Estate Planning Checklist: How to Get Your Affairs in Order

Estate Planning

Nov 3

This article will walk you through the basics of how to create your estate plan, outlining six of the most commonly used estate planning tools.

What is estate planning?

Estate planning is the process of creating a blueprint for the preservation, management, and distribution of assets in the event of your death and/or mental incapacitation. Ultimately, the objective is to maximize the value of your estate and minimize associated costs to ensure a smooth transfer of assets to heirs.

Who needs estate planning?

A common misconception is that estate planning is just for the elderly or wealthy. The fact is, however, that if you own a bank account, car, home, furniture, or insurance policy, you have assets. However modest your estate is, you’ll need to establish a plan for how to distribute the same upon your death.

Basic estate planning steps

Take inventory of your assets and liabilities

Before we explore basic estate planning tools, the first step in the planning process is to take inventory of all your assets—encompassing everything from homes, antiques, and collectibles to life insurance policies and bank or retirement accounts. Next, compile all your liabilities including mortgages, car loans, and any lines of credit. Any debts are generally paid out of money remaining in the estate.

Determine how to protect your family and assets

Once you have a firm grasp of your assets and liabilities, start thinking about how you want to protect your assets and family. For example, you’ll want to evaluate if you have enough life insurance to ensure your spouse or partner and any dependents can maintain their current lifestyle. If you have minor children, you’ll want to appoint a legal guardian to care for them in the event of your death or incapacitation (typically before they turn 18).

Consider who you’ll appoint as an executor and trustee

Next, think carefully about whom to appoint as your executor and trustee as well as how you want your assets distributed. Executors are responsible for executing the terms of your will; this includes collecting and distributing assets, paying debts, and filing tax returns. Trustees, on the other hand, manage assets held within a trust and are responsible for investments, accounting, and tax filings either indefinitely or until the trust is terminated. To ensure a smoother experience for all beneficiaries, make sure the individuals or institutions you appoint have the necessary financial knowledge and organizational skills to carry out your wishes.

Put your plan into action

You can now begin thinking about how you’ll safeguard your assets, which is where different estate planning tools come into play.

Re-assess

Circumstances can (and will!) change throughout your life, meaning estate planning is by no means a “one-and-done” deal. With this in mind, be sure to review your estate planning documents on a regular basis to ensure they continue to meet all of your objectives.

Commonly used estate planning tools

Power of attorney

A power of attorney is a document that gives the party of your choosing the power to make legal decisions on your behalf when (and if) you ever become incapacitated or can’t act on your own behalf for some other reason. This can take shape as various types and reflect a range of responsibilities. For example, you can establish a power of attorney to permit another party to act only for limited purposes (e.g., signing loan closing documents in your stead). Another common purpose is to entrust this person with paying your bills or managing your assets and investments. Know that attaching the word "durable" to any power of attorney means the authority given endures beyond the principal’s mental incompetence (e.g., with respect to a healthcare power of attorney).

Living will or advanced directive

While the exact name of this document varies by state, its purpose remains the same: allowing you to specify end-of-life medical care decisions in the event you’re unable to personally communicate the same. This document also helps prevent confusion and/or disagreements as no other party can override decisions you’ve already made. While a living will may seem similar to a power of attorney for healthcare (with some states combining the two documents), their purposes are different; the former reflects decisions you’ve made ahead of time whereas the latter names someone who can make medical decisions on your behalf if you’re unable to.

Last will & testament

A last will and testament is a key document ensuring an estate is settled in the manner the deceased had intended, communicating your final wishes concerning how assets and other possessions are distributed following your death. You can amend this document at any time while you are still living.

If you pass away in the absence of a will (“dying intestate”), the state becomes the executor and thus decides how to distribute your property and other assets. Corresponding court-made arrangements include freezing your assets until an executor is appointed and determining how to split them among family members (likely straying from your desires), this process often complicated, expensive, and extremely time-consuming for living family members as a drawn-out affair—particularly when significant assets are involved. In these situations, it’s not uncommon for months or even years to pass before any money, property, or belongings are distributed to heirs.

Living trust

A living trust is a legal document whereby your assets (anything of value such as a business, real estate, bank accounts, etc.) are placed into a trust account established while you’re still living and considered the “grantor” as you’ve personally created and funded the account. A designated person (a “trustee”) is tasked with managing assets for the benefit of the eventual beneficiary or beneficiaries. There are two different types of living trusts: “revocable” and “irrevocable” trusts, the former being the most common as something a grantor can change (or cancel) at any time, just as the name implies. Conversely, nobody—not even the grantor—can change an irrevocable trust. When a grantor passes, a revocable trust automatically converts to an irrevocable trust. One of the biggest benefits of establishing a trust is that it helps ensure a smooth estate transfer process, saving you money and the headache of probate court (the often-lengthy process used to verify a will or administer assets for those without one).

Beneficiary designations

You might already know that several types of assets—including retirement accounts and insurance policies—can pass to your heirs regardless of whether or not you have a will. What you may not know, however, is that beneficiaries listed on these accounts supersede even your own last will and testament (the aforementioned document communicating your final wishes regarding the distribution of assets and other possessions). Consequently, your assets can land in the hands of an unintended person such as an ex-spouse or even a deceased relative.

Other circumstances may trigger the inadvertent exclusion of a specific person—especially if you opened the account years ago (e.g., before the birth of a child or someone marrying into the family), situations such as these leading to probate and costly delays. The simplest action you can take every few years—or if you experience a life-changing event—is to update beneficiaries on your accounts, especially those established years ago, while choosing heirs who are mentally competent and not minor children (under the age of 21) to avoid the headache of court-contested decisions. Consider naming contingent beneficiaries for extra protection.

Life insurance

A life insurance policy can give you the peace of mind that your loved ones will thrive in the absence of your support. In the context of a comprehensive estate plan, this can go beyond providing cash liquidity via death benefit payments (e.g., if you need to split up property or business assets across more than one heir, life insurance can help equalize this wherein one party receives property and the other receives equal value in the form of death benefit proceeds from the insurance policy).

The bottom line: basic estate planning tools

As you can see, there are many factors to consider when planning for circumstances after your death. While an estate planning attorney and financial advisor can give you situation-specific advice, familiarizing yourself with the information shared herein is a great place to start.

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