What is it? To understand what an estate plan is, you first need to understand the meaning of the word “estate.” Your estate - and yes, you have one - is everything of value that you own minus any liabilities (debts you owe, such as the balance on your mortgage). Your estate includes real estate (vehicles, land, buildings, etc.), collectibles (art, antiques, etc.), investments, insurance, and entitlements.
Estate planning is the act of managing how your estate will be divided and inherited by your beneficiaries (the ones you are bequeathing assets to). An important part of any estate plan is creating a will, which is a document that explains your intentions for how you want your estate to be divided and distributed upon your death. Part of the estate planning process includes the settlement of estate taxes. Estate planning can also involve setting up trusts and/or making charitable donations. Note: estate planning also provides for the management of you and your assets in the event that you become incapacitated.
Why is estate planning important? Your motivation may vary, but some common reasons for estate planning include: preserving family wealth, providing a legacy, providing for your surviving spouse and/or children, minimizing probate headaches (loss of time, money, and privacy) for your loved ones, funding your children’s or grandchildren’s education, or supporting charitable causes.
How do you set up an estate plan?
Set up a will, including naming your beneficiaries and naming your executor (the person you want to administer your will after your death). If you have dependents (e.g. minor or disabled children), provide instructions for their care and support in your will, such as establishing a guardian.
Make sure the named beneficiaries on your plans / accounts are updated and in line with your wishes (e.g. life and AD&D insurance policies, bank accounts, and retirement accounts such as IRAs and 401Ks).
Set up a durable power of attorney (POA) to designate someone to act for you if you cannot.
Optionally, set up trust(s) and/or make charitable donations to limit estate taxes. A trust provides a benefit to named beneficiaries and is administered by the designated trustee. Typically, trusts are used to speed up the transfer of assets by avoiding probate and minimize taxes.
Periodically, review your estate plan to make sure that it evolves with you.
What professional(s) should I hire? To create an enforceable estate plan, minimize the taxes, and avoid probate pitfalls, you probably want to employ the services of a qualified estate planning attorney in your area. Everyone’s situation is different, but finding a trustworthy estate planning attorney is a good place to start.