The Ultimate Guide to Creating an Estate Plan

Estate planning is probably the last thing you want to think about as you start your family.

You’re bringing life into the world, which is joyous and happy. But estate planning is all about what happens when life ends, which is morbid and depressing.

You may also think that estate planning is only for rich people. If you haven’t yet built up much savings, or if you’re still working your way out of debt, you might wonder whether it’s actually important to tell people what to do with your money.

The truth is that estate planning is both important and empowering, no matter how much money you have. And that’s especially true when you have young children, because your estate plan is how you ensure that your family will always be taken care of, no matter what.

In this guide you’ll learn everything you need to know about estate planning so that you can make sure your family’s future is secure.

Why You Need an Estate Plan

The main reason to create an estate plan is to make sure that your family will be taken care of both physically and financially after you’re gone.

Physically, you get to decide ahead of time who would take care of your children — and other dependents — if you and your spouse or partner are no longer able to do it yourselves.

Financially, you get to make sure that there’s money available for your children, and you get to decide who would be in charge of managing that money until they’re old enough to do it themselves.

In other words, your estate plan is how you get to keep being a parent after you die. Your kids will continue to be taken care of because you set it all up ahead of time.

And if that isn’t enough, Bomopregha Julius, an estate planning attorney in New York City, suggests two other reasons to create an estate plan:

  1. It’s really for your family, not for you. Whether you have an estate plan or not, your surviving family members will have to figure out what financial assets you have and what to do with them, all at a point in time when they’ll be grieving your death. By creating an organized estate plan, you give them the tremendous gift of making that process as easy as possible.
  2. Build generational wealth. An estate plan is how you break the cycle of poverty and build generational wealth. By being intentional about leaving money behind to the people you care about, you create a stronger foundation for the next generation to build upon.

With that as your motivation, let’s talk about what goes into a good estate plan.

8 Key Components of a Solid Estate Plan

1. Your Will

A will serves two main purposes.

First, and most important, it’s the only place where you can name guardians for your children. This is why a will is essential for all young families, regardless of your financial situation.

Second, your will is how you pass on assets and possessions that don’t allow you to designate a beneficiary (more on beneficiaries below). Things like cars, furniture, and jewelry can all be passed down through a will.

The downside of a will is that it has to go through a process called probate. Probate is the court process of reviewing and executing your will, and it can be time-consuming and expensive. Family and friends can also challenge your will during probate, with the final decision up to the judge, which can lead to outcomes that may not be exactly what you intended.

For that reason, it’s usually a good idea to pass on as much of your money and possessions as possible through other avenues. Which brings us to…

2. Your Beneficiary Designations

Many bank and investment accounts, as well as life insurance policies, allow you to name beneficiaries or make payable on death designations. These designations allow you to specify who the money in those accounts would go to upon your death.

The benefit of these designations is that they allow the money to be transferred without going through probate, which means your family can get the money quicker, easier, and with more certainty.

You just need to be aware that these designations take precedence over anything you have in your will. That’s what allows them to skip probate, but it also means that updating your will often isn’t enough to keep your estate plan up to date. You need to make sure you keep your beneficiary designations current as well.

3. Life Insurance

Life insurance is one of the best ways to make sure that there will always be enough money for your surviving family members. This is particularly true when you have young children, since there is a long time between now and the point at which they’ll be able to support themselves.

Typically, both working and non-working parents should have at least some amount of life insurance.

For working parents, it primarily serves to replace lost income. For non-working parents, it helps the family pay to replace all of the duties they perform. And in all cases it can help the surviving family members navigate a challenging transition period without worrying about how they’ll pay their bills

Term life insurance is the type that most people need, but you can get a detailed breakdown of the options available to you here: Term vs Whole Life Insurance.

4. Financial Power of Attorney

A financial power of attorney designates someone to handle your finances in the situation where you’re temporarily incapacitated. This could, for example, allow someone to access your checking account and pay your bills.

You could set this up as a permanent right or you could make it conditional upon certain medical diagnoses. You can also limit which accounts the person is able to access and which actions he or she is able to perform.

Regardless, this ensures that your financial obligations can be handled even when you’re not able to do it yourself.

5. Health Care Power of Attorney

A health care proxy is essentially the same as a financial power of attorney, but for health care instead of finances.

It designates someone to be in charge of your medical decisions in case you’re ever not able to make them for yourself. Designating someone you trust as your health care proxy will make it easier for your doctors to care for you in a way that aligns with your personal values.

6. A Living Will

Your living will allows you to decide ahead of time how you’d like end-of-life decisions to be made. That might sound pretty morbid, but this helps ensure that you’re treated the way you want to be treated AND takes some of the responsibility off the shoulders of your family members to make some of those difficult decisions for you.

7. List of All Your Important Accounts

One of the most difficult jobs for surviving family members is often simply finding and accessing your bank and investment accounts. If they don’t know where they are, it’s pretty challenging to claim the money.

So at the very least, making a list that details which accounts you have at which institutions can eliminate a lot of the struggle. For some accounts, it may also make sense to securely share your username and password so that there’s always someone who can access them if needed.

8. A Written Summary of Your Wishes

While your estate plan should always be laid out formally using the tools above, it can also be helpful to provide a written summary of what you want to happen.

While it won’t be legally binding, it can help to explain your wishes in an easily understood format, which could make it easier for your survivors to execute your plan correctly.

When to Consider a Living Trust

While the eight items above are essential for any good estate plan, some people might also benefit from creating a revocable living trust.

A revocable living trust is a legal entity that you create and control. You can then transfer ownership of certain assets to the trust, and those assets are then bound by the terms of the trust, which specify how those assets should be disbursed upon your death.

For example, it’s common for spouses to create a living trust in which they are both trustees, meaning that they both have full access to all the assets owned by the trust and can modify the terms of the trust at any time.

Then they will transfer checking accounts, savings accounts, and non-retirement investment accounts to the trust. They can also name the trust as the beneficiary of their life insurance policies. And because they are trustees, they can manage those assets in the exact same way as if they owned them individually, with the difference being that those assets will now automatically pass to surviving family members according to the terms of the trust.

That might sound like a lot, and it may also sound redundant with the purpose of your will and your beneficiary designations. But there are two big benefits to this approach.

The first is that all assets owned by the trust skip probate. Probate can be a long and expensive process, and skipping it means that your money is passed on to your family members quicker, at a smaller cost, and with less chance for your desires to be overturned.

The second is that you have more control over certain decisions, such as when your children get access to your money. Instead of them inheriting your life insurance proceeds at age 18, for example, you can stipulate that they wouldn’t receive the money until age 25, when they might be better prepared to handle it. You can even put in provisions that protect the money from a messy divorce or from creditors. Trusts are flexible tools with a lot of room for you to set them up as you please.

The Cost

The big downside is the upfront cost. A will and all the other documents might cost anywhere from $50 to a few hundred dollars to set up, while a living trust will usually cost a couple of thousand dollars. The flip side is that it may actually save your family money in the long run by cutting out most of the probate process, but that doesn’t make it any easier to afford the bill now.

In general though, a living trust is a good idea if you can afford the upfront cost without sacrificing your basic financial security. It makes things quicker, easier, less expensive, and more certain for your surviving family members.

And remember that even if you don’t have much in the way of savings, your children might stand to inherit significant life insurance money. A living trust can make sure that that money is managed properly by the right people until your children are old enough to manage it themselves.

Hiring an Estate Planning Attorney vs. Doing It Yourself

Armed with all that information, there’s still one big question left to answer: how should you get it all in place?

It used to be that you had to go through an estate planning attorney, but as the world turns digital there are now a number of online tools that can help you get these documents in place quickly and inexpensively.

So which route should you take? Let’s look at the pros and cons of each approach.

The Pros and Cons of Doing It Yourself

There are a number of websites now that offer guided, DIY estate planning packages with all the essential documents. Some of the biggest are Nolo, LegalZoom, and Rocket Lawyer.

The biggest appeal of these tools is typically the cost. They currently range from $54.99 to $149 per person, which in some cases could be significantly cheaper than working with an attorney.

They’re also quick. Working with an attorney likely requires at least one in-person meeting, and often more to get everything handled, while the online tools might allow you to complete everything in just a couple of hours.

And for simple situations, many attorneys use a template similar to what these tools offer anyway, so you may not be getting a much different product.

The biggest downside is that you don’t get the guidance that comes from working with a good estate planning attorney. Given the importance of getting your estate plan right, that could be costly.

The DIY tools aren’t great for more complicated situations either, such as setting up a living trust or creating a plan for a second marriage. Those situations have more moving parts, and that’s where an experienced attorney can be very helpful.

The Pros and Cons of Hiring an Estate Planning Attorney

Working with an estate planning attorney has essentially the opposite set of pros and cons.

The biggest downside is simply the cost. It’s typically at least a few hundred dollars to work with an attorney, and it may be upward of $1,000. It really depends on where you live though, and even then there’s often a wide range, so it’s worth calling around.

The main reason to work with an estate planning attorney is for the guidance they offer. A good attorney will take the time to get to know you, to understand what’s important to you, and to explain all of the options available to you. The decisions you’re making are not always simple or easy to understand, so that kind of guidance can be invaluable.

Along with that comes the confidence of knowing that your plan is done right, both in terms of being set up the way you want and in terms of adhering to specific state laws that the online tools may or may not be aware of.

Similarly, your surviving family members may be in a better position to carry out everything with the guidance of the attorney who helped you create your plan and knows exactly what you wanted and how everything should work. Again, anything you can do to make things easier for your family is a huge gift.

Finally, working with an attorney may make it easier for you to make changes and updates as you move along, since he or she will already be familiar with your plan and have all the documents you originally created. So if you have a child, get divorced or remarried, or want to update the guardians in your will, your attorney can help you make those changes efficiently within the context of your overall estate plan.

Questions to Ask Before You Hire an Estate Attorney

Can you afford the cost of the attorney without sacrificing your financial security?

Can you find an attorney who cares about getting to know you personally and helping you craft a personal estate plan?

If the answer to both of those questions is yes, the cost of hiring an attorney is well worth it. Otherwise, the DIY tools are probably sufficient as long as your situation is relatively simple.

How to Find an Estate Planner

  1. You may have access to discounted legal services through your employee benefits.
  2. The National Association of Estate Planners & Councils has a search tool you can use.
  3. WealthCounsel is another organization that offers a helpful search tool.
  4. You can always simply Google “estate planning attorney” + your city/state to find one near you.

Where to Keep Your Estate Planning Documents

Once you have your estate planning documents in place, there’s still one big question to answer: where should you keep them?

This may sound trivial, but it’s actually pretty important. Remember, these documents tell everyone else how your family and your money should be cared for after you die, meaning you won’t be around to help them figure it out. So your main goals here are two-fold:

  1. Ensuring that there are always up-to-date copies stored somewhere.
  2. Making it easy for your surviving family and friends to access those documents if needed.

Here are a few options.

1.Your Attorney

If you work with an attorney, he or she will usually be able to keep a copy of all of your important documents on hand. This is a great way to make sure that those documents will always be available, even if something happens to your copies.

It’s also a good way to make sure that someone who knows what they’re doing is leading the way. Your attorney will already know who’s in charge of what and should be able to guide everyone else to make sure that things run smoothly.

2. A Safe

Even if you’re relying on an attorney, you’ll walk away with a number of physical copies of all your documents that you should hold onto in case originals are eventually needed. And it may be a good idea to keep them in a fireproof and waterproof safe, just to make sure they won’t get damaged in an accident.

3. With Friends and/or Family

Throughout the estate planning process, you’ll be naming a number of people who would be in charge of taking care of your children and handling your financial affairs if you die. You should already be talking these decisions through with them so that they know what’s expected of them, and it may also be a good idea to give them a copy of important documents so that they’re easily accessible if the need arises.

4. Digital File Share

Storing your files digitally using a service like Google Drive or Dropbox is a great way to make sure you always have backup copies, and it also makes sharing those documents with others easy.

You could also looked into a paid service like Everplans, which is specifically designed for storing and sharing sensitive estate planning documents. They also offer some customer support that may be helpful if you need a little guidance.

The Gift of a Good Estate Plan

If you’re like most people, you’ll probably procrastinate on putting your estate plan in place. It’s not an enjoyable topic, and it’s a cost that’s not easy to take on when you’re already paying for child care and everything else.

But a good estate plan is a gift, both to you and your family.

You get the gift of knowing that your family will be taken care of, no matter what. And your family gets the gift of having the transition period after your death be as easy as possible, giving them space to grieve and get their lives together without worrying about the financial side of things.

That’s the value of a good estate plan.

The post The Ultimate Guide to Creating an Estate Plan appeared first on MagnifyMoney.