Estate planning is the process of creating a legal and financial plan that determines what happens to your assets, your healthcare, and your dependents when you die or become incapacitated. It involves creating a set of legal documents that reflect your wishes and ensure they are carried out — without unnecessary court involvement, expense, or family conflict.
Despite its importance studies consistently show that the majority of American adults do not have a basic estate plan in place. Many people put it off because they think it is only for the wealthy, too complicated, or something they can deal with later. In reality estate planning is important for adults of all ages and financial situations.
What estate planning covers
A comprehensive estate plan typically addresses four main areas:
- Asset distribution — who receives your property, money, and belongings after you die and in what proportions
- Incapacity planning — who manages your financial and medical affairs if you become unable to do so yourself due to illness or injury
- Healthcare decisions — what medical treatments you do and do not want if you are unable to communicate your wishes
- Dependents — who will care for your minor children or other dependents if you are no longer able to
The core documents of an estate plan
A basic estate plan typically includes four essential documents:
- Will — a legal document that describes how you want your assets distributed after death, names an executor to manage your estate, and names a guardian for any minor children
- Durable power of attorney — names a trusted person to manage your financial and legal affairs if you become incapacitated
- Healthcare power of attorney — names a trusted person to make medical decisions on your behalf if you are unable to do so
- Living will or advance directive — describes your wishes regarding specific medical treatments such as resuscitation, mechanical ventilation, and artificial nutrition
For people with more complex needs a revocable living trust may also be included to avoid probate and provide additional flexibility.
Why estate planning matters
Without an estate plan in place several things can happen that you would likely want to avoid:
- Your assets may be distributed according to your state’s intestacy laws which may not reflect your wishes
- A court may appoint a guardian for your minor children without your input
- Family members may be forced to go to court to obtain authority to manage your affairs if you become incapacitated
- Your estate may go through a lengthy and expensive probate process
- Family conflict may arise over your assets and care decisions
- People or organizations you care about may receive nothing
Estate planning puts you in control of these decisions while you are able to make them.
Estate planning is not just for the wealthy
One of the most common misconceptions about estate planning is that it is only necessary for people with significant wealth. In reality estate planning is important for anyone who:
- Has minor children and wants to name a guardian
- Owns any property or has any financial accounts
- Has specific wishes about medical treatment
- Wants to choose who manages their affairs if they become incapacitated
- Wants to avoid putting their family through unnecessary legal proceedings
Even a simple estate plan with a basic will and power of attorney can make an enormous difference for a family during an already difficult time.
Estate planning and taxes
For most people estate taxes are not a significant concern because the federal estate tax exemption is quite high — over $12 million per individual as of recent years. This means that the vast majority of estates do not owe any federal estate tax.
However some states have their own estate or inheritance taxes with lower exemption amounts. And for people with very large estates tax planning can be an important part of a comprehensive estate plan. An estate planning attorney can advise whether tax planning is relevant to your situation.
When to create an estate plan
The best time to create an estate plan is now — regardless of your age or financial situation. Life is unpredictable and the consequences of not having a plan in place can be significant. Specific life events that make estate planning especially urgent include:
- Getting married or divorced
- Having a child or adopting
- Buying a home or other significant property
- Starting a business
- Receiving a significant inheritance or other windfall
- Being diagnosed with a serious illness
- Reaching retirement age
How to get started
Getting started with estate planning does not have to be complicated or expensive. Basic steps include:
- Take stock of your assets including real estate, bank and investment accounts, retirement accounts, life insurance, and personal property
- Think about who you want to receive your assets and in what proportions
- Choose an executor for your will and a trustee if you plan to create a trust
- Choose a healthcare agent and a financial power of attorney agent
- Think about your wishes regarding medical treatment and end of life care
- Consult with an estate planning attorney who can draft documents that reflect your wishes and comply with your state’s laws
- Review and update your plan periodically especially after major life changes
How often should you update your estate plan
An estate plan is not a one time event. It should be reviewed and updated whenever a significant life change occurs including marriage, divorce, the birth of a child, the death of a named executor or beneficiary, a significant change in assets, or a move to a different state. Even without major life changes reviewing your plan every three to five years is a good practice.
Key terms to know
- Estate planning — the process of creating legal and financial plans for asset distribution, incapacity, healthcare decisions, and dependent care
- Will — a legal document directing asset distribution after death
- Durable power of attorney — a document naming a person to manage financial affairs during incapacity
- Healthcare power of attorney — a document naming a person to make medical decisions during incapacity
- Advance directive — a document describing medical treatment wishes
- Executor — the person named to manage an estate after death
- Intestacy laws — state laws that determine asset distribution when someone dies without a will
- Probate — the court supervised process of validating a will and distributing an estate
Sources
- American Bar Association — Public Resources
- National Institute on Aging — Getting Your Affairs in Order
- USA.gov — Estate Planning
This article is for general informational purposes only and does not constitute legal advice. Laws vary by state. Consult a licensed attorney for guidance specific to your situation.