The first thing you might think of when you hear estate planning is old people or something that you do once you have lots of money. However, you may not realize that you already have an estate plan. By default, the government creates an estate plan for you if you haven't created one for yourself. And if the government creates your estate plan when you die, everything goes through the court system.
Who do you want to control what happens to your family and possessions when you die? You or the government? If estate planning sounds like something you don't have to do until you're older, consider the alternative. Here are seven things that everyone should do to prepare their estate, no matter what age they are:
1. Establish a Power of Attorney
Accidents can happen at any time. And while this is never a fun topic to think about, I’m sure most of you can think of someone you know who had a serious life-altering accident. Do you know what would happen if you were in a car accident today and fell into a coma? Who would make the medical decisions for you regarding your treatment? Who would help to make sure that your bills continued to be paid on time while you were disabled? (For more, see: read Getting Started on Your Estate Plan.)
A power of attorney helps to appoint someone to make financial decisions and medical decisions for you in the case of your incapacity. If you don’t have a power of attorney then your family may have to petition a court to obtain the powers needed to manage your medical or financial affairs. This can be a time-consuming process and there’s no need to put your family through that when a simple power of attorney could have done the job for you.
2. Appoint a Guardian for Your Children
If you’re married and something happens to one spouse, then the surviving spouse will almost always take on the role of caring for the kids moving forward. If something happens to both parents at the same time, however, then the process becomes more difficult and convoluted. Two spouses both might assume that their parents will care for the children if something happens to them.
But it’s critically important to get this in writing. If there is disagreement or uncertainty as to what will happen then a court may need to appoint a guardian. As is normally the case with the legal system, this can turn into a lengthy process. Be sure to name a guardian for your children in your will so that nothing is left to chance and best wishes if someone has to step in to raise your children.
You should do this even if your kids aren’t born yet. You get busy when you have kids. And you know what happens when you get busy and it's easy to neglect important tasks like adding a guardian for your kids in your will.
3. Create a Last Will and Testament
There is often confusion around what a last will and testament is. It is your way of letting the state know what your will for your property is when you pass away. Rather than just talking about what you want to happen with your belongings, a will is your way of telling the state how your belongings are to be distributed. A will can contain many different provisions. Here are some common ones:
- Designation of executor: This is the person who will be responsible for carrying out the provisions of the will.
- Designation of beneficiaries: This is who will inherit the assets.
- Guardians for minor children.
A will can indicate your burial wishes, how your assets will be distributed, who the guardian of your children will be, who will care for your pets, and more. If you die without a will then your assets pass through intestacy. Intestacy is the state’s way of trying to distribute your assets in a manner they think an average person would want. (For more, see: Top 7 Estate Planning Mistakes.)
Maybe it’s just me, but I would prefer to be in charge of this process with my estate rather than relying on the state to figure it out. If you’re like me and would prefer control over your assets then do yourself a favor and create a will today. This can be done online or you can contact an estate planning attorney. It can be helpful to work with an attorney to make sure that this gets done right, especially if you have more complicated estate planning needs.
4. Consider a Living Trust
There are many different types of trusts. Many are used for advanced estate planning techniques, but the one that we’ll talk about here is a revocable living trust. Revocable simply means that the person who created the trust (this person is called the grantor), can change the trust provisions as life changes or goals change. Living trust means that assets are placed and managed in the trust during the grantor’s lifetime.
People often ask what the difference is between a will and and trust. The main difference comes down to the fact that a will only goes into effect when you die, whereas a trust goes into effect as soon as you create it. Here are some benefits of a trust:
- It can save you time. Assets inside of the trust avoid probate when you pass. Probate is the process that courts go through to determine who inherits your assets, and we all know how long courts can take.
- It can save you money. Probate is expensive and avoiding it could save you thousands of dollars. In California, for example, probate fees can start at 4% of the value of your estate.
- You have more privacy. Anything that happens in probate can be seen by the public. A trust helps you to distribute property in privacy. Here’s the important thing to note though - a trust only protects the assets that you place inside of it. In other words, if you create a trust, but fail to place your home, investment accounts and other assets in it, then that property is going through the probate process as if the trust didn’t even exist.
5. Ensure Proper Beneficiary Designations
We mentioned above that in order to be protected by the trust, your assets must first be placed into the trust. However, there are some assets that typically won’t go your trust. These include IRAs, 401(k)s and sometimes life insurance policies. The good news is that these types of accounts allow for the designation of beneficiaries. This is important because when the account allows you to designate a beneficiary your asset will transfer right to that individual upon your passing, instead of going through probate.
Be sure to review beneficiary designations periodically on your retirement account and insurance policies. This is especially important after an event like marriage, divorce, birth of a child, or any other life changing scenario. (For more, see: 3 Secrets You Didn’t Know About Estate Planning.)
6. Get Organized
This one may seem obvious. But you would be surprised how often people fall ill or pass away without telling anyone where to find their important stuff. Having a place to store to important documents is crucial to help out your heirs. Common documents to make sure that you keep records of include:
- A copy of your will and trust.
- Other legal documents (power of attorneys, health care directives, business contracts).
- Insurance policies.
- Deed to the home.
- A list of investment accounts and where they’re held.
Finding out where everything is stored is the last thing you want your family to be worried about if something happens to you. Do them a favor and compile this information today so that you don’t have to worry about it later.
7. Tell Your Loved Ones
What good is going through all this work if none of your heirs know where to find anything? Be sure to tell your heirs, executors and successor trustees where everything is because if they can’t find it, then it's not going to do you much good.
I know it’s never easy to think about what might happen to our family and loved ones if we pass. But it's easier if you follow these seven steps because you will have a greater peace of mind knowing that your financial wishes will still be carried out no matter what happens to you. (For more, see: 5 Ways to Mess Up Estate Planning.)