Estate Planning 101: Preparing for the Possible — and the Inevitable

We interrupt this regularly cheerful website to bring you some unpleasant news: You're not going to live forever. And, just to pile on the unpleasantness, you might become incapacitated before you join that Great Tax Shelter in the Sky.

I know, this isn't fun to think about. But what's even worse is not thinking about it at all, which could leave your family trying to sort through all your affairs at a time of turmoil and grief.

We're talking about estate planning, something many think is just for “rich” people — but it's not. Everyone should take the following 10 steps to get their legal ducks in a row.

    1. Create (or update) your will. If you die without a will, the state decides who gets what (including your kids or pets), costing your family time and legal fees. If you already have a will, update it every three years, whenever you go through a significant life event (e.g., marriage, divorce, sell a business), or if you move to a different state.

 

    1. Get a living will. Make known the kind of medical care you wish to receive, and at what point you no longer wish to receive any care.

 

    1. Appoint a durable power of attorney. Designate a trusted person to handle your financial affairs if you ever become incapacitated.

 

    1. Factor probate into your plan. Probate is the process by which the state validates legal documents and ensures they're properly executed. Depending on the state, this can be a lengthy, costly, and public process. There are several simple ways to avoid probate (discussed later) and a few more complicated and expensive ways (e.g., trusts). Research the probate process in your area and determine whether bypassing probate should be a priority.

 

    1. Update your beneficiary forms. Insurance policies and investment accounts with properly completed beneficiary forms bypass probate and go directly to the named beneficiaries — even if the deceased person's will directs the assets to go to someone else. Contact your financial-services companies to make sure they have updated forms, and keep copies for yourself.

 

    1. Review the titling of your property. The legal status of your accounts, home, and other assets will also determine whether they bypass probate and a will. For example, an asset that is “joint tenancy with rights of survivorship” will become the sole property of the surviving co-owner(s) when another co-owner dies. That automatically disinherits other heirs from that asset, which may or may not be what the deceased intended.

 

    1. Make moves to lower estate taxes. If the sum total of all you own — investments, cars, homes, furniture, collectibles, and other assets — is close to $2 million, then start considering strategies to lower your potential estate tax bill.

 

    1. Know the truth about trusts. Trusts can be useful for avoiding probate, lowering estate taxes, and providing for relatives who may not be able to manage assets on their own. But they can also be expensive and over-promoted by law firms pejoratively known as “trust mills.” Get informed before agreeing to a trust.

 

    1. Create a document that explains everything. If something were to happen to you, you'd want your family to know how to locate your accounts, insurance policies, legal documents, safe-deposit boxes, hidden stashes of cash, attorney, financial planner, and other trusted advisors. Include the important information in a document that you give to someone you trust.

 

  1. Discuss your plan with the people who matter. Explain your wishes to important friends and family, especially if they might have a future role to play (for example, you want them to raise your kids if something happens to you). And encourage them to get their own estate plan. If your relatives have their affairs in order, it could spare you a great deal of difficulty down the road and keep as much wealth as possible within the family.

The Bottom Line
Those are ten important steps, and they'll involve some very difficult decisions, such as who will be your executor and your plans for your final arrangements. But creating a well-designed, complete estate plan will save your family a good deal of heartache and money.

As fee-only financial planner Sheryl Garrett (of the Garrett Planning Network) told me during an interview:

Get your financial household in order and it will take as much of the financial burden off of your family and your survivors. When death occurs, it is a very, very traumatic thing on the surviving family. Don't make it worse by not taking care of your financial affairs ahead of time.

How do you get all this done? Seek out the help of a qualified, experienced estate-planning attorney in your area. Yes, you can take care of some of this by putting your notarized John Hancock on forms downloaded from the Internet. But laws vary from state to state, and recommendations vary from person to person. So spend the extra money to get the professional help. And send this article to all your relatives; making sure they have a solid estate plan will save you grief and money down the road.

J.D.'s note: I was just talking with our house painter about this on Monday. He's settling his mother's estate, and he says it's a nightmare — one filled with lawyers and $100,000 in fees. He told me, “Get a will. Learn from my family: Get a will.” Photo by Seize the Photo.

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Lurker Carl
Lurker Carl
11 years ago

Having been the executor for several estates, a revocable living trust is the way to prepare for the inevitable for folks who own paid-for real estate and have some money squirreled away. It may be more work and expense for the deceased than a simple will but the trust sure makes settling an estate easier for the survivors.

DavidV
DavidV
11 years ago

I’d also suggest not doing it yourself if you can afford not to. My step-Dad had a will that he decided to change. So he made a new will and signed it but didn’t date it, he then wanted to make a change so he made a codicil (a document that changes a will) that he initialed but did not sign. Everything worked out in the end, but it was a pain and end up taking more time and money than it should have.

Chett
Chett
11 years ago

I would add, if you have children make sure you designate who they will stay with in the will in the event that both parents die at the same time. Think of who would best care for your children, not who has the most money and can financially support them. You can buy life insurance policies to make sure they are taken care of and supported financially.

Wise Money Matters
Wise Money Matters
11 years ago

This reminds me that I really need to get on updating my will. I’ve got all my property titling worked out these past few months but now have to get the ball rolling on my will.

Devbeth
Devbeth
11 years ago

If you leave money to a minor child – split it up – DO NOT give it to them all at age 18. My father left over $200,000 to my daughter – his attorney did not have the common sense to suggest that it be doled out in chunks – so at 18 she became a very wealthy young lady. Fortunately, my daughter is rather frugal and has used the funds for college and investing. Not all 18 year olds are as sensible.

Todd @ The Personal Finance Playbook
Todd @ The Personal Finance Playbook
11 years ago

I think you should expand on the “know the truth about trusts” comment. What is the truth you’re referring to? That they can be expensive? I’m an attorney, and I have several friends that do this for a living. They are amongst the lower paid attorneys that I know. They work hard for the fees they charge and they care about their clients. I would suggest finding someone willing to do it for less than 2k. That shouldn’t be too difficult to do right now, unless you have a tremendous amount of assets. I’m sure it varies based on where… Read more »

Andrea
Andrea
11 years ago

Getting my mom’s money/will/living will/ POAs(health and financial) in order while she was healthy was difficult enough- thank goodness we did it before she became ill and not competent. My mother had no idea of how much money she had- she kept her statements (for at least 20 years) in plastic grocery bags- maybe 40 of them stuffed into a walk-in closet in her basement. She also said she had her financial asset paperwork in order(ok, some of the basic documents were stuffed into a drawer)- well, things have turned up as recently as this year- 4 years later. Doing… Read more »

DavidV
DavidV
11 years ago

Devbeth- good point. My step-Dad left the grandkids 10k when they hit 18 to spend as they wished, and then the rest at 25. Not that I was that much smarter at 25, but…

Kevin M
Kevin M
11 years ago

Agree with Lurker Carl. As a CPA, we usually advise our clients to have a will and set up revocable trusts (and follow up to make sure they actually fund the trusts).

At the very least, set up your accounts with a TOD (transfer on death) or POD (payable on death) to help avoid probate.

Erin
Erin
11 years ago

I would love to hear more about the trusts item. We are (finally) about to do our estate planning and will. We have 2 young daughters and should something happen we don’t want them to all of a sudden get a big chunk of our life insurance/retirement etc. funds when they turn 18. We’ve heard too many stories about kids blowing settlement money on expensive cars, etc. when that happens. We want to specify that the money can only be used for certain things like college, etc. and my understanding is that a trust is probably the best way to… Read more »

Brent
Brent
11 years ago

I’ve been wondering for a long time what life events should trigger the need for a will. I’m 25, single,no kids, no life-insurance and about to buy a house, have a net worth around 25K. If I have the beneficiary information of my accounts set up the way I want, is there any point to a will? If I get married is that the time, if I have a kid? have a net worth over X amount? Parents die? When I no longer want assets to follow the normal legal lines?

David
David
11 years ago

Since dealing with my parent’s death I’ve been harping on friends and family to get their affairs in order too. I do suggest researching and finding forms online first. There’s even good programs that will walk you through the process. Then, once you’ve filled everything out, take it to a probate/estate attorney. Don’t rely on the cookie cutter forms to take care of all of your needs. Look at them as a way to do as much of the thinking process on your own, which saves you money in the long run with a lawyer. Also, make sure that your… Read more »

Bridgette
Bridgette
11 years ago

I am with Brent – when is the appropriate time to do this? I am 24 and in about the same situation, engaged and getting ready to buy a house, no kids.

Lara
Lara
11 years ago

@Brent and Bridgette You probably already should have wills. I had a friend die unexpectedly at age 32 – single, no kids. He owned an older car, a small older mobile home and had a little money in a checking account. He also had some student loans. It was a major headache for his family to deal with on top of their grief. The government wanted the loans paid back out of the estate, but there was no executor. The trailer park owner wanted paid, but they couldn’t sell or rent the trailer. No one could access the checking account… Read more »

guinness416
guinness416
11 years ago

One of the best personal finance articles I’ve read recently was this Globe and Mail Q&A about inheritance issues (some things possibly not relevant outside Ontario): http://url.ie/1qnp I though the bits about the executor just going ahead and taking a 5% fee (even though it’s not law) and the estate being held up since 1998 were particularly horrifying. Wills and inheritance are an interesting subject and not one I’ve seen many money bloggers cover much (probably because, like me, they’re pretty young). It’s sort of amazing the multitude of ways things can go wrong. Left me a bit depressed to… Read more »

Frances
Frances
11 years ago

We learned from family also. Grandma died fairly young at 53, a few years later grandpa remarried a 40 year old and they had a child. At grandpa’s death. all assets went to wife #2 and her child, leaving out 3 children from the first marriage. So my husband and I set up an A/B trust so if I die, my half of our assets go into a trust for our son. Even if he remarried, wife #2 couldn’t get her hands on my son’s inheritance. Our lawyer did not get this right the first time, he just assumed we… Read more »

Chris Johnson
Chris Johnson
11 years ago

@ comment #6–I think the “truth” about trusts means getting the whole picture, which would come from consulting an attorney who will take the time to compare all costs between wills and trusts, and just as important, take the time to explain how the entire plan will work, so there are no unintended consequences. I’m one of those attorneys, so I’m self-interested, but I also make a lot of fees from litigating estates with poorly drafted or no estate plans, so I also know a good plan will save money in the long run. In states like California with significant… Read more »

Shawanda
Shawanda
11 years ago

@Lara – Your friend’s student loan possibly should’ve been canceled upon his death if it was backed by the federal government. I’m not sure if his student loan was repaid out of his estate or if anything can be done about it now, but it may be worth looking into.

Private lenders are less forgiving.

http://www.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html

Kevin M
Kevin M
11 years ago

Brent & Bridgette – the bottom line is – for the amount of assets you have – do you want the courts deciding where that goes or would you rather pay an attorney to make sure it gets disbursed according to your wishes? I don’t think there is any set dollar figure, like most of personal finance, it is a personal decision.

For my wife and I, we finally got our act together when we had our first child. We did the life insurance and wills all around the same time.

EscapeVelocity
EscapeVelocity
11 years ago

My sense is, if you have a minor child, it’s essential because you need to figure out who gets custody if something happens to all the custodial parents. Otherwise, I would think the first step would be to find out what happens in your particular jurisdiction if you die intestate, and the urgency would be proportional to how much you don’t want that to happen, and the complexity of the estate.

Stephanie PTY
Stephanie PTY
11 years ago

At what age/life-stage should someone first establish a will? I don’t want to jump the gun (I’m 22 and I won’t even move out of my parents’ house until August), but I’m interested in not waiting too long, either. It seems like earlier is better, but now definitely seems too early?

AC
AC
11 years ago

@ Brent & Bridgette – go ahead and get the paperwork done now. It’s worth it for the peace of mind, and yours will be relatively simple, so relatively inexpensive. I’m single & young-ish too, and I had mine drawn up last year. It was $500 for the will, durable power of attorney, advanced medical directives, and (important to me) a face-to-face meeting with a smart lawyer who explained everything, answered my questions, facilitated the notarization, and put copies in a safe. (I’d recommend asking around for a referral to a reputable lawyer, rather than picking someone random from the… Read more »

DeeBee
DeeBee
11 years ago

Thank you for posting this. It is so important for everyone who is 21 years or older to think about. My friend died suddenly in January, leaving no will. Her brother and aunt had to waste time and lawyers fees to settle her estate. Her brother also had to take on debt in order to pay for her funeral expenses, since he had no access to her finances. For an highly intelligent person, my friend made a dumb and lazy mistake that hurt her family in ways I am sure that she never intended. I strongly recommend that anyone over… Read more »

David
David
11 years ago

Nice article. Lots for me to think about, as a young, un-married person with a non-insignificant amount of assets.

The breakdown in the article is nice, but as brought up by a lot of the comments, it would be nice if they were elaborated on. While I’m sure you have quite the backlog of article ideas, I think it would be an incredibly useful resource if each of these 10 steps received its own, in-depth article.

Alicia
Alicia
11 years ago

Great article. I too am bias, as an attorney who works in the field, but I can’t see how much more info people want. The definitions are excellent explanations of what sort of documents you need to consider. Bottom line is do your research before you go to the attorney and review all the documents before you sign them. Side note – I too would recommend at least a basic will to anyone who has some assets, even if they aren’t married or have no children. A DIY is at least a start if you don’t think the money is… Read more »

MyFinancialIndependenceCoach.com
MyFinancialIndependenceCoach.com
11 years ago

Great, simple article with step-by-step instructions. From a coaching perspective, I understand how important this topic is, and to get people to take action it is so helpful to keep it simple, and in this case, give “10 steps”.

Great quote from Sheryl Garrett too!

Thanks Robert for the insight…I will share this article with my clients.

Terrin
Terrin
11 years ago

A trust is better then a will. Trusts by pass probate. Getting a lawyer who understands your state’s laws is usually a good idea. It is your loved ones who will pay the price if you goof it up.

Elizabeth
Elizabeth
11 years ago

Brent & Bridgette — Whether or not you get a will, it’s still important to talk to your family about your wishes “if the worst should happen”. I watched a talk today about “dying with dignity” and the speaker warned that it’s not just the elderly that need to make a living will. Young people also end up sick or in accidents, and brain dead patients end up on life support indefinitely because the family can’t decide what to do. I’ve had a few frank talks with my parents (who are currently my legal next of kin). They know where… Read more »

Amber Warren
Amber Warren
11 years ago

Truer words could not be said. My husband’s grandmother died suddenly a few months ago. Her affairs were not in order. There was no information, no will, no life insurance to even cover the funeral. It was traumatic enough to lose her at such a young age, but for the family to have to be responsible for a financial mess on top of that is terribly careless.

Hogan
Hogan
11 years ago

Love the photo on this post! Very funny!

Bill in NC
Bill in NC
11 years ago

Better than a living will is the health care power of attorney, where you appoint someone to make medical decisions when you cannot. The health care agent you choose will know your wishes better than an attending physician who likely has never seen you before but now must interpret your living will. And another huge advantage of a revocable living trust is privacy – probated wills are a matter of public record, so everyone can see what you left to whom. We set up a trust for mom when she got sick. After her passing, some Nosy Parkers asked in… Read more »

quinsy
quinsy
11 years ago

As a doctor I would like to post a word of warning: BE CAREFUL WITH LIVING WILLS! In some states, living wills are invalid and will mean NOTHING when you are on life support in the hospital. We will still have to pound on your chest and shock you and keep you on a ventilator even knowing that is not what you said you wanted to be done. Especially if you live anywhere near a state border and the hospital you end up at may be in a neighboring state where your living will is meaningless. Plus, living wills are… Read more »

Anita
Anita
11 years ago

@ Brent & Bridgett & Stephanie – All legal adults should have a will to save their families a lot of trouble. My dad was in the military and took both my brother & I to execute wills at the local military legal office when we came of age. He told us that it’s really important to have a will that names an executor and specifies the executor can operate (mostly) independently of the probate court and work without bond. This keeps two things from happening – the court from collecting a ton of money from your estate when your… Read more »

Urchina
Urchina
11 years ago

To Kevin M: the TOD (transfer on death) and POD (payable on death) designations seem like a great idea. Unfortunately, you have to make sure they’re executed properly. My father-in-law died unexpectedly in January this year. He had left money in a TOD account to my husband. Unfortunately, the TOD was not signed properly by my father-in-law, so it was invalid. We were told of this after he died, and all the account statements said “TOD” on them, so we had thought all was in order. If you are using TOD / POD accounts, it makes sense to have an… Read more »

Laura
Laura
11 years ago

I can’t help but add that if you’re updating your estate plan or just reviewing a few of these items AND you’re over 60 or so, find an elder law attorney in your area. Their advice can be invaluable for both yourself and possibly aging parents. Generally, they have excellent estate planning knowledge coupled with elder issues (government benefits, long term care insurance, etc.) that a straight estate planning attorney may not be as familiar with.

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