5 Basic Steps To Creating An Estate Plan
What the heck is an estate plan and how do I create one?
It seems like every year, we're reading about a celebrity who died without a family estate plan. I immediately think of my client's responses to estate planning whenever I read these articles. Many, particularly my 80s kids, think of a Dynasty-like setting with rich people sitting around a table that cost more than my house, reading from a document that probably killed a forest. Most people think, "Estate, what estate? I don't have anything of value."
I challenge you to re-think family estate planning if this sounds like you. A family estate plan is a written plan explaining what you and your spouse want to do with the things you own or the people you love, like your children, if one or both of you are deceased or one or both of you cannot make a decision. It's you and your spouse's chance to make sure that all the hard work you've done to become financially secure doesn't die with you.
Estate laws depend on what state you live in AND the state where your property is located. More importantly, your best estate plan will depend on your family's situation. Creating a family estate plan is complex; we're just covering the basics.
Consider consulting with an attorney to help you create a family estate plan, especially if you have a:
Property in a different state
High net worth
Blended Family (you or stepchildren have children by someone that's not your spouse)
Child with lifetime special needs.
The following are the basic parts of a family estate plan with a few honorable mentions. Note: The names of the document may vary by state.
Will
Living Will (name may vary depending on your state)
Healthcare Power of Attorney (name may vary depending on your state)
Durable Power of Attorney for Finances
Honorable Mentions: Trusts, Beneficiary Designations, Asset Titling, Life Insurance
1. Will: Documents who gets what when you pass away.
A legal document states what you want to be done with the things you own and your children when you pass away.
Probate court processes the will, and once filed, the will becomes a public record.
A will can state who you want to care for your children if you are not around. Without a will, you leave it up to your state's laws to decide who gets what, including your kids.
Decide with your spouse (and children if older) who will care for your kids if you are no longer around. Make sure you discuss your decision with your family to prevent future problems. Every year, have the same discussion about making sure the chosen person can still care for your children.
If you have stepchildren, decide how you and your spouse want to divide your assets when one or both of you pass away. I strongly encourage both of you to talk to an attorney.
Depending on your finances and the state you live in, the process can be expensive and time-consuming or inexpensive and straightforward. I know this is clear as mud, which is why it's vital to see legal professionals' guidance.
2. Living Will: Your written medical wishes
Sometimes known as an advance healthcare directive or, as my mother loving put it, the "pull the plug" document. It states what you want to be done or not done to you medically if you're unable to make a decision.
From personal experience, I beg you not to leave life and death decisions, like taking a loved one off of life support, to weigh on the souls of those who love you.
It is one of the most heart-wrenching decisions for someone you love to make. Save them the heartache, and please put your wishes in writing. Share your wishes with your family so there are no surprises if the unexpected happens. Discuss your burial wishes with your spouse and loved ones as well.
3. Healthcare Power of Attorney: Who will make medical decisions for you?
A healthcare power of attorney is the person you designate to make healthcare decisions about your medical care. Choose carefully; your decision can mean life or death.
Choose the person you feel will honor your wishes, can mentally handle tough decisions, and will fight for your medical rights, if necessary. Even if it's your spouse, consider putting it in writing.
Do not assume your spouse can easily decide your medical treatment on your behalf. The Terry Schiavo case was a 15-year right-to-life legal battle between her spouse and her family. This case proved that being married does not automatically mean that your spouse has the final say in your medical treatments.
4. Durable Power of Attorney for Finance: Who manages your money if you can't
Also called a Financial Power of Attorney. This legal document kicks into effect if you cannot make a decision. The person you designate as your financial power of attorney has the authority to make financial decisions on your behalf.
The person you choose does not have to be a financial expert- just someone you trust.
5. Honorable Mentions
Ok, so I cheated a little here. Although the items below are not basic estate documents, each of the items below, depending on your family, is an important consideration to ensure your wishes are followed if you die early or cannot make a decisison.
Trust
A trust is a legal document that states who gets the things you own AND how you want your heirs to use those things when you pass away. For instance, you can decide that you want your children to get part of their inheritance at 18, 25, or 30.
You can also state your wishes if you become incapacitated and cannot make a decisison.
Most attorneys agree that trust isn't necessary for every family. A trust may be a consideration if you have properties in different states, a high net worth, or a complex family situation. There are different types of trusts. I strongly encourage you to talk to an estate attorney to review your family's needs.
Creating and maintaining trust is typically more expensive than a will. Typically trusts, unlike wills, do not go through probate court (a local court where a deceased estate is processed, including a will), which means trusts do not become a public record.
Beneficiary Designations
As part of your family estate planning process, check all of your family's accounts with beneficiary designations (retirement, life insurance, etc.) to make the correct beneficiary is listed. The most likely accounts you and your spouse will have with beneficiary designations are:
Retirement Accounts- 401ks, 403bs, 457s, pensions, IRAs, etc
Healthcare Savings Accounts (HSAs)
Accidental Death and Dismemberment (AD&D) Insurance
Accident Insurance
Bank Accounts
Annuities
When I was in the Army, I worked in the personnel department for a few years. I cannot tell you how often I saw an ex-spouse named a soldier's sole life insurance beneficiary when I knew the soldier was re-married with children.
A good rule of thumb is to review your beneficiary designations every open enrollment season.
Below are some of the beneficiary designation terms some people struggle to understand with links to definitions:
Contingent Beneficiary (sometimes called a Secondary Beneficiary)
Special consideration for minor children (and possibly special needs adults) listed as beneficiaries
Typically, the court will appoint an adult to manage the assets (probably the surviving parent but not always), and the assets will go into a custodial account. The court-appointed adult manages the money until your child is considered an adult.
Your child gets the money at the "age of majority," typically between 18-21. I don't know about you, but giving me a pile of money at 18, would have been a recipe for disaster.
At this point, you have two potential problems.
The possibility of a financially irresponsible adult in charge of your kids' assets.
An 18-year-old going buck wild with the cash to support every irresponsible decision.
There are various ways you can direct what you want to be done with your family's assets if you or your spouse pass away with minor children. You could name an adult to manage the finances or set up a trust. The options can be complex, and each option has pros and cons. Consult with an attorney to go over the best choice for your situation.
Asset Titling
In a nutshell, asset titling indicates who gets your stuff if you or your spouse die. Most people ignore how their assets are titled, which can cause unpleasant surprises when someone passes away.
Asset titling rules and names vary per state. Review your accounts, deeds, and titles to ensure your assets are titled correctly. Below are the most common types of titling. My explanations are simple, but the rules to titling are complex. Seek legal advice before making changes:
Sole ownership: One owner, sole right, the asset goes to the owner's estate.
Joint with rights of survivorship: Typically, for two or more owners, all are equal owners, and the entire asset passes to the surviving owner(s).
Joint tenancy by the entirety (in some states): Allowed between husband and wife, considered one owner, property transfers to the surviving spouse upon the death of a spouse.
Tenants-In-Common: Multiple owners, ownership may or may not be equal. Only the portion of ownership passes to deceased owners' heirs.
Transfer-On-Death: Typically used at financial institutions, mainly for investment accounts. Upon death, the assets in the account are transferred to a designated beneficiary without probate.
Payable-on-Death: Normally, it applies to bank accounts and Certificates of Deposits.
Life Insurance
Life insurance exists to take care of the people who depend on you financially. Even if you do not contribute to the household monetarily, you still have economic value as the primary caretaker.
Without you, your family would need a full-time chef, nanny, housekeeper, tutor, and personal assistant.
A rule of thumb is to have 10x your income in life insurance. Use calculators like the one from Life Happens.org to estimate your family's specific life insurance costs.
Go on your and your spouse's companies' benefits websites to find out how much life insurance you have from your employer. Most employers typically offer employees free life insurance equal to about 1x base income. This can vary dramatically per employer, so contact your and your spouse's employer for more details.
Your employer may offer supplement life insurance benefits, which you pay for, up to 5x your income, although this number can vary. While you are on your benefits website, find out if your insurance benefit is portable. Portable means you can take the insurance policy with you if you change jobs.
Make sure people can find your stuff.
I've seen so many people struggle to find their deceased loved ones' documents or contacts needed to process their estate. Ensure the person you want to manage your estate knows where you find your documents.
Create a list of contacts- your financial team, estate attorney's office, HR department, or any other department where you may benefit.
Include your manager's phone number and friends you want your surviving family to contact. Include passwords to your emails, social media accounts, and frequently used websites.
Resources to help you create your family's estate plan:
Employer-Employee Assistance Program (EAP): Some EAP programs include online estate document services or even low to no-cost meetings with attorneys.
Pre-paid legal program: Either through your employer or purchased separately. For a small fee, you can get a host of legal services, including estate planning services.
Online estate planning services: Some services only include wills, and other online services include full estate planning services, including lawyers.
Hire an estate planning attorney: Yes, all attorneys have a basic knowledge of the law, but an estate attorney specializes in estate law. This is particularly helpful if your situation is complex.
You can also go to our Leave Money page for family estate planning resources.
Next Steps
Your family's estate's plan goal is to make sure your wishes are honored if you die or cannot make a decision. If you're unsure where to begin, a general rule of thumb is to start with #1 and create a will.
You're protecting the financial security of those left behind by transferring your finances in a way that helps your family maintain their standard of living.
Your estate plan can leave a legacy to build generational wealth.
It bears re-mentioning that estate laws vary per state, and it's highly advisable to talk to an attorney.
Taking the steps now to create your family estate plan ensures all the hard work you're doing to build financial security for your family doesn't end when you do.
