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Estate Planning 101: Understanding the Basics

Topic: Estate planning

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While it's never fun to think about our own mortality, death is something inevitable that every responsible adult should plan for. Having the right documents in place ensures your final wishes and affairs will be easier for your loved ones to take care of after you're gone. This can relieve some of the stress and burden during what will be a very difficult time in their lives. Think of estate planning as a final gift!

Some people assume estate planning is just for the wealthy. In reality, an estate plan is beneficial for nearly all independent adults. If you don't already have an estate plan, now is the time to make this a priority. With a little bit of time and research, you can put together a thorough estate plan that covers all the basics and then some.

What is an Estate Plan, Anyway?

An estate plan refers to a document or set of documents that instruct your family and an executor (a person you choose to carry out your final wishes) on what should be done at the end of your life and after you pass away. These documents outline your wishes for end-of-life healthcare and what should happen with things like real estate, bank accounts, personal property, and other assets you own.

Perhaps most importantly, an estate plan is a legally binding document. This means it can be used in court if there are any disputes regarding your assets or belongings. Hopefully, this isn't something that will apply to your situation—but it's good to know that you're covered by your estate plan just in case any issues need to be resolved.

Why Should You Have an Estate Plan?

There are many reasons to have an estate plan, aside from the peace of mind it can provide for you and your loved ones. For starters, an estate plan helps you to determine who will receive what following your death and ensures that your designated property/assets are legally transferred to those people as easily and seamlessly as possible. After all, you don't want to make your loved ones jump through all kinds of legal hurdles, do you?

An estate plan, when written strategically, can also help to minimize the amount of taxes that will be owed when property or other large assets are passed onto a loved one. A well-thought-out plan also takes a lot of the confusion and stress out of carrying out these wishes and making decisions. If you create a living trust as part of your estate plan, this can expedite the probate process after you pass. 

Finally, an estate plan can outline the details of the funeral/memorial service you'd like and how these should be paid for.

Basic Components of an Estate Plan

Estate plans can vary a bit in the specific documents they include. However, most estate plans will at least have a last will and testament (sometimes just called a "will"). Some may have other components such as a living trust, a letter of instruction (not legally binding), a charitable trust, or other types of wills. Ultimately, it's all about what works best for you and your needs.

Will (Last Will and Testament)

Perhaps the most important component of any estate plan is the last will and testament. This legally binding document is meant to help you establish your final wishes and outline exactly how you'd like your property and assets to be distributed among your family and loved ones. 

Another important aspect of a last will and testament is that this document names an executor. This is the person who will be legally responsible for taking over your estate and managing the distribution of your property/assets. If you owe any taxes on these assets, your executor will also be the person responsible for handling these. 

Before naming an executor, it's always a good idea to speak with that person one-on-one to ensure they understand and accept the responsibilities that will come along with the role. You don't want to take anybody by surprise by naming them an executor of your will, as this can be a substantial and time-consuming responsibility! That said, you can make provisions in your will to ensure your executor is paid for their time and effort.

Another thing to keep in mind when drafting a will is that not everything is covered in this document. Specifically, many monetary possessions (including retirement funds and insurance policies) are not covered in a final will and testament.  

Some people choose to create a simple online will if they have uncomplicated estates and no dependents. There's a number of free or paid options.  This can be a decent stop-gap measure to protect your assets until you can meet with an estate planner. Just be sure to avoid these  8 common online will mistakes.   You should also be aware that an estate planner is highly unlikely to re-use or alter a will you create online for liability reasons. They will need to start from scratch.

Trust

living trust is another common document to consider including in your final estate plan. The information you include in a living trust is quite similar to what would be included in a standard will. The biggest difference here is that whereas a will becomes public record, living trusts can be kept private. This is ideal if you have aspects of your financial life that you wish to keep as private as possible.

With a living trust, your family may also be able to avoid going through the probate process for a lot of things. This can help to speed up the entire process and make things less stressful on your loved ones. When creating a trust, you'll need to decide whether you want a revocable or irrevocable trust. A revocable trust can be changed/updated at any time, whereas an irrevocable trust cannot be amended at all. Most people will find that a revocable trust is best suited to their needs. Learn more about how trusts work. 

Letter of Instruction

Another document you may want to consider including in your estate plan is a letter of instruction. It is important to understand that this document, however, is not legally binding. On the other hand, it can be helpful to have as a sort of "supplement" to the legally binding documents in your state plan.

A letter of instruction is simply a free-form letter that gives you the opportunity to explain in detail how you would like your assets to be divided and your final wishes carried out. There is no required format for a letter of instruction and nothing that must be specifically covered, which gives you more freedom to write as much or as little as you'd like.

Ideally, your letter of instruction should serve as a helpful supplement to your other estate planning documents. You might include, for example, details on the types of flowers you'd prefer to have (or not have!) at your funeral/memorial service. And even though this letter is not legally binding, the information found inside it can be useful to reference during the probate process. Just be sure that if you decide to include a letter of instruction in your estate plan, that you find a way to attach it to your final will and testament. Learn more about writing a letter of instruction.

Power of Attorney for Finances

Your estate plan should also serve the important purpose of establishing power of attorney. There are different powers of attorney, including a healthcare power of attorney (see Advance Directives below) and a financial power of attorney. A financial power of attorney will make financial decisions on your behalf in the same scenario. You can opt for a situational financial power of attorney to grant this financial decision making power to someone else while you're away on military service or otherwise traveling. Learn more about the role of power of attorney for finances.

Advance Directives

Advance directives are forms that outline what types of medical interventions you wish to receive (or not receive) if you become unable to vocalize your wishes at any point. A good example of this would be a situation where you fall into a coma. These documents also allow you to choose a health care proxy (or agent) to carry out your healthcare wishes. Depending on your state, an advance directive may be broken out into two separate documents, often called living wills and health care proxy forms (or healthcare power of attorney).  Some states like Massachusetts and Michigan do not currently recognize a living will as a legally binding document.  You do not need a lawyer to complete these forms. Cake has a resource where you can download your state's advance directive forms and learn what you need to do to make them legal. 

Steps for Creating Your Estate Plan

Now that you have a better understanding of estate planning basics, it's almost time to sit down and begin drafting yours. Before you do, though, there are a few steps you may want to take.

1. Start With A List

It can be helpful to begin with a couple of simple lists. Consider, for example, creating a list of all your property and assets that you will want to pass on after you die. Then, create a list of possible beneficiaries of these assets. This can include family, loved ones, and even charitable organizations you'd like to give to. Keep in mind that if you do plan on donating any substantial assets to charity that you will want to have a charitable trust in place as part of your estate plan.

Once you have a detailed list of your assets and beneficiaries, you can begin specifying who should receive what.

2. Research Your State's Laws

Keep in mind that estate planning and probate laws can vary from one state to the next. With this in mind, you'll want to take some time to research your state's laws so that you can make the right decisions for yourself and your loved ones. The main thing to keep in mind here is that different states have different laws regarding the taxation of estates. Some states may tax not only your estate but the people who inherit it as well.

3. Consult With a Lawyer

Often times, the best way to take the stress and confusion out of estate planning is to consult with a lawyer who has specific experience in estate planning, trusts, and wills. They will be able to analyze your specific situation and even make recommendations to reduce tax burdens for your loved ones who will be inheriting your property or other assets.

An estate planning lawyer can also help with other aspects, such as helping you draft your important estate planning documents and making sure they include all the details that will be needed during the probate process later on. There are also estate planning software options available to help with this, but for personalized advice and guidance, consulting with a lawyer is your best bet. They'll know how to best optimize your plan to avoid tax burdens in your jurisdiction.

4. Keep Your Estate Plan Somewhere Safe (and Accessible!)

Once all your estate planning documents are drafted, you'll want to have a safe place to store them. In addition to keeping printed physical copies of these documents somewhere in your home (such as in a safe/lock-box), it's also a good idea to save digital copies.

Cake is a great resource for saving your important estate planning documents on a secure server. This end-of-life planning platform makes it easy for adults of all ages to be proactive about their planning. Here, you can create and save documents—including your will, living trust, and letter of instruction—and then share 24/7 access to loved ones. Cake also allows you to go back and edit or revise your plan as needed. Create a free Cake plan!

Updating and Revisiting Your Estate Plan

Speaking of updating your estate plan, it's important to revisit these documents frequently to make sure they always reflect your current wishes and needs. Ideally, you'll want to revisit your estate planning documents at least once a year. At the very least, be sure to review them any time you have a major change in your assets or financial accounts. If you purchase a new home or open a new bank account, for example, you'll want to make sure these are reflected in your estate plan.

The Bottom Line

An estate plan is something that every adult should have in place, regardless of age or position in life. You have loved ones counting on you to have your affairs in order, so why not get started on your estate plan today? Create your free Cake account to start to make and to share your end-of-life plan.


Sources

  1. Henderson, Laura W. "Components of a Legal Will." LegalZoom. www.info.legalzoom.com/preparation-legal-will-4220.html.
  2. Kaminsky, Michelle. "Top Three Benefits of a Living Trust." LegalZoom. November 2015. www.legalzoom.com/articles/top-three-benefits-of-a-living-trust
  3. Niemeyer, Brooke. "A Simple Guide to Estate Planning." Credit.com. December 1, 2016. www.credit.com/personal-finance/estate-planning-a-simple-guide/