What is estate planning?

Amy Fontinelle

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Nov 1, 2019

Do you want a say in what will happen to everything you own after you die? Do you want to prevent your family from fighting over your assets? If so, then you need an estate plan — no matter how much or how little you have. Estate planning can also determine who will make decisions about your health and finances if you become legally incapacitated while you’re alive.

This estate planning basics overview will describe the importance of estate planning and the key components of a comprehensive estate plan. These include:

Most of us know we need a plan in case something unexpected happens to us, but we may not know what’s involved in the estate planning process. If you aren’t sure what you need to do to create that plan, this article can help you get started. And consulting a financial professional can also help with particular questions and situations that may arise in the estate planning process.

The importance of estate planning

What is estate planning, and why is it important? Estate planning is laying out in writing what you want to happen to your assets after you die. It’s also documenting who you want to make key medical and financial decisions for you during your lifetime if you can’t make them yourself.

What is involved in estate planning? It varies for each person. A single person who rents an apartment and doesn’t have children will likely have a simpler estate plan than a remarried person who owns two homes and has children from both marriages. As a result, the process of estate planning for each will likely be markedly different. But going through that process may be just as important for each as well.

Creating a formal plan and making sure it’s enforceable with legally valid documents means that you get to choose what happens to your assets and your person. It can also greatly reduce the anguish your family might experience if they had to make these decisions without your input.

Estate planning is important “to make sure that those you leave behind are looked after,” said J. Stephen Gunter II, a Certified Financial Planner™ professional and an associate advisor with Bridgeworth, LLC, an independent registered investment adviser firm in Huntsville, Alabama. “We don’t do estate planning for ourselves, we do it for our loved ones. We do it for the people and the organizations that we care about and that we want to make sure are supported and know that we care about them, even after we are gone.”

If you don’t make these decisions while you’re able to, a system of laws exists to make them for you when you pass away or become legally incapacitated. For example, state intestacy law will decide who gets your assets. A court can appoint a conservator to manage your finances if you’re incapacitated. State law can give your spouse the authority to make medical decisions for you if you’re unconscious after an accident.

It’s good that we have backstops in place. But these broad laws don’t take individual circumstances into account, so they might not be right for your beliefs, your wishes, or your family’s needs.

Beneficiary designations for financial accounts and life insurance policies

Some aspects of estate planning are straightforward. You probably have a checking account. Who do you want to inherit the balance after you die? You could spell it out in your will, but there’s an easier way. You can ask your bank for a form called a transfer on death designation.

When you fill out this form, you’ll write down the name, date of birth, and your relationship to the person or people you want to receive your account balance when you die. At a minimum, you should name one beneficiary. Even better, you should name a contingent beneficiary — a backup person to inherit your account if your first choice predeceases you. You can also name more than one beneficiary and choose what percentage of your account balance each person should receive.

If you have other accounts, such as savings, brokerage, or retirement accounts, you should add transfer on death designations for those, too.

Do you have any life insurance policies? If so, check to see who you’ve named as your beneficiary. When you first took out the policy, the insurance company asked you to name a primary and a contingent beneficiary. Since that time, your circumstances might have changed and you may prefer to name different beneficiaries.

For example, if you’ve gotten divorced and your ex-spouse is still named as the beneficiary on your life insurance policy, you’ll probably want to change the beneficiary to your child, your new spouse, or a trust. As another example, after becoming a parent, you may have purchased life insurance for yourself and named your first child as beneficiary. But you may not have updated your policy to include your second child after they entered the picture. If you have minor children, you should speak with your attorney about naming a testamentary trust, created in your will, as the beneficiary of your policy.

Wills

When most people think of planning for death, they think of wills. A will is a document that states who you want to receive your assets and, if you have children, who you want to become their guardians. It also states who should carry out your wishes, a role called executor of the estate.

A will is generally simple and inexpensive to set up and make legal. Requirements vary by state, but in many states, you’ll want to work with a licensed attorney, and then have witnesses present when you sign and date it. These witnesses should be able to attest that you knew what you were doing and no one was pressuring you when you signed your will. (Related: Will basics )

Here’s what will happen after you die if you have a valid will in place. The executor of your estate will submit your will to the court. If your assets exceed a certain threshold (which varies by state), then your estate will go through probate. (Related: You’re an executor...now what?)

Probate is a court-supervised process of confirming a will’s validity, repaying the deceased’s creditors, paying the deceased’s taxes, and distributing the remaining assets to heirs as specified in the will. Probate will also be used to distribute your assets if you die without a will, but in that case, state law will determine who receives your remaining assets. Many people arrange their affairs to avoid probate because the process is slow and costs money. (Related: Probate: What it is, why people fear it )

Probate is one reason why completing beneficiary designations is so important. Those simple forms ensure your beneficiaries will receive certain assets with little delay after your death, and no court fees will reduce their value. But it’s important to know that beneficiary designations take precedence over a will if the two don’t agree.

Finally, after you pass away and your will is filed with the court, it will become a matter of public record. Many people don’t want to make their affairs public. Fortunately, there’s a private way to distribute your assets and avoid probate: by setting up a living trust.

Living trusts

When you create a trust and place assets into it, such as your home, those assets become the legal property of the trust. As a result, when you die, those assets don’t have to go through a probate court proceeding. Instead, the successor trustee of your trust distributes the assets within it according to your wishes. The process is designed to be quick, inexpensive, and private, though there may still be accountant and attorney fees to settle the estate and the process may still take a few months.

Living trusts are also called “revocable trusts” or “revocable living trusts” because you can change them or dissolve them during your lifetime. You can sell or remove trust assets, you can add new assets, and you can change the beneficiaries, for example.

There are other reasons to create a living trust in your estate planning besides avoiding probate. Placing assets in a trust lets you name someone, your successor trustee, to manage your assets while you’re still alive if you become unable to. You can’t accomplish this with a will. But if you have minor children, you’ll still need a will to name their guardians. You’ll also need a will to distribute assets that aren’t held in trust, such as personal possessions.

“To drive home the importance of estate planning, I often ask my clients with children if they have ever met the local probate judge,” said John P. Farrell, an estate planning attorney with the Farrell Law Firm in Marietta, Georgia. “Of course, they say no, and then I remind them that the local probate judge will be the person who decides who raises their children if they don’t name a guardian for their children through a will.” (Related: Wealth management: Is setting up a trust right for you?)

Durable powers of attorney for finance and health care

“A will is great when you pass away, but a will won’t allow someone to make your medical decisions or financial decisions before you go,” said Patrick M. Simasko, an elder law attorney at Simasko Law in Mount Clemens, Michigan, and an adjunct professor at Thomas M. Cooley Law School. For that, “you need a separate medical power of attorney and financial power of attorney.”

A financial power of attorney allows someone to make financial decisions while you’re alive if you become unable to. For example, if you’re in the hospital in a coma, this person could make gifts, pay your mortgage, property taxes, and other bills on your behalf using your money.

It’s important to delegate this responsibility with extreme care. While someone with financial power of attorney is legally required to make financial decisions that are in your best interest and do not benefit themselves, laws don’t always stop people from making unethical decisions. It is also important to update this document every 3-5 years, as they can become stale.

A health care power of attorney authorizes someone of your choosing to make medical decisions on your behalf if you become physically or mentally unable to make those decisions for yourself. It’s important to choose as your agent someone who is strong enough to carry out your wishes even when they might be getting pressured to make different decisions.

Powers of attorney need not become effective immediately. They are commonly set up as part of an estate planning strategy to go into effect only if certain conditions are met.

Advance health care directives

An advance health care directive or living will lays out your wishes for life-sustaining medical treatment (including your wishes not to receive such treatment). For example, you could use this document to state whether you would want to be placed on a respirator if you couldn’t breathe on your own.

Your doctors and your health care power of attorney should get copies of the completed document. Advance directives are available for free online. You can supplement these standard forms with additional information if they don’t cover all your wishes. It’s important to follow the proper procedure for having the document witnessed or notarized when you sign it so your wishes will be honored.

Having this type of document in place means your family members won’t have to make agonizing decisions without knowing what you would have wanted. It is also important to update this document every 3-5 years, as they can become stale.

Conclusion

Once you have the key documents for your estate plan in place, it’s important to review them each year or whenever a major change in your family occurs, such as a birth, death, marriage, or divorce. Having children might change who you want to inherit certain assets, for example.

Also, you may want to consider how life insurance may factor into your estate planning. While life insurance is generally thought of as way to provide for your surviving family, it can go further. Life insurance proceeds can help pay future estate taxes and settle a policyowner’s debt. (Learn more: Life insurance overview )

Leave copies of your will, health care directives, and powers of attorney with instructions in a safe place, along with a list of accounts and assets. Someone you trust — a family member or the person you named as executor — should know where to find them.

It might feel overwhelming to handle all these tasks, especially if your assets or family situation aren’t simple. Breaking them into small steps to accomplish one at a time or consulting an estate planning attorney or financial professional to help with the process can make it more manageable. But in the end, it’s important for your loved ones to have an estate plan in place.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.