Retirement Primer: All You Need to Know About Estate Planning
Estate planning isn’t just for the wealthy; it’s essential for anyone who wants to secure their legacy, protect their loved ones and ensure their assets are distributed according to their own preferences. It might sound complicated, but with the right guidance, estate planning can provide genuine peace of mind. Here’s what you need to know to get started with estate planning, from the essentials to how it benefits you and your family.
What is estate planning?
Estate planning is the process of arranging how your assets—such as money, property and possessions—will be managed and distributed after your death, or if you’re incapacitated. It typically involves drafting legal documents like wills, trusts, powers of attorney and health care directives. Each component helps clarify your wishes and gives directions to manage your estate in various scenarios.
Key components of an estate plan
- Will. A will is the cornerstone of any estate plan. It’s a legal document specifying how your assets will be distributed after your death and who will be the guardians of any minor children. Without a will, the court will decide how to distribute your property, which might not align with your wishes.
- Trusts. Trusts are legal arrangements allowing you to specify how assets should be handled on behalf of beneficiaries. Unlike a will, trusts avoid the probate process (a potentially lengthy legal proceeding) and can provide ongoing control over assets. There are many types of trusts, including revocable and irrevocable trusts, which have unique benefits and tax implications.
- Power of Attorney (POA). A POA authorizes a trusted representative to make financial and legal decisions on your behalf if you’re unable to do so. This could be due to illness, injury or any circumstance where you’re incapacitated. Without a POA, the court might appoint someone to make these decisions, potentially against your wishes.
- Healthcare directives. Often known as a “living will,” healthcare directives outline your medical preferences if you cannot make decisions yourself. They can include instructions on life-support preferences, palliative care and organ donation. Designating a healthcare proxy—someone who can speak to doctors and make decisions on your behalf—is also an option in this document.
- Beneficiary designations. Certain accounts, like life insurance policies and retirement accounts, let you name beneficiaries who will receive funds directly upon your death. These designations supersede instructions in a will, so it’s essential to keep them updated.
- Letter of intent. A non-binding document that clarifies your wishes and intentions, a letter of intent provides personal messages, explanations of decisions or details on funeral arrangements. Although it’s not legally binding, it offers guidance to your loved ones during a difficult time.
Why is estate planning so important?
Estate planning has several benefits, regardless of your age or wealth. Here’s why it’s crucial:
- Avoiding probate. Without a plan, your estate goes through probate, a potentially lengthy and costly court process. Estate planning minimizes or avoids probate, so your assets are distributed faster and more efficiently.
- Reducing taxes. Estate planning can help reduce estate taxes and inheritance taxes, ensuring more of your wealth is passed on to your chosen beneficiaries. By structuring your estate with trusts or gifting strategies, you can lessen the tax burden on your heirs.
- Providing for your family. A comprehensive estate plan protects minor children, ensures they’re provided for and reduces family conflict by clarifying your wishes. With guardianship directives in your will, you can designate who will care for your children if something happens to you.
- Supporting charitable causes. If charitable giving is important to you, estate planning allows you to designate donations to specific causes or organizations, either as one-time gifts or ongoing funding.
Common mistakes to avoid
Unfortunately, there are several common mistakes people make when it comes to estate planning, including:
1. Failing to update the plan. Life events, like marriage, divorce, birth and death, require updates to your plan. Failing to revise beneficiaries or account for new assets can lead to unintended outcomes.
2. Not having a contingency plan. Always designate backup options for executors, trustees and guardians. This ensures that, if your first choice is unable or unwilling to act, your plan still proceeds smoothly.
3. Not planning for incapacity. Many people only think about what happens after they die, but incapacity can strike at any age. Without a POA or healthcare directive, a court may appoint someone to make decisions for you.
4. Overlooking digital assets. Lots of people forget to plan for digital assets, such as social media accounts and online financial accounts. It’s a good idea to make a record of passwords and instructions so your executor can access them.
How to get started
Follow these tips to get started on your estate planning:
- Take inventory of your assets. This involves listing everything you own, including checking accounts, real estate, investments, retirement accounts, insurance policies and valuable personal property.
- Define your goals. Consider what you want your estate to accomplish. Do you want to support your children? Do you have charitable goals? Are there specific ways you want your assets managed?
- Choose key people. Select people for roles like executor, guardian, trustee and healthcare proxy. Be sure they’re trustworthy and willing to act in your best interests.
- Consult an estate-planning attorney. While you can create a simple will online, complex estates benefit from professional guidance to ensure all legal bases are covered.
Estate planning might seem overwhelming, but it doesn’t have to be. Use this guide to get started on your estate planning today.