TL;DR: Learning how to start estate planning helps you put clear instructions in place for your assets, healthcare wishes, and financial matters. This guide covers the main documents and steps involved in creating an estate plan, along with situations where professional help may be useful.
Main points:
- Learn what common estate planning documents do, including a living will, living trust, pour-over will, and healthcare and financial powers of attorney.
- Follow eight estate planning process steps, from listing assets and reviewing beneficiaries to storing and updating your documents.
- See how trusts and beneficiary designations may help certain assets avoid probate.
- Learn when an estate planning attorney may help with complex assets, trusts, taxes, business ownership, or family situations.
- Review common estate planning mistakes, trust rules, and frequently asked questions.
Most people want their heirs to benefit from the wealth and assets they build over time. But many don’t realize that the process of planning your estate isn’t just for the mega-wealthy. Learning how to start estate planning involves how to handle your money, property, healthcare choices, and legal matters if you pass away or can no longer make decisions.
It’s easy to put this plan off. We are all so busy, and planning for the future can get put on the back burner when we are dealing with everyday distractions. The best time to start with the estate planning basics is now, and there are some key components you will need to create your plan.
What Goes into an Estate Plan?
A complete estate plan often includes several estate planning documents. Each one supports a different part of your plan, from medical decisions to asset transfers. Use this as a simple estate planning checklist as a starting point:
- Living will
- Living trust
- Pour-over will
- Healthcare power of attorney
- Financial power of attorney
1. Living Will
A living will is not a normal will. This legal document lays out what medical treatments you do and do not want at the end of your life. It should address issues like:
- Resuscitation
- Mechanical ventilation
- Tube feeding
- Organ and tissue donation
- Other types of end-of-life medical care
Having these wishes clearly written down will help your family members make decisions on your behalf if you can’t.
2. Living Trust
A trust will protect your assets as you pass them down to your heirs. You can name a trustee who will oversee passing down your assets to the beneficiaries. In this document, you can lay out exactly how you want your assets to be distributed. You could leave money to help your adult child with their mortgage, wedding expenses, or student loans.
If you’re comparing living trust vs will, the main difference is how assets may be handled after death. A will explains where assets should go. A living trust can help some assets transfer outside of probate when it is created and funded correctly.
3. Pour-Over Will
This estate planning document is a special type of last will and testament. It works together with your trust and can keep your family members out of probate court. A pour-over will protects any assets that you didn’t include in your living trust or will.
Assets that are left behind with no direction could be subject to probate, and that can be a big headache for your heirs. By law, the assets that weren’t funded in a trust or pour-over will go to your next of kin, based on the state you live in, which can vary.
4. Healthcare Power of Attorney
A healthcare power of attorney lets you choose someone to make medical decisions for you if you become incapacitated.
This person may be able to review medical records, speak with doctors, choose where you receive care, and make treatment decisions based on your wishes. Since this person will likely be tasked with making really hard decisions, choosing a close family member or friend may be a good choice.
5. Financial Power of Attorney
Much like your physical health, you need someone in your corner prepared to take over your finances when you pass away or become incapacitated. You can decide how much control your power of attorney will have when accessing accounts, selling stock, and managing real estate.
A durable power of attorney generally remains effective if you become incapacitated, subject to the document's terms and applicable state law. Depending on the authority granted, your agent may be able to:
- Manage a bank account
- Pay bills
- Handle investments
- Manage real estate
- Complete certain financial transactions
- Deal with financial institutions
Do I Need an Estate Plan?
Not having a plan in place will ensure that your wishes won’t be met and can put your grieving heirs through probate court. We’ve seen a lot of celebrity examples of what can happen if you don’t have a plan.
Prince passed away when he was only 57 years old, and he didn’t have a will. Because of that, people started coming out of the woodwork claiming to be a wife, child, sibling, or distant relative. After a six-year battle, the pop star's estate was finally settled in January 2022.
That’s one example of why proper estate planning is important. So, do you need an estate plan? When it comes down to it, planning will ensure all your wishes are fulfilled, and your family members won’t have to worry about legal battles. That’s why we include estate planning in every financial plan for our clients to make sure they can make the best decisions for themselves and their families.
How to Start Estate Planning: 8 Estate Planning Process Steps
If you are unsure how to start estate planning, breaking the work into smaller steps can make the process easier.
The entire estate planning process includes:
- Make a list of your assets and debts.
- Review existing beneficiary designations.
- Decide who should receive your property.
- Choose people you trust to handle financial and healthcare matters.
- Prepare the appropriate estate planning documents.
- Transfer assets to a trust when your plan requires it.
- Store your documents somewhere secure and accessible.
- Review your plan after major life or financial changes.
Your assets may include your home, other real estate, investment accounts, retirement accounts, insurance policies, business interests, personal property, and bank accounts.
Beneficiary designations also deserve attention. Certain assets can pass according to the beneficiary listed on the account or policy, so those designations should align with the rest of your estate plan.
Do I Need an Estate Planning Attorney?
With all this complex legal documentation needed to create an estate plan, you might wonder if you need an estate planning attorney. The answer depends on your circumstances.
An attorney can help explain state-specific requirements, prepare legal documents, and coordinate different parts of an estate plan. Professional guidance may be especially useful when your situation involves:
- Significant or complex assets
- Business ownership
- Property in multiple states
- Blended families
- Minor children
- Trust planning
- Irrevocable trusts
- Potential estate tax issues and federal estate taxes
- Complex family circumstances
At Asset Preservation Wealth & Tax, estate planning attorneys may also work alongside tax professionals and financial advisors so that legal documents, beneficiary designations, and financial plans work together.
Frequently Asked Questions
What is the 5 by 5 rule in estate planning?
The 5 by 5 rule is a trust provision that may allow a beneficiary to withdraw the greater of $5,000 or 5% of the trust's value each year without certain tax consequences. It applies only to specific types of trusts and is not part of every estate plan.
What are the 7 steps in the estate planning process?
The estate planning process typically includes taking inventory of your assets, identifying your beneficiaries, choosing key decision-makers, creating essential legal documents, reviewing tax and probate considerations, securely storing your documents, and updating your plan as your life changes.
What are common mistakes to avoid in estate planning?
Common estate planning mistakes include waiting too long to create a plan, failing to update documents after major life events, not naming or updating beneficiaries, overlooking powers of attorney, and failing to properly fund a trust.
What are the 5 elements of estate planning?
The five core elements of an estate plan are a living will, a living trust, a pour-over will, a healthcare power of attorney, and a financial power of attorney. Together, these documents help protect your assets, healthcare decisions, and loved ones.
