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Steps to Create an Estate Plan

Estate planning is the process of preparing for incapacity and death. An estate plan is also used for tax planning, conveying wishes for medical care, end-of-life decisions and post-mortem directions. While most estate plans should include a last will and testament, a last will by itself is not an estate plan.

Creating an estate plan requires time and effort. However, without an estate plan, children can be disinherited, end-of-life decisions can be made by strangers and wealth can be consumed by taxes or go to the wrong person.

Making the Estate Planning Process Easier

The estate plan begins with discussions and goal setting:

Who will make critical medical and financial decisions in the event of incapacity?
Will all assets pass to your spouse upon your death?
Who will raise your minor children to adulthood, if they are orphaned?
Should children receive a large lump sum when you die?
Will federal or state estate taxes present a problem for heirs?

How you and your spouse answer these and other questions will guide the preparation of your estate plan. Different goals require different strategies. A modest estate plan will be simpler than one comprised of significant assets, properties in multiple states or children from different marriages.

Once goals have been established, strategies can be developed. If taxes are a concern, trusts can pass assets across generations. If the family includes a family member with special needs, a Special Needs Trust (SNT) will be needed to protect the his or her eligibility to receive government benefits while having access to an inheritance. To keep a vacation home in the family, it may be productive to create a legal entity to own the property and pay for maintenance and taxes.

Create an Estate Inventory

An inventory of assets should be created. In addition to assets like real estate, savings, investments, life insurance, retirement funds, personal property and even “digital assets,” be sure to include account numbers, institutional information and contact information. Calculate your net worth, which will be used to determine if your estate may be subject to federal or state estate taxes. Some states also have inheritance taxes.

Develop a Plan for the Family

If there are minor children, the last will is used to name a guardian in many states. Review the family budget to ensure that enough money would be available to support the family in the event of the death of one or both parents. Life insurance is a great financial tool for this purpose.

Have the Correct Estate Planning Documents Prepared

Last Will and Testament. A last will provides for the distribution of property, nominates an executor to administer the estate and to nominate guardians for minor children. Jointly owned assets, Payable on Death (POD) assets and assets controlled by beneficiary designations are not governed by a last will.
Financial Power of Attorney. This person, often called an “agent” or “attorney in fact,” will act on your behalf, if you are incapacitated. The POA may give broad powers or be limited to specific transactions, when it comes to your financial affairs.
Healthcare Power of Attorney. This names a person who may make treatment decisions, if you are incapacitated.
Trusts. The size and complexity of the estate determines which type of trust may be most appropriate.

Final Steps to Completing an Estate Plan

Once the estate planning documents are prepared and executed, the estate plan is not done. There are two final steps: checking beneficiary designations and funding trusts.

Assets having a designated beneficiary, like IRAs and pensions, need to be reviewed and updated. This should happen every few years and more often, if there is a divorce, death, or remarriage in the family.

Assets placed into trusts must have the ownership status changed. If real estate is placed into a trust, the deed must reflect the change in ownership. If trusts are not funded, the goals of the estate plan will not be achieved.