Your complete guide to estate planning

An estate plan lays out who gets your assets when you pass away and how you want people to handle your things if you can’t do so yourself.

Derek Silva

Derek Silva

Published July 29, 2019

KEY TAKEAWAYS

  • Estate planning covers what happens to your things and how you want your health care and estate handled in the case you can no longer take care of yourself

  • You can create a solid estate plan with just a few documents, which you could write yourself if you wanted to

  • An estate planning attorney can guide you through the entire process, but doing it yourself is an option for the average person

Your estate is the collection of everything you own — money, property, and other personal belongings. No matter how much you own, those things will need to go somewhere after you pass away. That’s where estate planning comes in.

Estate planning allows you to prepare for what happens to your estate when you pass away. Many people feel that an estate plan is only for rich people, but that isn’t the case. If you own anything of value, you should have a plan.

Importantly, an estate plan also describes the kind of care you want should you become incapacitated (unable to care for yourself), and who will handle your affairs if you can’t. This is an important thing to plan for no matter how much money you have.

In this article:

What is an estate plan?

An estate plan is a collection of legal documents that lays out your intentions and expectations for two general situations:

  • What happens to your assets after you pass away
  • What happens when you can no longer take care of yourself or your estate

Your estate is the collection of everything you own. That includes cash, investments, real estate, business interests, and any other personal property. When you pass away, all of those assets need to go somewhere. An estate plan lays out who gets what.

Just as importantly, an estate plan explains what you want loved ones and caretakers to do if you become incapacitated and can no longer take care of yourself. That covers health care, long-term care, who will manage your finances, and who will look after your children if necessary.

Unsure why it’s necessary to plan for becoming incapacitated? Consider that according to the U.S. Centers for Disease Control and Prevention (CDC), two in five Americans age 65 and older live with a disability, which can affect their day-to-day lives. More than half of Americans aged 65 and older also suffer from Alzheimer’s or a related form of dementia. Even if this never affects you, it’s better to be prepared.

Who needs an estate plan

Everyone should have an estate plan. If you own anything of value, you will need a plan for you how to pass it on. The thing often overlooked is that a plan can make life a lot easier for your loved ones, who won’t want to be thinking about financial and legal matters as they grieve and handle your funeral arrangements.

4 common estate planning myths

To help drive home the point that everyone should have an estate plan, let’s dispel some common myths that exist around estate planning.

Myth 1: I’m young so I don’t need to worry about it.

Even someone who’s 30 will probably have multiple bank accounts, a retirement account, debts, and personal property that needs to go somewhere should they die. It’s frightening to think about your own death, but life is unpredictable and it’s a lot easier to create a plan before you die.

In some cases, you can also save money by creating your plan now. For one, a life insurance policy will be significantly cheaper when you’re young and healthy than when you’re in your 50s or 60s. You can clearly see that in this breakdown of life insurance costs.

Learn more about how wills and life insurance work together.

Myth 2: I don’t need a plan since my spouse just gets everything.

Even if you’re married, you and your spouse should each have a plan. An estate plan will prevent people from contesting ownership of your things and then potentially dragging out the disbursement of assets for months or more. There are also unique situations: what if your spouse dies before you or soon after you? Things could get messy if neither of you has a written plan.

At the very least, a clear plan will reduce the number of decisions your spouse and loved ones have to make while they’re grieving.

Myth 3: My family will know what to do.

While we like to think that our family and friends will follow our wishes after we pass away, it’s hard to guarantee that without a legal document instructing them on what to do. Unfortunately, people may act unexpectedly when a larger inheritance is a possibility. There are also seemingly small things you may not even consider but that could lead to disagreements, like who will get that box of old pictures in your closet.

Myth 4: Once I create a plan, I’m done.

It’s vital that you keep your plan and all documents current. If you divorce, do you still want everything to go to your ex-spouse? What happens if one of your beneficiaries dies before you do?

Regularly check your list of beneficiaries and make sure that all your documents still reflect your current wishes.

What actually happens to an estate after you die?

It’s easier to understand the estate-planning process if you know what happens to your estate when you pass away.

Everything you own at the time of your death becomes your estate. Then, the estate either goes through a summary judgment procedure, where estates under a certain value are automatically distributed per the deceased person’s will, or the estate goes through the probate process, where a probate court decides what happens to your assets.

If you had a will and testament, the court uses the will as their guide. If you didn’t have a will or if it was invalid for some reason, you are considered to have died intestate and the court uses local intestacy laws to decide who inherits your assets.

Read more about intestacy.

What is probate?

Probate is the process of verifying that your will is legal and that your final wishes are carried out. A will does not help your estate avoid probate. It simply makes the process smoother because the court can use it as a guide to what you wanted.

For most small estates, probate is a pretty simple process that takes a month or less. However, things may slow down if someone contests your will, which means they challenge what’s in it. Perhaps they feel they were wrongfully excluded or that they deserve something other than what the will says they'll receive. Contesting a will can drag out the probate process for months and potentially cost a lot in lawyer or court fees.

If you don’t have a will, your estate still goes through a probate court. The difference is that a judge will appoint someone to handle disbursing your assets.

Who handles your estate?

Ideally, you have created a will that names someone as your executor. The executor of your estate, also called a personal representative, manages your estate through the probate process. They handle tax bills, debts you hadn’t paid off, and other matters affecting your estate. The executor also oversees the disbursement of your assets to beneficiaries.

Most people nominate their spouse or child as an executor, but you can choose anyone. However, the person you nominate is allowed to decline, so make sure to choose a contingent executor or two.

If you don’t name an executor before you die, the probate judge will choose an administrator. Normally a surviving spouse if offered the administrator duties first, and then other family if the spouse declines.

Learn about what an executor does.

Taxes on your estate

Your executor handles all tax bills for your estate. The money comes out of the estate, normally from your bank accounts. If necessary, the executor may need to (and has the right to) liquidate assets to pay off certain debts.

Your executor will file an income tax return for you and for your estate if it earns income, such as a rental property might. The executor will also handle any property taxes.

Very wealthy estates also need to think about estate tax.

Estate tax

Estate tax applies to your estate before anything is distributed to your heirs, but it only affects wealthy estates.

As of 2019, the first $11.4 million of your estate is exempt at the federal level. You only pay tax if your taxable estate is worth more than the $11.4 million exemption, and so very few people actually pay federal estate tax. (Any assets passed to a surviving spouse are also exempt.) If your estate is worth that much, your executor is responsible for determining your taxable estate, filing the proper forms, and paying the tax bill.

There is also an estate tax in 12 states and the District of Columbia:

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

Some states have lower exemptions so you may need to pay a tax to the state even if you don’t have to pay federally. However, you still don’t need to worry about the tax in any of those places unless your estate is worth at least $1 million.

Learn more about who pays estate tax and how much it will cost you.

Inheritance tax

Inheritance tax applies to the people receiving assets (not the estate itself) and the tax depends on how much they inherit.

Only the following six states have an inheritance tax, so you are unlikely to pay it.

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

States also exempt or apply lower rates to certain relatives. A surviving spouse is exempt from paying inheritance tax and sometimes the deceased person’s children are, too. Less direct relatives, like cousins, and unrelated individuals usually pay the highest rates.

Community property states

Most states use common law, which means that whichever spouse bought or has their name on the title of an asset is the owner. A handful of states have community property laws, which dictate that any asset a married person gets while they’re married is owned equally, 50/50, by their spouse.

If you live in one of the community property states, your spouse may be entitled to receive your community property after your death. This can make it difficult to pass on assets to other heirs. A well-written will may allow you to bequeath assets to others, but state laws vary. You should talk to an estate planning attorney if you live in one of these states, to learn what your options are.

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Thinking about retirement?

A will is the best way to ensure your property goes to your loved ones after you die.

The 4 steps of estate planning

  • Make a list of everything you have
  • Design a plan
  • Execute the plan
  • Keep your plan up to date

Step 1: list everything you have

The best way to start estate planning is to take an inventory of all your assets. Identifying these up front can save a lot of time in the future, especially if you’re working with an attorney or working on a joint plan with your spouse. Keep your list in a place where you can easily reference and update it.

Make sure to include

  • All of your bank accounts with at least approximate balances
  • All investments you have
  • Any retirement plans you have, including pensions
  • Any real estate or property you own
  • Businesses you own, wholly or partially
  • Personal property of value, from your grandmother’s wedding ring to your collection of trading cards
  • Insurance policies
  • Digital assets, like passwords and email accounts where you receive important communications
  • All debts you owe

This asset inventory guide from Charles Schwab is a great place to get started. Having an asset inventory can also help you in other situations, like when you apply for homeowners insurance and need to know how much coverage to get.

One thing you may not need to include? Any payable-on-death accounts (POD accounts) you have. Also called transfer-on-death accounts (TOD accounts), the funds in these accounts pay out to a named beneficiary, bypassing probate.

Step 2: create a plan

Once you have a record of all your things, you can start to create a plan. Consider who you want to pass things on to. These are your beneficiaries. Also, think about who you would bequeath things to if something happened to your primary beneficiary choices. (These alternative choices are known as your secondary or contingent beneficiaries.)

How you actually create your plan depends on your situation, but there are generally two options. We’ll go more into them later, but there’s the do-it-yourself option — probably using documents from the internet as a guide — or you can work with an estate planning lawyer.

One benefit of working with a professional is that they have experience planning estates and know how to create a plan even if you aren’t sure what you want to do. And even though an attorney will cost more, it can save your loved ones from the cost of an expensive probate trial should someone contest your will.

You can find more guidance on how to actually create an estate plan later on.

Step 3: execute the plan

Your individual situation determines how exactly this step looks. For some people, you won’t have to do much right now. You will sign some documents, put them somewhere safe, and then notify everyone involved in the plan that you have actually signed the documents.

At the same time, you may have quite a bit to do once your plan becomes official. Maybe you’ll need to change the names on some titles, sell a property, or begin regularly gifting money and assets to your beneficiaries.

Step 4: keep your plan updated

It’s important that you keep your estate plan up to date and that you continue following your plan. This is especially true if you create your plan while you’re young or if you experience a major change in life, like a divorce or the birth of a child. In some cases, a beneficiary may pass away before you.

Learn more about updating your will, which is called adding a codicil.

Even if there are no major changes in your life, you have to remember to stick to your plan. If your plan calls for joint titling with your spouse and you buy a new car, you will need to make sure to put your spouse’s name on the title. A great estate plan can be derailed if you don’t do your part to follow it.

How to actually create an estate plan

While it’s easy to say you should create an estate plan, what does that actually entail? There are two basic routes you can take: work with an estate planning attorney or create a plan yourself, likely using online documents as guides.

Find an estate planning attorney

An estate planning attorney is a professional with knowledge and experience in estate planning. They can help you determine what you have, what you need a plan for, and who should be part of your plan. An attorney will help you write legally binding documents that people won’t be able to contest after your death.

Working with a professional is particularly useful because even though there are online guides available, estate laws can vary greatly from one state to the next. A local lawyer will know the rules specific to your area.

If you have a large or complicated estate with many assets, definitely get professional help. An attorney will help you create an ironclad will that ensures your estate is disbursed as you wanted. People who think they may need to pay the estate tax can get help creating a plan that minimizes their tax bill. In this case, the expertise of a tax accountant may also help. You may even be able to plan ahead to help your beneficiaries limit or avoid inheritances taxes.

Also look for an attorney with knowledge in elder law, which covers legal matters related to old age, like long-term care, other health care, retirement, Social Security, Medicare, and Medicaid. An estate planning attorney should be able to help you with this, but some people may prefer the help of a specialized elder law attorney.

Learn more about elder law and whether you need an elder law attorney.

The cost of an estate planning attorney

If you’re working with a lawyer, make sure that you plan for the cost. Creating a will is likely to cost you at least a few hundred dollars. This isn’t an unreasonable price since you should be getting a rock-solid will, but prices go up as your situation becomes more complex. If you want to set up a trust, you will probably spend at least $1,000.

And while this cost may seem high, it could save your loved ones from a costly situation where someone contests your will in probate.

DIY estate planning

For the average person, DIY estate planning is a realistic option. This is especially true if you don’t have a lot of assets to pass on or if you want to leave everything to just a couple of people.

The best place to start as you plan your own estate is by creating a will. Luckily, there are many books and online documents to get you started. There are also sites that generate a will based on your specific information, like LegalZoom or Trust & Will.

Learn more creating a will online.

In addition to a will, there are only a few other documents that are really necessary. You can read more about those in the next section.

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5 essential estate planning documents

Whether you work with a professional or go the DIY route, it’s good to know which documents every estate plan should have.

Each estate is different but there are five documents you should consider:

  • Last will and testament
  • Letter of instruction
  • Living will, or advance medical directive
  • Durable power of attorney
  • Life insurance policy

Everyone needs a will

A last will and testament, or more simply a will, states who gets your money, assets and property. Everyone should have a will. If you don’t type one out, you might even be able to write one by hand, which is called creating a holographic will.

The exact contents of your will depend on what assets you have and what you want to do with them. Your will should also name an executor, who will oversee the probate process and disbursement of your assets once he or she has received letters of testamentary (a court document that states they can legally for your estate.

In the will, you can make specific bequests to your certain heirs. Anything left over becomes part of the residue of the estate and is distributed to a beneficiary you named in your will.

Letter of instruction

The letter of instruction, sometimes called an ethical will, is a plain-English summary of your will. This document isn’t strictly necessary since it has no official legal standing, but it allows you to simply explain your personal wishes and hopes for your heirs. No one legally has to follow what’s in your letter of instruction, but it can help answer questions people have about what your exact wishes were.

This is especially useful if you created a will yourself and either forgot to include something or your language was unclear.

Living will, or advance medical directive

Not to be confused with a regular will, a living will is important because it details what kind of treatment and health care you want to receive if you become incapacitated and can no longer take care of yourself.

For example, it covers how you want your loved ones to handle a situation where you become terminally ill and are on life support. A living will is also called an advance medical directive.

(You can further protect yourself with short-term or long-term disability insurance.

Durable power of attorney

A durable power of attorney allows you to name someone to make financial, legal, and perhaps medical decisions on your behalf. They can manage your bank accounts, make mortgage payments, or change the details of some trusts.

Without this document, a court will have to appoint someone. This person is legally required to act in your best interests, but you may want to name someone yourself for the peace of mind that comes from knowing that someone you already trust will be handling your things.

Why to consider life insurance

Do you to help pay the monthly bills? Do you help pay for children? Do share any debts, like a mortgage? Do you have credit card or student loan debt? If you answered yes to any of these, you could benefit from life insurance.

A life insurance policy is a way to protect your loved ones, financially, after your death. For most people, when they pass away, their spouse is left paying for everything: the mortgage, utilities, grocery bills, childcare, and medical bills. They may also have to pay personal debts their spouse left behind. When a couple is used to covering these bills with two incomes, it’s difficult to cover them with just one.

Life insurance protects your spouse (or other loved ones) by providing them with a payment — known as a death benefit — upon your death. The benefit allows them to continue covering their financial obligations without having to completely alter their lifestyle.

(Worried about the life insurance payout adding too much to the value of your estate? Some people put it in an irrevocable life insurance trust.)

And while many people have a small amount of life insurance from their employer, the benefit from an employer policy is normally far below what you will actually need.

You can compare life insurance policies to see how much you need and what it would cost you.

One other thing to consider: a trust

If you have the five documents listed above, you likely don’t need anything else. These documents are versatile enough to address most situations. However, some people may benefit from a trust.

A trust is a legal entity that you can put assets into so that your chosen heirs can access them. In particular, a living trust allows you to avoid probate for the assets in the trust. This can save time and money if know that you want to pass certain assets to certain beneficiaries. It also makes it easier to donate to certain charities (via a charitable trust) or companies.

Assets you move into a trust are also no longer part of your estate, which means your taxable estate is smaller.

Since a living trust covers distribution of your assets, some people create one instead of or in conjunction with a will. Learn more about whether you would benefit most from a living trust or will. A will can even create a trust, either by “pouring over” into a revocable living trust or by creating a new testamentary trust.

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Takeaway

A will is the best way to ensure your property goes to your loved ones after you die.

Estate planning checklist

Estate planning is daunting because it requires you to plan for your own death. And while it’s very easy to ignore, a solid plan can really make things easier for you and your loved ones both before and after your death.

When you create an estate plan, there are some essential things to consider. During your planning process, make sure you answer these questions:

  • What kind of care do I want to receive if I become unable to care for myself?
  • Who will handle my financial, medical, and legal affairs if I become incapacitated?
  • Is my estate worth enough to trigger estate or inheritance taxes?
  • Who do I want to manage my things directly after my death?
  • Who do I want to receive my assets and how much do I want each person to receive?

You can address the questions above with a few main documents. So make sure that at the very least you

  • Create a last will and testament,
  • Make a living will that details the health care you want to receive in case you’re incapacitated,
  • Give power of attorney to someone who can handle your affairs,
  • Get a life insurance policy to protect your loved ones financially.

It’s also a good idea to write a letter of instruction, which is a plain English version of the instructions in your will. This is especially important if you decide to write your own will because it can fill in any gaps you may have left in the will.

Here’s a more complete estate planning checklist to help you get through the process.

Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.

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