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Guide to estate planning

An estate plan ensures your loved ones are taken care of financially when you're no longer around.

While it might be an awkward or even painful topic to think about, mapping out what should happen to your assets if you die or become incapacitated is a crucial part of financial planning. If you can work your way through the main estate planning tasks now, you’ll set your loved ones up for an easier transition when you die.

Download a printable PDF estate planning checklist

What is estate planning?

Estate planning involves developing a strategy to deal with your assets and investments after you die. It aims to provide peace of mind for you and your loved ones, ensuring that your assets are passed on to your beneficiaries in the most simple and effective way.

What does estate planning involve?

A thorough estate plan might include:

  • Making a will, this is an official document that records the distribution of assets.
  • Taking out life insurance.
  • Naming an executor of your estate or a trustee for minor beneficiaries.
  • Appointing power of attorney, or someone to conduct your affairs if you’re unable to do so.
  • Filing an advance medical directive, or instructions regarding medical treatment if you’re mentally incapacitated or unable to communicate.

How do I start estate planning?

The estate planning process can be broken down into a few simple steps:

  1. Take stock of your assets. Create a list of all your personal assets, as well as other assets that form your estate, such as trusts, stocks or life insurance.
  2. Identify risks. Identify any potential risks you want to plan around before and after your death, such as divorce, mental incapacity or your early death.
  3. Create a plan. Work with your lawyer, accountant or financial planner to work out an estate plan that is tailored to your needs and incorporates all your assets.

For help developing a comprehensive estate plan that covers all necessary issues, it’s recommended that you seek independent legal advice. Your lawyer will be able to help you get started and provide expert advice tailored to your personal needs.

How can an estate plan benefit me?

There are several important benefits to estate planning, including:

  • Peace of mind. The biggest benefit of estate planning is the peace of mind it provides, ensuring that your hard-earned assets will be distributed according to your wishes.
  • Financial support for the people you care about. By developing a comprehensive estate plan, you can guarantee that your assets go to the right people.
  • Eliminates disputes. A clear will and a good estate plan will help your loved ones avoid arguments, disputes and messy legal battles about the fair distribution of your assets.
  • Tax-effective. With help from legal and financial professionals, you can distribute your assets in a way that minimizes the tax obligations your heirs will face.
  • More than money. Estate planning is about much more than simply dividing up your finances; it also allows you to ensure that you receive the medical care you want, that your children are properly cared for if you die unexpectedly and that you’re given the memorial you want.

Estate planning checklist

While estate planning might seem like a morbid task, having your estate in order means saving your loved ones stress and heartache in the future. Here’s a list of steps you can take to cover all your bases:

  1. Take stock of any physical assets. Prepare a detailed list of all the physical items that you own that can be deemed as assets. To start, include your house, any other property you own, vehicles and any expensive art or artifacts. Experts also suggest including any physical item greater than $100 in value, like laptops and other electronic devices.
  2. List your nonphysical assets. These include all bank accounts, both personal and business. If you own any stocks, CDs or savings bonds, include those here. Remember to list the names of the respective banks and companies along with your detailed account information.
  3. Account for your debts. Make a list of all your debts so your estate income can correctly resolve them. This includes any mortgages, car loans, business loans and personal loans. You should also list all of your credit cards along with the balances due on each.
  4. Review your retirement plans. This includes pensions, 401(k) accounts, annuities, IRAs and insurance policies. Check that everything is up to date, the proper beneficiaries are listed and all contributions and premiums are being paid properly. You’ll also want to add these to your list of nonphysical assets.
  5. Choose an executor. This person will ensure that all your wishes are carried out as per your will. When appointing an executor, choose someone responsible and trustworthy. It’s best to choose someone who is not a beneficiary under the terms of your will so that they remain fair.
  6. Make a will. Once you have a list of all your assets and liabilities, create a will online or make an appointment with a lawyer if you have a more complicated estate or financial situation.
  7. Set up a trust. If you have a particularly large estate, you may want to think about setting up a trust to manage your estate. You’ll need to appoint a trustee to manage the trust upon your death, though a trustee can manage the trust while you’re alive if you choose.
  8. Take out a life insurance policy. If you don’t already have one, now is a good time to consider taking out a life insurance policy. Aside from term or whole life insurance policies, you may want to consider adding critical illness or disability coverage, which can help cover costs if you become sick or injured and are unable to work.
  9. Write a living will. Also known as an “advance directive,” this is a legal document that lays out your wishes for medical treatment in case you become incapacitated and can’t express them yourself.
  10. Appoint a power of attorney. This is a legally binding document that gives another person the power to manage your affairs if you’re unable to do so. This can include making financial, legal and medical decisions on your behalf.
  11. Make sure all paperwork is legally binding. Once you’ve prepared all the lists and documents as mentioned above, review them with a lawyer and sign them in the presence of at least two witnesses. While you don’t technically have to have a will notarized, doing so can make it easier on your executor after you pass.
  12. Find a safe place to keep your will. Keep one copy of all the documents with you and another copy with your lawyer. It’s also a good idea to let a spouse, family member or close friend know where your will is.
  13. Update documents periodically. A person’s estate is constantly changing, and so is their family. Set a date on your calendar to review your estate plan once a year and make any necessary changes. For instance, if a family welcomes a new child, you may want to include that child as a beneficiary in your will. If you update your will and other important documents every few years, it will ensure the plans for your estate always reflect your wishes.

How to choose a life insurance policy

Consider the following when choosing a life insurance policy:

  • Your dependents. Who relies on you for financial support? This can include children, your spouse and other family members or loved ones.
  • Their financial needs. How long until your dependents will be financially independent? For example, if you have young children, you may want a policy that will support them until they graduate college.
  • Your debts. Any outstanding debts, such as your mortgage, car loan, student loans or credit card balances, will likely need to be paid before any money is passed on to your loved ones.
  • Your income. Consider both how much you can afford to pay and how much your family depends on. For example, if you currently make $100,000 a year, a $50,000 life insurance policy doesn’t give your family much time to adjust to the loss of your income.
  • Taxation. The good news for beneficiaries is that typically life insurance payouts are tax-free, though there are a few exceptions for large estates.

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How to make a will

A will is a critical legal document that outlines your wishes for distributing your assets after your death. By creating a clear and unambiguous will, you can:

  • Ensure that your assets are distributed to the right people.
  • Provide instructions on who will look after your children.
  • Establish trusts to distribute assets among your beneficiaries more effectively.
  • Donate money to charity.
  • Provide instructions for your funeral.

If you die without a will or with an invalid will, this is known as dying intestate. When this happens, each state has its own laws regarding how your assets will be distributed. Though those assets will usually be distributed to your family members, this allocation may go against your final wishes.

With this in mind, it’s essential that you create a will and update it regularly to reflect any changes to your legal rights.

Who’s involved after I die?

When you create your will, you’ll be required to nominate your executor. The executor’s role is to carry out your wishes as specified in your will, and they have the power to administer the estate.

Depending on your personal circumstances, others may also be involved. For example, if you establish a testamentary trust in your will, you will also appoint a trustee to administer that trust.

What is a testamentary trust?

At its core, it’s a trust created as part of a will. When a person dies and leaves behind a will, and that will states a testamentary trust should be created and all their assets should be transferred to the trust, then this trust comes into effect. Testamentary trusts ensure your assets are divided how and when you desire.

For example, you may want your assets to go to your heirs at a specific date in their life. For that reason, you choose to add a provision for a testamentary trust in your will. With the provision in place, the testamentary trust is then created once you die and all assets are transferred into the name of the trust, until the specified date.

Who handles a testamentary trust?

Usually, a trustee — or the executor of the estate — will be appointed for the testamentary trust. It’s the responsibility of the trustee to manage the trust until the specified time listed in the will. Once the period mentioned in the will passes, all the assets of the trust are transferred to the legal heirs or beneficiaries of the trust.

How do I change my will?

Changing your will isn’t as simple as crossing out a section here or adding a name there. Once your initial will is squared away, you may want to start by calling a lawyer, financial planner or other professional.

Because a will is a legal document, changes to it will require a witness or notary, usually with a lawyer’s help. Doing so can help you void older versions of your will, so there isn’t confusion as to which version is most current on your death.

You have three main ways to change the information in your existing will:
  • Change your original will. Though professionals don’t recommend it, you can make changes directly to your original will. But you run the risk of leaving multiple versions, which can be messy and confusing to your surviving loved ones.
  • Adding to your existing will. A lawyer can help you put together legal additions — called codicils — with witness signatures to make them official.
  • Creating a new will. Typically the easiest option, especially for big changes, you can legally render your original will null and void, replacing it with an updated legal will that supersedes any other version.

How do I cancel my will?

Any time you write a new will, you’re effectively canceling your old will. To strengthen your new will and clear up any potential confusion, include a statement clearly revoking all previous versions of your will.

To explicitly cancel your will without creating a new one, you can create, sign and notarize a legal document that clearly indicates you intend to revoke your will.

Still another way of canceling your will is to physically destroy it by burning, tearing, cutting or otherwise mutilating the will in front of two witnesses. Note that it must be destroyed beyond recognition, so that nobody can challenge its validity by presenting even a portion of it in probate court.

Bottom line

Creating a new estate plan can require a bit of time and paperwork, but it’s necessary to make sure your wishes are honored and your loved ones are taken care of. Once you have the framework, it’ll be much easier to make adjustments as needed — and you’ll be able to rest easy knowing that you have a plan in place for your loved ones.

To make sure your family is taken care of after you pass, consider taking out a life insurance policy to provide for them when you’re no longer able.

Frequently asked questions

What happens to my 401(k) when I die?

Any funds in your 401(k) can be passed on. You were likely asked to name a beneficiary when you opened the account. If not, check with the manager of your 401(k) to find out how to name a beneficiary.

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