What Is an Estate Plan? The Basics + How To Create One
If you think that creating an estate plan is only for the sick or elderly, think again. It’s an unfortunate truth that death can happen to anybody at any age, and you wouldn’t want to leave your family to pick up the pieces of a disorderly estate after you die while they sort out their grief. Instead, take a weight off their shoulders and create order in your absence.
Every time you stop and think about what will happen to your possessions after you die, you’re in the beginning stages of estate planning. But now may be a good time to take those plans a few steps further with our guide to estate plans and how you can create one — no matter your age.
By taking charge of your finances and learning about estate planning, you can feel confident that you took a necessary step in protecting your family and your assets.
What Is Estate Planning?
Estate planning is the act of hiring an estate planning attorney — or fiduciary — to help you prepare the transfer of your assets, possessions, charitable gifts, donations, and wealth in case of death or incapacitation.
This means that in the event that you are unable to represent yourself at the end of your life, you will have a plan in place to divide your estate (or possessions) amongst your loved ones.
It also means that you can also set health care directives and medical power of attorney to follow your wishes if needed.
The 3 Elements of Estate Planning
Whether you’re creating your very first estate plan or updating one later in your life, there are three basic elements that every estate plan must have:
1. Wills and Trusts
People who are under 40 should create a will or living trust to ensure that their estate is accounted for in case of an accident or sudden illness. Since they are both documents that detail how assets should be handled after death or incapacitation, the differences between wills and trusts can be confusing.
- Tend to be more affordable than trusts
- Only take effect after you die
- Become public after probate
- Are slower to transfer assets
- May have to go through probate
- Are more expensive to carry out
- Will stay private
- Can provide for your intensive care or disability
- Avoids probate
Both wills and trusts:
- Allow you to leave property to children
- Let you name primary beneficiaries
- Can be changed
2. Power of Attorney
A power of attorney (POA) is a binding legal document that enables somebody to make decisions on your behalf regarding your legal and financial affairs. A POA goes into effect if you pass away unexpectedly or are incapacitated and unable to care for yourself. These documents have specific instructions for attorneys based on the specific circumstances of your estate plan.
If you don’t enact a power of attorney while you are alive or physically able, then the court will have to hire somebody to appoint somebody for you to take charge of your property, make life-altering decisions, or even pay your bills.
With this in mind, attorneys aren’t the only people who can receive your POA — family members may also take charge. For example, your sibling can be your medical POA.
There are several kinds of powers of attorney, including:
- Durable power of attorney: This is when you allow somebody to make decisions on your behalf. This is the standard POA.
- Limited power of attorney: A limited power of attorney limits the power of your attorney or representative for non-general POAs like financial and medical powers of attorney.
- Medical power of attorney: This is when you allow your attorney to make medical decisions if you are unable to do so. These include end-of-life decisions, surgeries, and medications.
- Financial power of attorney: Much like a medical POA, you allow somebody to make decisions regarding your money and property if you aren’t able to do so.
- General power of attorney: This is a POA that ends if you become incapacitated and allows your representative to control financial, medical, legal, business, health, and property matters.
For the most part, you are able to update your power of attorney as you see fit throughout your life — a medical POA is an exception to this since the best way to change it is to create a brand new one. You will typically change a POA when you hire a new estate planning attorney or representative to cover your affairs.
3. Health Care Directives
Much like a medical POA, a health care directive carefully details your end-of-life wishes and care. These documents will sometimes include a durable POA that allows another person to make health care decisions for you. They may also include a living will that details your wishes if you were to become incapacitated, depending on your guidelines.
How To Create an Estate Plan at Any Age
Planning an estate is important for people of all ages — especially for those who have next of kin or equity in the form of houses or other property, savings accounts, or prized possessions like family heirlooms.
Although we may conjure the image of an elderly person when we think of creating an estate plan, accidents and illnesses may happen to people of any age.
Estate Planning Under 40
When creating an estate plan under the age of 40, you’ll first need to find a reliable estate plan lawyer to handle your assets. Decide on the appropriate power of attorney that fits your lifestyle. Then, create a living trust or will to ensure that your estate plan is taken care of in case of an emergency or incapacitation.
Estate Planning Over 40
When you reach your 40s, it’s important that you start getting more specific with your estate plan. Within the next two decades, you should have a long-term retirement plan mapped out and an updated durable POA that includes health care directives and even living trusts, depending on your circumstances.
Whether you are in perfect health or ailing, it’s recommended that you have an estate plan in place by the age of 55. You may also set aside assets for charitable purposes in this stage of estate planning.
Here are the steps for charitable giving with an estate plan:
- Designate a bequest for a charity that is near and dear to your heart.
- Choose a predetermined portion of your estate to donate.
- When the estate plan comes to fruition, the money will go to your chosen cause.
Planning for Estate Tax Liabilities
The last thing you want to worry about is an estate plan tax affecting your family after you pass away. After you transfer your gross estate, property, and other possessions, they will be taxed if it reaches a certain threshold. This is often referred to as a death tax or estate transfer tax.
For 2022, your family will generally not need to file an estate tax return if your gross estate is less than $12 million — and this number will increase every year. If your estate does reach the threshold and you want to reduce it, you can donate a portion of your estate to charity, transfer it to a surviving spouse, or give away assets to friends and family while you are still alive.
Benefits of Estate Planning
Estate plans are more than bequeathments and end-of-life decision-making — there are many other benefits that come with careful estate planning. These include:
- Reducing taxes and debts for your loved ones with gifts and marital trusts
- Charitable giving from a portion of your assets after death
- An easier transition of wealth for small business owners to their family, friends, or co-owners
- Cover your own funeral expenses to save loved ones the cost
- May save your family from probate, which can be a costly process
Common Estate Planning Mistakes
Estate planning mistakes may occur for the everyday person, especially if you try to do everything yourself. The biggest mistake somebody could make while creating an estate plan is not hiring the right representative for their estate.
Another common mistake is forgetting to update your will or power of attorney throughout your life. If you have a portion of your estate bequeathed to a specific beneficiary that has since died, there may be confusion or legal battles in the wake of your death.
For example, let’s say you requested that your estate be equally split between your kids, but one has since passed away. When you pass away, their spouse or children may claim that they deserve a portion of your estate. If you don’t clarify your estate plan by specifically naming your loved ones, the confusion that results from it may cause a familial divide.
Estate Planning FAQs
You may have more lingering questions when it comes to the basics of estate planning. Luckily, we’re here to help answer some frequently asked questions.
How Expensive Is Estate Planning?
The expense of hiring an estate planning attorney to draft a will or living trust will vary by your needs and location. They can range anywhere from under $1,000-10,000+ for more complex estates.
If you have a larger estate, the cost of your will can greatly increase. If you have a simple estate and very few assets to your name, an estate plan may be cheaper to execute.
What Are the Common Estate Plan Documents?
Every estate plan should consist of a will or trust, a power of attorney, health care directives, guardian and beneficiary designations, and a letter of intent.
Budget for Your Estate Plan Today
Now that you know the intricacies of what an estate plan is, when to start planning for one, and the documentation required for both your family and your attorney, you can take the next step in your estate planning journey.
As you start looking into investments for your estate plan, remember that preparation is key. Check out our retirement planning calculator or net worth calculator to determine how much you will leave to your family once your estate plan is in place.