If you’ve started building wealth — especially if you have a family and loved ones who depend on you — it’s imperative that you make arrangements for your estate to be transferred to them if something happens.
While this process, called estate planning, can seem daunting and cumbersome, you should sit down with a legal or financial advisor to get the paperwork sorted. This is especially true if you’ve accumulated substantial wealth or if you have kids, but estate planning is a process every single adult should go through in order to ensure that their surviving spouse and children are looked after and their wishes respected.
What Is Estate Planning?
Estate planning is establishing a plan laying out who will receive your assets. It also involves other personal matters, such as the transfer of guardianship of children. While the document most associated with estate planning is your will, there are essential aspects to take care of, including healthcare directives and power of attorney.
Many people believe you only need estate planning if you’re wealthy and have high-value assets. This is not the case. Estate planning is crucial for everyone. Your estate comprises everything you own, including your home, car, real estate holdings, checking and savings accounts, retirement plans, pensions, furniture, jewelry, technology, and personal possessions.
Further, if you have children, you should establish their guardianship. Who will take care of minor children if you can no longer do so yourself? Health directives, which also form a part of your estate, can inform about your medical care preferences.
To create a thorough estate plan, you may need the services of professionals, such as an estate attorney or a financial expert at a brokerage.
Why You Need an Estate Plan
There are many good reasons you should consider making an estate plan. These include:
1. Making Decisions for Your Family
Ultimately, estate planning comes down to decision-making. If you’re not clear about who you want inheriting your assets, you leave it open to interpretation and your wishes may or may not be honored. Further, if you’re unable to make business and life decisions due to physical or mental incapacity, someone appointed by a court will need to control your assets. If you die without an estate plan, the laws will dictate how your assets are distributed, and your family members will have little say.
2. Care for Your Children
An estate plan also helps prepare and plan your family for a situation where you or your partner may no longer be in a position to take care of your children. By naming guardians in your estate plan, you can have the peace of mind to know they’re looked after if the worst happens.
3. Record Organization
As we get older, we accumulate a variety of bank accounts, assets, and possessions. By planning your estate, you can put all your financial records, insurance policies, deeds, and accounts in one place so that they’re easy to find. Plus, by going through estate planning now, you can ensure that errors or omissions are fixed before they become a problem.
4. Peace of Mind
A good estate plan gives you peace of mind that the wealth you have spent your life working to build will benefit the people you choose. It also helps ensure that your family is cared for at a devastating time. A good estate plan will include instructions for your care if you become incapacitated, name guardians for minor children, provide for the transfer of any business or real estate holdings, provide for loved ones, and minimize taxes and court costs.
Estate Planning Documents
The most common documents you need in an estate plan are:
- Last will and testament: This is an estate plan's most commonly used document. The will establishes directives for distributing your assets, including real estate properties and investments.
- Guardianship: If you’re caring for minor children or other dependents, this document will specify the instructions for transfer of guardianship. You’ll need to outline what happens to the children and other dependents and who you want to care for them. This is often a section in your will, but it can also be a separate document.
- Living trust: While a will outlines what happens to your assets upon your death, a living trust is a vehicle that holds your assets while you’re alive, up until a predetermined time. In the living trust, you can provide instructions for how the assets in the trust can be managed and distributed. Another big difference is that all assets outlined in a will go through a state’s probate court before distributing to beneficiaries. However, a revocable living trust can avoid the probate process, which is why it’s often preferred.
- Power of attorney (POA): You can have multiple POAs, which are legal documents giving an assigned person the power to make legal, medical, or financial decisions for you. The most common types include a financial power of attorney, which can allow a person to control your financial affairs, and a durable power of attorney.
- Advance healthcare directive (AHCD): This is sometimes called a living will or a medical power of attorney and outlines what medical actions or healthcare decisions must be taken if you become physically or mentally incapacitated and are unable to make your own decisions.
How to Create an Estate Plan
Here are the steps to follow to create an estate plan:
1. Create an Inventory of Assets and Debts
The first thing you’ll need to do is to make a list of your assets and liabilities. What do you own? And what do you owe? The list of your assets will include physical assets and non-physical items, such as retirement accounts, 401(k) accounts, IRAs, life insurance policies, annuities, etc. You’ll also want to inventory your stuff, including vehicles, art collections, book collections, technology, jewelry, antique furniture, coins, etc.
It’s also a good idea to list out your debts. This will include mortgages, personal loans, auto loans, student loans, home equity lines of credit (HELOCs), and any credit card debt.
2. Select Your Beneficiary Designations
Once you’ve created your list of assets, you need to decide on the designated beneficiaries. Consider accounting for your family’s needs when picking your beneficiaries. You’ll need to determine whether you have adequate life insurance and make decisions regarding the care and guardianship of minor children.
At this point, you’ll want to determine and establish necessary directives. This will include your will, your power of attorney, and trusts. You’ll also want to select an estate administrator or executor who will be in charge of ensuring your instructions are followed.
3. Work With an Attorney or Tax Advisor
Depending on how complicated your estate is, you may choose to work with an attorney to draft your will. You may also need to work with a financial planner or tax professional to ensure that your dependents don’t end up paying a substantial portion of their inheritance in taxes. You must be mindful of tax laws, including federal estate, inheritance, and gift taxes.
It’s a good idea to review your estate plan with an estate planning attorney every few years to ensure its currentness, especially as your financial situation changes and for tax planning.
The Bottom Line
Regardless of whether you’re a real estate investor with dozens of investment properties to your name or just starting the process of building wealth, estate planning is essential for every adult who wants to protect their assets and have control over how they are divided. If you have a family, putting together a plan for your dependents becomes even more imperative.
