What Is Estate Planning?

Becca Stanek, CEPF® for SmartAsset.com, 17th April 2019

Estate planning is the process of making a plan for how your assets will be distributed upon your death or incapacitation. Through estate planning, you can ensure your assets are given to the people and organizations you care about and also take steps to minimize the impact of taxes and other costs on your estate. Even if you don’t have a million-dollar home or a hefty bank account, you should take steps — either on your own or with the help of a financial advisor or attorney — to ensure that your assets end up where they should.

While this might seem like something you can push off until old age, it’s actually crucial to begin the process of estate planning sooner than later. If you aren’t properly prepared, financial uncertainty could plague the lives of those you leave behind. These aren’t just concerns for the wealthy either.

What Is Estate Planning?

Estate planning is the series of preparation tasks that dictate how your assets will be dispersed upon your incapacitation or death. Put simply, estate planning means electing heirs for your estate.

Everything you own is part of your estate. That means property like real estate, in addition to cars and other valuables. Your estate also includes financial products, like stocks, bonds, life insurance, retirement savings and bank accounts. Things you share, like joint accounts, count too. Even if something only has sentimental value, you’ll want to specify its bequest. This ensures that your loved ones receive your assets instead of a probate lawyer or the IRS.

Estate planning entails far more than just creating a will. It may also include:

Assigning a power of attorney and healthcare proxy to make decisions on your behalf
Creating trusts
Establishing guardians for living dependents
Appointing or updating beneficiaries on life insurance plans and retirement accounts
Making funeral arrangement
Preparing for estate taxes, potentially by scheduling annual gifting

Steps to Take for Estate Planning

Before you begin your estate plan, take inventory of your assets. Create a list and include corresponding values for each item. You’ll also need to ask yourself who you want to leave your assets to and how you want to divide them. After you’ve decided all of the above, you can begin the process.

Draw up your last will and testament. In it, you should name an executor, assign a legal guardian for any minor children and establish any necessary trusts.
Your will doesn’t account for everything. Now, you’ll need to review all your plans, accounts and shared assets to assign or update beneficiaries.
Assign a power of attorney and healthcare proxy to make financial and medical decisions on your behalf if you cannot.
Write a letter that includes any information that hasn’t been accounted for. This may include desired funeral arrangements or the bequest of sentimentally valuable assets.
Ensure that all documents are organized, properly notarized and stored someplace safe, like your attorney’s office or safety deposit box. This includes a list of your digital assets and passwords.

Estate planning is typically an ongoing process. While you should start estate planning as soon as you acquire assets, it likely won’t end there. You should review your estate plan every few years, whenever you experience a life-changing event or in the event that Congress makes any changes to estate tax law. This will ensure your plan reflects your current desires and goals.

Living Trust vs. Will: Which Do You Need?

Both a will and a living trust are estate planning documents that provide instructions on how your assets are to be distributed to your heirs. While both can achieve similar objectives, a trust gives you capabilities that a will does not. However, those extra options come at a higher price and often require greater effort to establish. You must also transfer assets into a trust for it to be beneficial, as a trust can only control assets that it contains.

One of the biggest benefits of a revocable living trust over a will is that a trust allows you to avoid probate. For a will to be enforced, it must go through probate, which can be costly and makes your personal affairs a matter of public record. Another major advantage of a living trust as opposed to a will is that a trust makes it possible to plan for the possibility of your own incapacity, in addition to your death.

Ultimately, there’s a lot to weigh when considering the pros and cons of a will vs. a living trust. You can always opt for both, so a will can deal with any property not included in your trust. You should talk to an estate planning professional and do further research before making your decision.

How to Choose an Executor

In addition to drawing up your will and trusts, you’ll also have to choose an executor. Your executor will be responsible for administering your assets after your death and ensuring your final wishes are met. An executor’s duties may include:

Filing court papers to begin the probate process
Taking inventory of the entirety of the estate
Distributing assets to named beneficiaries
Filing final personal income tax returns
Paying remaining bills, including taxes and funeral costs

Often, people choose a family member, such as a child or spouse, to fill this role. You can also select a friend. What’s important is to make sure you pick someone who is dependable, trustworthy and organized. Also consider a person’s age and health, as you want your executor to be around after you’re gone. If your chosen executor lives in a different state, be sure to check your state’s laws as there may be requirements regarding an out-of-state executor.

Estate Taxes: What You Should Know

Another big piece of the process is estate taxes. If you don’t plan accordingly, taxes can take a big bite out of your estate. Your assets can be taxed in two ways: estate taxes and inheritance taxes. With estate tax, the tax is taken out of the estate before it’s divided up and distributed to beneficiaries. Inheritance tax, on the other hand, is levied after the inheritance is distributed to beneficiaries. While estate tax is taken directly out of the estate, beneficiaries are responsible for paying inheritance tax.

Inheritance tax is only levied by states, but both the federal government and states may collect estate tax. As of 2018, the federal estate tax only applies to estates that are worth more than $11.2 million. Twelve states and the District of Columbia levy their own estate taxes, and it often only applies to estates over a certain value. Only six states still impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

There are steps you can take to mitigate the estate tax so more of your assets go to your beneficiaries. For instance, you can gift portions of your estate to your family ahead of time instead of waiting until you die to give everything away. Other tactics include setting up an irrevocable life insurance trust, making charitable donations, establishing a family limited partnership and funding a qualified personal residence trust.

Do I Need an Estate Planner?

You can do estate planning on your own with thorough research. However, know that there are risks to DIY estate planning and it can be overwhelming. An estate planning professional, like a financial advisor or attorney, can help. A planner has years of education and experience, while you usually only do this once. Estate planning laws are very specific and vary state by state. One mistake and your whole plan could be invalid or work differently than you want.

As your estate grows in size, estate planning becomes more complicated and the need for a professional becomes greater. This is especially true if you have children under the age of 18 who would need to be provided for and taken care of. If you own a business, own property in more than one state or don’t have obvious heirs, an estate planner’s expertise will come in handy.

In addition to elucidating the process and taking work off your hands, an estate planner can help you save money. Federal and state governments tax your asset transfer through estate taxes. A planner can help you to mitigate or avoid these costs, as well as avoid probate and protect your assets from your beneficiaries’ creditors.

How to Find an Estate Planner

If you’ve decided you don’t want to handle estate planning alone, there are a number of ways to find a qualified estate planner. Both estate planning attorneys and financial advisors can be helpful in the process. Ideally, your financial advisor and attorney will work hand-in-hand to make sure you’re making the best estate planning decisions for your situation and have your assets in order.

A lawyer can help you with everything from creating a will and drafting living trusts to developing a plan to minimize estate taxes and preparing powers of attorney. To find an estate planning lawyer, check with the state or local Bar Association. Also take note of certifications, like the National Association of Estate Planners and Councils’ Accredited Estate Planner designation, which indicate expertise in the area.

Your financial advisor can also help you find a qualified attorney to draw up your estate planning documents. Additionally, a financial advisor can help you better define your objectives before legal documents are drafted and also ensure your estate planning documents align with your goals.

Before hiring anyone, you should do due diligence. Research the attorney or advisor and ask him or her a number of questions about their practice, fees and background.

What Happens If You Don’t Plan Your Estate?

If you don’t come up with an estate plan, your state will take control upon your incapacitation or death. If you become disabled, the court will determine how your assets will be used to care for you through a conservatorship or guardianship. Similarly, if you die without an estate plan in place, your state will distribute your assets according to its probate laws.

As you might have guessed, these scenarios can have significant downsides, as you will lose control over who is in charge of your care or how your assets are distributed. If you have minor children, the court will take control of their inheritance. In the instance that both you and your spouse died, the court would appoint a guardian for your children.

In other words, estate planning is crucial no matter your age or level of wealth. You want to have a say in where your assets end up and ensure your loved ones are adequately cared for should something happen to you.

Tips for Estate Planning

Take steps to minimize estate taxes. If you don’t want your estate gobbled up by taxes, plan ahead. You can gift portions of your estate in advance to heirs or set up a trust.
When in doubt, get help. Estate planning can be tricky, especially as your estate grows in size. Don’t hesitate to find a financial advisor or an attorney to help you. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you answer a series of questions about your situation and your goals. Then the program narrows pairs you with up to three advisors in your area who meet your needs. You can then read their profiles and interview them to help you decide who to work with in the future. This allows you to find a good fit while doing much of the hard work for you.

BECCA STANEK, CEPF®
Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She’s passionate about helping people understand the sometimes daunting ins and outs of personal finance. Becca is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Her work has also appeared at Time, The Week, Mic and The Washington Monthly. Becca grew up in the Midwest and now lives in New York City.