Trust assets.
Other Estate Planning Considerations
In addition to creating estate planning documents, it's important to review beneficiary designations on your financial accounts and ensure your loved ones are adequately protected and provided for.
Although you may think your final affairs are in order after creating a Will, account beneficiary designations actually supersede your Will.
That means if you want your assets to go to your children, but you have an ex-spouse or sibling listed as an account beneficiary, that account will be inherited by the ex-spouse or sibling.
For this reason, an integral part of estate planning is to ensure your account beneficiaries are consistent with your estate planning documents.
Common assets to pass by beneficiary designation include retirement accounts, life insurance policies, and any financial account with transfer-on-death (TOD) instructions.
While life insurance is separate from traditional estate planning documents, it's critical to ensure you are providing for your beneficiaries in the event of your untimely demise.
Life insurance is especially important for those with dependents and minor children. You will want to ensure the guardian of your children has the financial means to adequately provide for your children.
How to Create an Estate Plan
While you may be able to accomplish some components of estate planning on your own (reviewing beneficiary designations and obtaining life insurance), drafting estate documents is best left in the hands of a professional.
Two broad options are available for drafting estate documents: working with an attorney or using online software. Which route is right for you is dependent upon your preferences and the complexity of your personal situation.
In any case, beginning to take these steps to protect your loved ones and lessen their burden in the event of your passing is an integral part of a financial plan. And like most components of a financial plan, your estate plan, its complexity, and your choices within your plan will evolve as your life changes.