What is an estate plan?
Questions this article will help you answer:
- What is an estate plan?
- What is included in an estate plan?
- What are some benefits of an estate plan?
- How do I get started?
One of the most overlooked aspect of a person’s financial plan can be answered with a simple question: “What will happen to your assets when you die?”
On the surface it’s not a terribly difficult question, but as you lean into your response, it forces you to confront two very personal subjects: death and money. Topics such as these don’t exactly make great for great conversation starters in the same way we discuss the stock market or an upcoming election, but I can assure that they are just as significant as any other element of your financial plan.
What is an estate plan?
A common misunderstanding is that an “estate” is reserved for those living in mansions or flying private jets, but the truth is that you don’t have to be wealthy to have an estate. An estate simply consists of all the property a person owns, albeit cars, cash, retirement savings, real estate, or anything else. An estate plan is the process of deciding who will inherit these things and handle your responsibilities should you pass away or become incapacitated and formalizing those decisions in a collection of documents, such as a will or trust or power of attorney.
To put it simply, an estate plan is about making sure that if something were to happen to you, your loved ones won’t be burdened with speculating about what you may or may not have wanted. It provides your family with the comfort of knowing they’re honoring your wishes, and allows you to continue helping them achieve the goals you set together, even after you’re gone.
What is included in an estate plan?
In order to get started with creating an estate plan, it’s important to break down some of the important documents to consider and what they entail.
- A will. A last will and testament is a document that spells out how you want your property and assets divided, and should also include who you appoint as guardian of your minor children or other dependents. It also should spell out who you’ve elected to be the executor of your estate to oversee the estate plan process.
- Durable Power of Attorney. This document appoints someone to take care of your legal and financial affairs if you are unable to do so yourself. Without this document, family members may have to go to court to get permission to pay your bills or manage your finances should you become incapacitated.
- Medical Power of Attorney. This document allows the appointee to make medical decisions on your behalf if you are unable to yourself.
- Advance Directives or “Living Will.” This document states the healthcare directives you want to be followed if you become terminally ill or in a state that involves life-prolonging procedures. The presence of this document can make difficult decisions easier for family member who won’t be forced to make that decision on their own.
- A trust. Similar to a will, a trust allows you to control who your estate is distributed after your pass, but it also gives you the ability to determine how and when the assets are passed down. It also, depending on the size of your estate, may allow you to reduce or eliminate estate taxes.
- Beneficiary Designations. One of the most easily forgotten pieces of an estate plan that take little to no effort to complete. Many accounts – including bank, brokerage, and retirement accounts, as well as life insurance policies – allow you to select beneficiaries, which serves as a great way to pass along assets without having to use a will or trust. Beneficiary designations on accounts have the ability to supersede a will, trust, and probate (the court-supervised process of distributing a persons assets after they pass).
What are some benefits of an estate plan?
If you’re still on the fence about taking the next steps to formalize an estate plan, consider the following benefits (outside the obvious) it may provide for you and your loved ones:
- Protects Your Family. Nobody plans on dying young, but if you are a parent, you need to prepare for the unexpected. Without a will that names a guardian to care for your children, should you and your spouse or significant other pass away, the courts will be responsible for deciding who will raise your little ones. And if you are older, it equips you with the means to protect your family by taking control of your estate rather than leaving some elements to chance.
- Probate and Privacy. Should you pass away without a proper plan in place, the probate process allows anyone to access information regarding your estate, and can be both expensive and slow. The average uncontested probate process may possibly take longer than a year and can cost, through attorney’s fees and court costs, up to 5% of an estate’s value.
- Leaves a Legacy. Whether you are providing your family with financial security, passing on family values, or supporting a philanthropic cause that means something to you, an estate plan allows you to leave behind a legacy that your family and loved ones will cherish after you pass away.
How do I get started?
Once you’ve decided to create an estate plan for you and your family, it’s important to understand the steps that go into making it happen. The following steps provide a basic framework for creating a formalizing an estate plan:
- Take Inventory. No matter how modest or grandiose your estate may be, the first step is taking stock of what you own. To get started, list the value of all your “tangible” assets (i.e. your home, cars, jewelry, and other “physical assets”) and then make a similar list for all your “intangible” assets (i.e. statements from your bank, brokerage, retirement accounts, as well as life insurance policies). Once these lists have been completed, write down all your liabilities (i.e. mortgages, credit card debt, lines of credit, etc.) that are outstanding. Lastly, one additional step that has become incredibly beneficial in estate planning is to securely store all of your login information (i.e. usernames, passwords, etc.) so that your loved ones would be able to access your online records, if necessary.
- Develop a Plan. Now that you have a sense of your estate, the next step is to meet with a qualified estate planning attorney to draft your estate plan. It’s important to think about a few questions before you meet, such as “Who should inherit your assets? Or care for your children? Or be responsible for distributing your assets?” All of these will play a big role in formalizing your estate, so giving these questions some thought beforehand will be really beneficial as you develop a plan.
- Put Your Plan into Action. Once your plan has been created and formalized by an attorney, the next step will be to put your plan into action. Part of this will consist of updating beneficiary designations, signing documents in front of a notary, and possibly transferring or retitling assets into your newly established trust. It’s also important in this step to communicate to the loved one’s you have chosen for roles such as executor or guardian where they can locate your legal documents or who they can contact in the event of your passing.
- Keep It Updated. As you know, life is always changing. We change jobs, start families, move to new cities, and as a result of that, it is very common for an estate plan to become stale or outdated so it’s important to remember to regularly look back on your plan as your personal situation changes over time. If you are working with a financial advisor, this can be something you discuss annually to ensure your affairs are always in good order.
There are few certainties in life, but one of them is this: Nobody likes to talk about the possibility of dying or what will happen to your loved ones after you pass away. So it’s no surprise that roughly half of Americans have yet to create a will, and even fewer have an estate plan prepared for themselves and their loved ones. But think about it from this perspective, if you were to pass away today, what would the experience be like for a loved one to have locate all of your bank records and other details of your finances and personal life? Would it be easy or difficult?
Creating an estate plan is crucial part of everyone’s financial plan. If you are unsure of how yours is currently designed or if you believe you could strengthen your existing plan by putting one into place, please let us know. Our team at Mills Wealth Advisors would be glad to assist.
Jim Davis, CFP® | Financial Planner | Mills Wealth Advisors, LLC | 817.416.7300