Regardless of your assets and net worth, everyone should have an estate plan. Estate planning documents can minimize tax and other consequences for your beneficiaries, avoid a lengthy probate process, name a guardian for your children, help you plan for old age, and make things easier if you ever become unable to manage your own affairs.
A basic estate plan for people of any age includes:
- A will
- Financial powers of attorney
- A living will
- And possibly a trust
Here are some of the top things to know about estate planning.
Wills, trusts, and beneficiaries
Some of your assets can be handed down to your beneficiaries through a will. These are known legally as "probate assets" because they go through the probate process before being distributed to heirs.
But certain types of property are "non-probate assets" that bypass the will and probate and go directly to beneficiaries you have named. This includes assets in a trust, life insurance policies, 401K plans, IRAs, pensions, "payable on death" or "transfer on death" financial assets, and real estate owned as a joint tenant with another person.
Because of this, the process of writing a will should include updating all your beneficiary designations. This will ensure that all your property goes to the people you intended.
Everyone needs a will
A will specifies what should happen to your money and property after your passing. A will can also name a guardian to take care of your children. But writing a will can be important even if you're young and single.
If you don't have a will, your probate assets will be passed down according to state law. That usually means your closest relative(s) will inherit everything, and other people you care deeply about—unmarried partners, stepchildren, and best friends, for example—will get nothing. And a court will decide who will care for your children.
An estate planning lawyer can help you with how to make a will and the requirements for signing and storing your will.
A trust is a legal document that holds assets. A trustee oversees the trust. Beneficiaries are the people who will receive the assets in the trust.
Distribution of trust assets to beneficiaries happens according to the terms of the trust—without going through the probate process. In addition to the primary beneficiaries, trusts commonly have contingent beneficiaries who will receive the trust assets if the primary beneficiary cannot receive them.
Probate avoidance is a major reason for setting up a trust, but trusts can also help with long-term care planning or provide for children or other family members who need help managing an inheritance. A trust can also help minimize state estate taxes, which often have lower limits than the federal estate tax.
Powers of attorney and advance directives
Powers of attorney protect you during your lifetime. A power of attorney is a document that allows another person to make decisions and conduct business on your behalf if you aren't able to.
- A durable power of attorney ensures that the business and financial side of your life can continue if you have a serious illness, an accident, or dementia.
- A healthcare power of attorney appoints someone to make healthcare decisions for you if you can't do it yourself.
If you lose your mental capacity and you don't have a power of attorney in place, your family can't get power of attorney without going to court and convincing a judge that you're mentally incompetent. Meanwhile, there may be no one who can pay bills, sell property, authorize medical procedures, or carry on your day to day business.
An advance directive, or living will, is a related document meant for very specific situations. A living will describes your wishes regarding life-prolonging and other treatment if you are terminally ill or in a persistent vegetative state and you have lost the ability to communicate your wishes. A living will can ease the burden on family members and healthcare workers during a difficult time.
Understanding how to write a will and why you might also want a trust and powers of attorney are key to a good estate plan. If you've never had an estate plan, or if your plan needs updating, there's no time like the present to get your affairs in order.
Find out more about Estate Planning Basics