Everything You Need to Know About Estate Planning

August 25, 2021
financial literacy

The word “estate” often conjures up images of giant mansions and lots of land. But the truth is that anyone who owns assets, including you, has an estate.

You can’t take assets with you, so you want control over who receives them when you die.

That’s what estate planning is for.

In this post, we’ll explore estate planning and its benefits, discuss the key elements of an estate plan, and how to start creating yours so that your assets are distributed exactly how you want them to be.

What is Estate Planning?

Estate planning is the process of figuring out how you would like to pass down your assets and property after you die. It consists of creating a collection of documents that together make up your estate plan.

Those who receive your assets based on your estate plan are known as your beneficiaries.

Estate plans are a key part of building generational wealth — you pass down your assets to heirs. In doing so, you increase your heirs’ financial security and help them build on your wealth as well.

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Why Should I Create an Estate Plan?

You don’t need to be wealthy to create an estate plan. If you have any property, you have an estate.

Estate planning lets you spell out your wishes for where these assets go, but it also covers other matters relevant to your finances, healthcare, and more.

Here are several reasons to create your estate plan as soon as you can.

Ensures your assets get into the right hands

First and foremost, estate plans put your wishes for your assets in writing. 

A good estate plan eliminates any questions about who receives your assets, minimizing family arguments.

Without an estate plan, courts work these issues out. Assets may not go where you’d like, only adding to family strife during an already difficult and emotional time. 

Provides for your family

Estate planning is not just for older individuals or retirees. 

We never know what tomorrow brings — you could have an untimely passing.

Regardless of your age of death, an estate plan ensures your family is provided for by passing them your assets. 

Protects your children and other loved ones

It’s not fun to think about, but as mentioned earlier, neither you nor your spouse may be here tomorrow. How will your children or other loved ones that rely on you be cared for in your absence?

You can name primary and backup guardians in your plan if you and your spouse both pass. Without the plan, the court decides who gets custody of children.

Lets you support charitable causes

You don’t only have to pass assets to loved ones. 

If you’re passionate about a specific charitable cause, you may be able to pass some of your assets to them upon your death.

This may offer tax advantages for your estate while providing significant help to charities working on issues you care about.

Minimize estate taxes

The federal government and many states tax estates. 

In this case, estate planning can help you plan for and minimize these taxes. This will help your beneficiaries receive the maximum amount of your assets.

Prepare for incapacity

Estate plans don’t just help you plan for death, but any sort of incapacity, such as an injury that leaves you unable to make certain decisions independently.

As you’ll see, some portions of your estate plan let you document your wishes for who will make financial and medical decisions if you become physically or mentally incapacitated.

Business succession planning

Entrepreneurs have another component of estate planning: figuring out the business succession plan. 

The succession plan states who will take over and run the business after you. It also explains what will happen to your interest in the business should you die or become incapacitated.

Business succession planning is part of a business owner's estate planning
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What Are the Key Elements of an Estate Plan?

Your estate plan is more than a will. 

Ensuring each of your assets goes to the right place takes some work.

Plus, you want to spell out who you’d like to make medical and financial decisions if you become unable to do so. 

There are several documents to prepare to ensure asset transfer happens seamlessly and your family is taken care of. 

Failing to prepare the following documents leaves ambiguity, forcing the court to make decisions that may not align with your wishes.

1. Will

The will is what most people think of when they first hear “estate.” It contains your desires for who will receive your assets upon your death.

Wills also name someone as guardian for your children should you and your spouse die or become incapacitated while your children are still young.

Some tips on assigning guardians: 

Make sure the guardian or guardians you pick are financially stable enough to afford the care of your children, share your views on any matters important to you (such as religion or secondary education), have a desire to raise children, and are decent people you trust with your children’s upbringing.

You may wish to name a backup guardian as well, in case your first choice cannot take on guardianship.

It’s important to ensure your will aligns with any wishes for assets outside of it, such as beneficiary designations.

For example, if you designate your child the beneficiary of a retirement account through your broker, name that same child the beneficiary of that account in your will.

Otherwise, confusion and family conflict could occur, leading to bad feelings and costly legal battles.

An example of the first page of a will
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2. Trust

A trust is a type of agreement that lets a third-party fiduciary — someone acting in your best interest — hold your assets on behalf of your beneficiary or beneficiaries.

These offer numerous benefits, such as potentially reducing estate taxes and helping you avoid probate court. They also help you make certain assets go where you want them.

In some cases, they can help you build a nest egg for your children as well while you’re still alive.

There are several types of trusts:

  • Living trust
  • Revocable living trust
  • Irrevocable trust
  • Joint trust
  • Testamentary trust

Trusts aren’t always necessary. However, they can benefit people with specific situations, such as:

  • Owning property, especially if it’s out of state
  • Having a substantial amount of assets
  • Wanting to add stipulations to inheritances
  • Hoping to reduce estate taxes
Sample of the first page of a revocable trust
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3. Beneficiaries

Your beneficiaries are the people or organizations that you would like to bequeath your assets to. 

You can name beneficiaries in a will, but retirement accounts, bank accounts, brokerage accounts, and life insurance policies let you designate beneficiaries separately.

These designations generally take priority over your will and trust.

Thus, you want to review these regularly to make sure they align with your wishes.

You can usually contact the institution with the account in question and ask them to update your beneficiaries if necessary. Many have self-service options as well — you can log into your account through your online portal and designate your beneficiaries.

4. Durable power of attorney

A power of attorney is a legal document giving someone else the authority to manage your financial matters.

Regular POAs aren’t enough, though, because they end when you become incapacitated.

You need a durable POA, which stays in effect even after you’re incapacitated but still living. 

Designating a trustworthy person — the agent — in your durable power of attorney will allow them to make financial, legal, and property-related decisions on your behalf.

Sample first page of a durable power of attorney
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5. Healthcare directives

Healthcare directives let you set up your plans for your medical care should you become incapacitated.

A couple of documents fall under the healthcare directives umbrella.

  • Living will: A written document with instructions regarding your healthcare if you become incapacitated.
  • Healthcare proxy: Designates an agent to make medical decisions on your behalf when incapacitated.

Some states combine them into one document.

Regardless, these documents legally cement your wishes should loved ones disagree with you.

6. Letter of intent

A letter of intent is an informal document that isn’t legally binding. However, it helps guide your family in carrying out your estate plan.

You may write one of these to provide your family with the location of vital documents — such as your birth certificate or marriage license — or passwords to your online accounts.

They can also provide further directions on what to do with your personal property — things that aren’t larger assets.

Lastly, a letter of intent also offers a place for your plans or wishes for funeral and burial arrangements.

How to Start Your Estate Planning: 8 steps 

Estate planning can be daunting. After all, it’s an entire field of law.

To help you out, here’s a basic roadmap to putting together your estate plan.

1. Inventory your assets and property

You likely have more items in your estate than you think. 

Your first step is making a list of all your assets, split into tangible and intangible assets.

Tangible examples include:

  • Home or real estate properties
  • Vehicles
  • Precious metals
  • Collectibles
  • Personal possessions

After taking inventory of tangible assets, calculate or appraise their values.

Here are some intangible asset examples:

  • Bank accounts
  • Brokerage accounts
  • Retirement accounts
  • Business ownership interests

You may need an outside valuation for appraising the value of your business ownership interest and similar assets.

2. Determine your family’s needs

After taking inventory, estimate your family’s future needs for when you pass.

This helps identify any gaps in your assets that must be filled to provide for your family.

For example, you might consider a life insurance policy. 

This can provide income to your family in your absence — it’s especially useful if they’ll need help paying for college or if you have a child with special needs.

Speaking of your children, you’ll also need to work out guardianship and childcare wishes at this stage.

3. Work to close any gaps

Once you know what you currently have to pass on, and what you hope to leave your loved ones, you can assess if there are any gaps between the two. 

If you have more wealth than you want to leave your loved ones, you can set some aside for charity in your will or a trust, or increase your current donations. 

If you haven’t yet built as much wealth as you hope to, you may want to consider investment vehicles that can help you generate more funds for your loved ones. 

For instance, by investing in a custodial account, you can set aside money for children you love that will grow over time and that they will automatically gain access to when they come of age. 

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4. Review beneficiaries

Next, check all applicable accounts to ensure your beneficiaries match your wishes. 

Your asset inventory helps here — you may discover forgotten accounts with beneficiaries that don’t match what you want.

Make sure no beneficiary section in any account is blank. Otherwise, the courts might have to figure things out.

Also, you may wish to name contingent beneficiaries in case the primary beneficiaries die before you.

Keep in mind that you can name various charitable organizations as beneficiaries as well.

5. Learn your state’s estate tax laws

Federal estate tax law currently exempts any estates worth less than $11.7 million.

Options for estates that exceed this limit exist, but those are outside this article’s scope.

Individual states may also have inheritance or estate taxes. 

Inheritance taxes are levied against the heir, whereas estate taxes are levied against the estate itself.

Review your state’s inheritance and estate tax laws and factor these into your planning.

6. Consider professional assistance

Nearly every estate planning document is legally binding. One error could have drastic consequences for your overall plan.

People with simpler situations, such as smaller estates or less complex wishes, could use online will-writing solutions. 

These guide you through the process and may provide templates. 

If you have any questions the program doesn’t answer, contacting an estate planning attorney is worth the cost. You may want to work with a tax professional, too.

Working with an estate attorney and a tax professional can be invaluable if you have a more complicated estate.

7. Put together and organize each document

Now that you’ve reviewed all pertinent information and obtained professional assistance, it’s time to put together each document.

If working with a lawyer, you’ll collaborate with them to ensure your wishes are spelled out correctly across all documentation.

After creating these, make at least three copies of each one.

Store them in various safe locations, and give the original copy to the executor — the person responsible for ensuring your wishes are carried out.

8. Periodically review your plan

Life changes, and your plan should change with it. 

Whenever a major life event occurs — such as marriage, having a child, sending a child to college, or moving — you should review your plan.

That said, regardless of life circumstances, review your estate plan regularly, generally every three years. Your wishes may change over time, even if surrounding circumstances don’t.

Put Your Assets Into the Right Hands

Estate planning is not just for the old or rich. Setting up your estate plan is vital for ensuring your family is cared for, and your assets go to the right places when you die or become incapacitated. 

The process can be lengthy and involves plenty of legal paperwork, but your peace of mind and your loved ones’ financial security is well worth it.

So set up your estate plan as early as possible. Remember, you can (and should) always reassess and make adjustments to the plan later.

Want to start investing in your young loved ones without having to worry about all the estate planning rules and taxes? Open an EarlyBird account today and start funding their future now. 

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