What Is Estate Planning, and How Do I Do It?

Sharks. Spiders. Snakes. Estate planning.

Some topics strike fear in the hearts of people just by mentioning them.

Now, I can understand a healthy fear of sharks. I’ve watched too many specials on TV. I’ll stick to my beach chair, thank you very much.

Estate planning, on the other hand, is nothing to fear. There’s no superstition that says you’ll face impending doom if you start working on it. In fact, you’ll feel more confident about your future after you’ve made and communicated these decisions. Here are some of the most commonly asked questions:

  1. What is estate planning?
  2. What do I include in my estate plan?
  3. How are wills and living trusts different?
  4. What is a living will?
  5. Why do I need a power of attorney (POA)?
  6. Why is umbrella insurance in an estate plan?
  7. How do I choose an estate planning attorney?

Let’s get started!

What Is Estate Planning?

An estate is what you own—houses, cars, jewelry, investments, stamp collections. Estate planning is just a fancy term for deciding what happens to that stuff when you pass away. It also states clearly who can make medical, financial and legal decisions for you if you can’t.

And everyone—including you—needs an estate plan . . . even if you’re young and just starting out. Going through this decision-making process keeps you in control of your assets. And you spare your family and loved ones the angst of making those decisions in the midst of an emotional situation.

What Do I Include in My Estate Plan?

An estate plan is made up of several legal documents that a lawyer typically creates and you sign. You keep copies of those documents and let loved ones know where to find them in case something happens to you. The basic paperwork in an estate plan includes:

  • Will
  • Living trust
  • Living will
  • Power of attorney
  • Umbrella insurance

In addition to this legal paperwork, you need to include a list of your financial accounts: 401(k)s, IRAs, annuities, bank accounts, savings bonds, etc. You also need to gather other documents, including:

  • Life insurance policy
  • Long-term care insurance policy
  • Housing or land deeds
  • Vehicle titles
  • Marriage license
  • Divorce papers
  • Military discharge papers
  • Partnerships or business agreements

If there are user names and/or passwords associated with any of these accounts or documents, include that information, too. All of these documents need to be stashed together in secure place, such as a safe-deposit box or a home safe. Make sure the executor of your will (usually a lawyer) knows where these documents are. All of this documentation and paperwork make up your estate plan.

How Are Wills and Living Trusts Different?

A will is a legal document that tells other people what you want done with your stuff when you die. Here are some instructions you can include in a will:

  • How you want any of your money distributed among family or loved ones
  • The amount of money you want given to charitable organizations of your choice
  • Who gets any heirlooms (jewelry, vases, art, etc.)
  • Who you want as your children’s legal guardian
  • Who you want to take ownership of your business

Estate attorneys know what’s often included in a will, so they can help you craft one that fits your situation. If you’re young and have few assets, you can use an online template and create a legally binding will in less than 20 minutes.

A living trust is similar to a will because it specifies what you want to happen to your assets. When you create a trust, though, you transfer your money, property, investment earnings, and other items of value into a trust while you’re still alive. At that point, you don’t own whatever you’ve put into the trust. The trust owns it.

If you have assets (including property) over $400,000, you need to set up a trust. If anyone were to sue you for any reason, the assets you’ve put into that trust can’t be touched because you don’t own them—the trust does. A trust adds a layer of protection for your money.

When you pass away, everything you’ve put into the living trust will be transferred immediately to the people or organizations you’ve left it to. That keeps your estate out of probate court, so the people you love will receive their inheritances more quickly.

A trust is private, while a will is public. No one except your beneficiaries will know what you’ve given to others. A trust can also have some tax advantages, so you’ll want to talk with your financial advisor about that.

What Is a Living Will?

A living will is also called a directive, a health care directive, or an advance directive. It lets you state in clear terms your wishes for end-of-life medical care, such as whether or not to resuscitate you. The document spells out what measures should be taken to save or prolong your life and only applies to deathbed decisions.

Why Do I Need a Power of Attorney (POA)?

A living will deals with your medical wishes, but a power of attorney deals with your financial and legal wishes. This document shows who can make financial and legal decisions for you if you can’t. This is especially important as you age, because no one—not even your child—can access your financial accounts without prior permission. You’re saving family and loved ones a huge mound of paperwork, time and money by drafting a power of attorney, so get this done.

Why Is Umbrella Insurance in an Estate Plan?

An estate plan outlines what happens to your stuff should you die, but it doesn’t protect those assets in case of a legal proceeding. That’s why you need umbrella insurance. It is extra liability insurance that protects you from major claims and lawsuits. It acts like a shield over auto and homeowner’s insurance and kicks in when those policies have reached their limits.

Let’s say you have a teen driver and he crashes into an oncoming car. The injuries to the other driver cost $750,000, but your auto policy only covers $500,000. In this case, the umbrella policy will pay the remaining $250,000. This way, your financial accounts (savings, IRAs, investments) don’t get raided and you can still enjoy a secure retirement.

How Do I Choose an Estate Planning Attorney?

Finding an estate lawyer can seem overwhelming, but it doesn’t have to be. Can I give you a piece of advice? Ask around. Talk to your financial advisor. Get a referral from your tax accountant. Ask your parents. Talk to your lawyer friends. Then do your research. You can find reviews for anything online, including local estate planning attorneys. Then, make an appointment to talk to them. It’s that easy.

Estate planning may sound scary, but it’s a fairly simple process once you know what you need to decide and what documents you need to include. If you need motivation to get started, remember that completing an estate plan is one of the most loving things you can do for your family and friends. Don’t put it off!

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