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It might seem like estate plans are just for people with actual “estates,” but most people should have one.
That’s because, in financial and legal terms, an estate simply consists of your possessions. This can include your home or other real estate, but also your car, investments, life insurance, furniture or other personal possessions, and even your checking and savings accounts.
What is estate planning?
Think of estate planning as a road map for making sure your wishes are carried out when you pass away or are unable to make decisions for yourself.
It’s an umbrella term used to describe multiple different documents that help outline your health care wishes, how you’d like your assets and possessions to be distributed and can even name who you’d like to care for your children, dependents and pets.
What’s the purpose of making an estate plan?
The reason an estate plan is so important is that without it, your assets can wind up in legal limbo for years. This can put an unnecessary burden on your heirs and other family members who are left to deal with sorting out your finances. Besides making sure your assets get to the people you choose, planning can help minimize income, gift and estate taxes, too.
Without an estate plan, and specifically a will, the laws in your state will determine what happens to your possessions, and the courts will decide who gets custody of your children.
What documents are needed for estate planning?
Every estate plan is different, but the following is a list of some commonly included estate planning documents
Last will and testament
This legal document allows you to outline how you want your possessions to be distributed and who you’d like to care for your children, dependents and pets.
This is different from a last will and testament and is used to define your wishes for end-of-life treatment if you‘re terminally ill. For example, you could define if and when you’d like to be removed from life support.
While there are many different categories of trust, they all center around a relationship in which one party (the trustor) gives another party (the trustee) the right to hold the title of property or assets for the benefit of a third party (the beneficiary).1
Medical Power of Attorney (POA), aka health care proxy
This allows you to choose someone who can make important decisions about your medical care on your behalf.
It gives someone the ability to make financial decisions and to carry them out on your behalf.
Life insurance can be added to an estate plan to help your loved ones replace lost income, pay the mortgage or rent, or even to cover funeral or other end of life expenses in your absence. It can also be used to leave a legacy.
Many assets, such as life insurance, IRAs and 401(k) plans allow you to name a beneficiary and a contingent beneficiary. This helps avoid probate and allows the asset to be paid directly to your loved one. So it’s important to keep these designations up to date.
How much does estate planning cost?
Estate planning costs will vary based on the complexity of your estate. If you have more straightforward planning needs, there are online providers, such as FreeWill, that can help you get the information and documents you need completed for free.
People with more complex planning needs may want to hire a financial and/or legal professional to help guide them through the process. The cost for these services can vary, too. Some offer flat estate planning rates, while others charge an hourly fee.
While creating an estate plan can seem overwhelming, it doesn’t have to be. Having a last will and testament is an important part of every estate plan, making it a great first step in getting your plan in place.
1“Trust,” Investopedia (Oct. 19, 2020).