The Essentials of Everyday Estate Planning

Estate Planning Essentials.jpg

A secret last will and testament, a fifteen-year fight to remove a comatose woman’s feeding tube, a last-minute model wife who sues for the late billionaire’s estate — this is the stuff of John Grisham novels, Supreme Court cases, and Us Weekly.

For the rest of us, estate planning may be less dramatic (hopefully), but it remains an essential piece of ordering your financial world.  In a nutshell, estate planning is planning for your family and finances in the event of your death or incapacity. Estate planning used to center on tax planning — using various trusts and gift transfers to minimize the 40% federal estate tax — but with the skyrocketing of the estate tax exemption in recent years, hardly anyone pays estate taxes anymore.  So assuming you don’t fall into the ultra high net worth category, here are the essentials of your everyday estate planning.

Who needs estate planning?

You may first be wondering whether you even need an estate plan.  But — surprise! — you actually already have one.  If you don’t have a will (or trust) in place, the laws of your state dictate who gets your property when you die.  This is typically some combination of your spouse and children (if you have them), or otherwise your parents and then your siblings.  

Here are the biggest reasons not to rely on your state’s default plan and instead to put in place your own estate planning documents:

  • If you want your property to go to people (or entities) other than those your state designates by default.

  • If you have minor children, so you can appoint guardians for them and ensure your assets are managed and distributed responsibly for their benefit.

  • To plan for complex family situations, like remarriage and blended families.

  • To plan for possible incapacity and appoint someone to make medical decisions on your behalf.

  • To plan for charitable giving.

  • To plan for business succession.

  • To avoid the time and expense of probate after your death (the public court process in which your estate is administered and your assets get distributed).

  • To pick your preferred executor (the person who administers your financial and legal affairs when you pass).

  • To plan for your digital assets, like your social media accounts and photos.

The key estate planning documents

Estate planning revolves around putting the right legal documents in place to ensure your wishes are carried out for the protection of your family.  Here are the four key estate planning documents appropriate for most people.

1. Will: Specifies how your property (everything from your cash and investments to your stamp collection and pets) is distributed when you die.  Your will can also accomplish a number of other things, like appointing guardians for minor children, establishing a trust for minor children or special needs family members, and appointing an executor.

2. Power of attorney: Authorizes someone (typically a family member) to engage in financial transactions on your behalf.  For example, if you’re in an accident and become incapacitated, your agent can access your bank account to pay your medical bills.

3. Health care proxy: Designates someone (again, typically a family member) to make medical decisions in the event you become incapacitated.  You don’t need a lawyer to complete a health care proxy, though you may benefit from one. Most states provide a standard health care proxy form you can use — for example, here is New York’s.  (Everplans maintains a database of health care proxy forms by state.)  

4. Living will: Sets forth your wishes for life-sustaining treatment in the event of incapacity.  Living wills commonly address whether to continue medical care in the event of a terminal illness, and whether to remove a feeding tube in the event of a persistent vegetative state.  The living will is often combined with the health care proxy into a single document (sometimes called an “advance healthcare directive”).

For some people, a revocable living trust may also be a good idea.  This is a trust you create during your lifetime that you can change whenever and however you like.  You keep your assets (bank and investment accounts, real estate) inside the trust so that when you die, they pass directly to whoever you name, instead of having to go through probate.  While a living trust — and the cost and hassle of forming and maintaining it — isn’t necessary for everyone, it can be worthwhile for some, especially those who are older and have substantial assets (particularly real estate) or live in states where probate is more burdensome.

When should I tackle my estate planning?

If you have minor children or are expecting, get going on your estate planning.  You’ll want to designate guardians for your kids in the event you and their other parent both pass.  Also, you’ll want to keep your assets from passing directly to your children, both so the court system doesn’t need to get involved and so your children aren’t getting direct control of excessive amounts when they turn 18.

If you don’t yet have children but are planning to, waiting to tackle your estate planning is generally a fine approach, as your documents would need to be redone anyway once kids are in the picture.  However, it’s a good idea at a minimum to put in place a health care proxy (which you can do without an attorney — check out the links above).

If you’re not planning on having children, it’s usually prudent to go ahead and put estate planning documents in place sooner rather than later.  

When in doubt, speak to an estate planning attorney — most will offer a free consultation.

Good to know facts about estate planning

  • Wills are not joint documents.  Each individual needs one.

  • Retirement accounts and life insurance policies pass according to the beneficiary designation forms, not your will. Same for bank or brokerage accounts with a “transfer on death” beneficiary designation (often noted on the statement as “TOD” or sometimes “POD”).  I recommend reviewing these designations annually or any time you have a major life event that might impact your beneficiary preferences.

  • Joint accounts will pass to the surviving joint owner (assuming the account has a right of survivorship, which most do by default).  Same with real estate owned jointly with a right of survivorship.

  • You need to hire an estate planning attorney who practices in your state.

  • You should review and likely update your estate planning documents when you have a major life event, such as having a first child, moving states, divorce, or death of a spouse.  Otherwise, a good estate plan should last a decade or more (though it never hurts to look over your documents every several years).

How much does estate planning cost?

This depends on your location, but in a major metropolitan area you can typically expect to pay $2,000 to $3,500 for a package of the four key documents for both spouses.

Where can I find an attorney?

It can be tricky to find a good, reasonably-priced estate planning attorney.  If you have a financial planner, ask him or her — a good financial planner will shepherd you through the estate planning process anyway.  Otherwise, ask friends with children or any lawyers or planners you know for recommendations. If you’re in NYC, let us know and we’ll recommend someone.

Also, be sure to check whether your employer offers some form of group legal benefits that include estate planning.  This can be a decent, cost-effective option if your situation is not too complex, though you may not get the same comprehensive service you would from an attorney you separately engage.

Can I do it myself?

DIY online estate planning platforms like LegalZoom hit the scene about 15 years ago, providing a low-cost alternative to traditional lawyers.  If you don’t have minor children and don’t have much in the way of assets, this could potentially work for you — but exercise caution. DIY estate planning platforms are rife with pitfalls, like users improperly executing the documents (which can render your will invalid), failing to coordinate beneficiary designations with your estate plan (so your assets don’t end up where they should), and trying to distribute assets that pass outside of probate (like retirement accounts).  For those who can afford it, it’s almost always worth the investment to get your estate planning done right.

Subscribe to our newsletter and receive our FREE budget toolkit.