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Estate Planning Basics: A 7-Step Checklist

March 31, 2017
Estate Planning, Investing
Estate Planning Basics: A 7-Step Checklist
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Estate planning is the process of designating who will receive your assets and handle your responsibilities after your death or incapacitation. The goal is to make sure your beneficiaries receive these things in the most cost-effective way possible.

Though it’s sometimes viewed as a task primarily for older people, estate planning can help young people establish a foundation that they can fine-tune as their personal and financial situations change. And it’s not just for the rich, says Roger Wohlner, a financial advisor and writer based in Arlington Heights, Illinois.

“Regardless of your income level, you need to think about how do you want your financial assets to be distributed or handled in the event that you die or are incapacitated,” Wohlner says. “What happens to your stuff?”

As you ponder that basic question, here are seven steps you can take to begin planning your estate.

1. Take inventory

Many young people think they don’t have enough to justify estate planning. But once they start looking, they might be surprised by all the tangible and intangible assets they possess.

The tangible assets in an estate may include:

  • Homes or other real estate
  • Vehicles including cars, motorcycles or boats
  • Collectibles like coins, antiques or trading cards
  • Other personal possessions

The intangible assets in an estate may include:

  • Checking and savings accounts and certificates of deposit
  • Stocks, bonds and mutual funds
  • Life insurance policies
  • Retirement plans like workplace 401(k) plans and individual retirement accounts
  • Any interest held in a business

Once you’ve taken inventory of your tangible and intangible assets, you need to estimate their value. That’s easy when you have outside verification, such as a recent appraisal of your home or the statements from your financial accounts.

When you don’t have an outside valuation, value the items based on how you expect your heirs will value them. This can help ensure your possessions are distributed equitably among the people you love.

2. Account for your family

Once you have a sense of what’s in your estate, you can consider ways to protect it and your family.

Do you have enough life insurance? This is important if you’re married and your current lifestyle — and monthly mortgage payment — requires your dual incomes. A policy is even more imperative if you have children and are planning to help them attend college, or if you have a special-needs child.

There are many variables when it comes to insurance. In addition to the types of policies — for example, whole life versus term life — you need to take into account your household income, your children’s needs, the needs of other dependents such as aging parents, and other assets.

You also should spell out, after consulting with the other parent, your wishes for your children’s care. Don’t presume that family will be there or that they will have the same child-rearing ideas and goals as you. And definitely don’t presume that a judge’s decision will match your wishes if the issue goes to court.

Name a guardian — and a backup guardian, just in case — when you write your will, Wohlner says. This official document can help sidestep costly family court fights.

“There’s no better way to squander the money you want to go to your heirs than to have to have relatives squabbling over the kids,” Wohlner says.

3. Establish your directives

Estate planning is key to directing your assets once you’re gone, but a complete plan also includes important legal directives that could come into play before then.

A medical care directive, also known as a living will, spells out your wishes for medical care if you become unable to make those decisions yourself. You also should give a trusted person medical power of attorney for your health care, allowing that person the authority to make decisions if you can’t. These two documents are sometimes combined into one, known as an advance health care directive.

If you’re medically unable to handle your financial affairs, a durable financial power of attorney allows a surrogate of your choosing to manage them. Your designated agent, as directed in the document, can act on your behalf in legal and financial situations when you can’t. This includes paying your bills and taxes, as well as accessing and managing your assets.

If turning over everything to someone else concerns you, consider a limited power of attorney. This legal document does just what its name says: It imposes limits on the powers of your named representative. For example, you could grant the person the power to sign the documents on your behalf at the closing of a home sale or to sell a specific stock.

Consider carefully the people you grant power of attorney. These people could literally have your financial well-being — and even your life — in their hands. You might want to assign the medical and financial representation to different people, as well as a backup for each in case your primary choice is unavailable when needed.

In some cases, a trust might be also appropriate. With a living trust, you can designate portions of your estate to go toward certain things while you’re alive. If you become ill or incapacitated, your selected trustee can take over. Upon your death, the trust assets are transferred to your designated beneficiaries, bypassing probate, the court process that may otherwise distribute your property.

4. Review your beneficiaries

While your will and other documents spell out your wishes, they aren’t all-inclusive, Wolhner says.

“Retirement plans and insurance products have will substitutes — beneficiary designations that you need to keep track of and update as needed,” he says. “Beneficiary designations trump wills.”

People sometimes forget the beneficiaries they named on policies or accounts established many years ago. If, for example, your spouse from your first marriage remains as beneficiary on your life insurance policy, your current spouse will get the bad news — and none of the policy’s payout — after you’re gone.

Don’t leave any beneficiary sections blank. In that case, when an account goes through probate, it will be distributed based on the state’s rules for who gets the property.

Also be sure to name contingent beneficiaries. These backup beneficiaries are critical if your primary beneficiary dies before you do and you forget to update the primary beneficiary designation.

5. Note your state’s laws

Estate planning is often viewed as a means for minimizing estate and inheritance taxes. But at the federal level, only very large estates are subject to estate taxes. For 2017, up to $5.49 million of an estate is exempt from federal taxation.

A handful of states, however, have their own estate tax laws. They may levy taxes not only on estates — even those valued below the federal government’s exemption amount — but also on the people who inherit assets.

6. Weigh the value of professional help

Is it worth hiring an attorney or estate tax professional to help create your estate plan? As with the question of whether you should hire a tax preparer or turn to tax software, the answer generally depends on your situation.

When your estate is small and your wishes are simple, an online or packaged will-writing program may be sufficient for your needs. These programs typically account for state-specific requirements and walk you through writing a will using an interview process about your life, finances and bequests. You can even update your homemade will as necessary.

However, it might be worthwhile to consult an estate attorney and possibly a tax advisor if you have any doubts about the process. They can help you determine if you’re on the proper estate planning path, especially if you live in a state with its own estate or inheritance taxes.

In cases of a large and complex estate — think special child care concerns, business issues or nonfamilial heirs — an estate attorney and tax professional can help you maneuver the sometimes complicated implications.

Professionals can also help in the future as your circumstances change and the need to adjust your plan arises — see Step 7.

7. Plan to reassess

Life changes. So should your estate plan.

Periodically assess your estate plan and make changes as necessary. You should revisit your final wishes whenever your circumstances change, for better or for worse. This may include a marriage or divorce, birth of a child, loss of a loved one, getting a new job or being terminated.

Even if your circumstances don’t change, it’s still a good idea to evaluate your estate plan periodically. While your situation may be the same, laws may have changed.

It will take some effort to revise your plan, but take heart. The need to revise means you’ve already avoided the biggest estate planning mistake: never drafting a plan at all.

More tips

  • Want to leave more to your heirs? Consider a Roth IRA for your savings, which doesn’t require minimum distributions in retirement.
  • Need to review your insurance coverage? See NerdWallet’s ranking of the best life insurance companies.
  • Worried you’re not saving enough to fund your retirement, let alone an inheritance? Use our retirement calculator to see where you stand today.