Estate Planning Basics: What’s Included and 6 Steps to Make Yours

A couple on the beach contemplating the horizon and their estate plan

Estate planning is a key part of a retirement strategy. Contrary to popular belief, an estate plan isn’t just for the wealthy. While the word “estate” may bring to mind visions of mansions and rolling lawns, in this context, it’s simply a blanket term for property and assets. An estate may include real estate, expensive stuff, sentimental stuff, digital stuff, or financial resources. No matter how large or small their estate, every adult should have an estate plan. Here’s what one includes and how to go about making yours. 

What Is an Estate Plan? 

An estate plan is a series of instructions set out in legal documents that will designate how the assets in an estate are to be distributed at the death of its owner—called the testator in legal terminology. It also makes provisions for what should happen in the event the testator becomes incapacitated and cannot act on their own behalf.   

A comprehensive estate plan ensures that beneficiaries receive assets with minimal penalties, appoints a guardian for minor children, and includes information regarding health directives.  

What Is Included in a Comprehensive Estate Plan? 

Most estate plans are comprised of the following documents: 

  • Last Will and Testament, or Trust. These are both mechanisms for distributing property and assets to heirs that function slightly differently. You will choose either to draft a will or trust or both depending on the complexity and needs of your estate. 
  • Power of Attorney. This document gives a designated individual the power to act on your behalf in the event you become incapacitated.   
  • Medical Directive. This document will include a living will designating how you would like your health care to be approached if you are unable to act on your own behalf and a health care proxy that designates who you would like to make medical decisions on your behalf if you cannot.  

In addition to the documents listed above, the following elements are important parts of an estate plan that should not be overlooked or left out. 

  • Beneficiary designations. Life insurance and retirement policies allow you to designate a beneficiary. If no one is selected as a beneficiary on the account, the court will determine who the account goes to. If a beneficiary on a particular asset is listed differently on the asset than in the will, the court will award the asset to the beneficiary listed on the asset. For that reason, it’s important to make sure your beneficiaries are always designated and kept up to date. 
  • Guardianship designations. A guardianship designation is someone you select to take care of your children. If this isn’t in place, your children may be cared for by a family member you don’t necessarily like or who won’t uphold your child-rearing wishes.  
  • Letter of intent. Written wishes left for a beneficiary or executor, the letter of intent can include instructions regarding assets, your funeral, your pets, or other special requests. It isn’t binding in accordance with the law but could be evaluated by a judge to help them understand your intentions.  

Why Make an Estate Plan?  

While no one loves the idea of passing away, an estate plan ensures the people you care about don’t suffer unnecessary hardship while grieving. 

When a person passes away without a valid will or trust, their estate goes into probate. That means the court system will decide how assets are distributed and can be a complicated and drawn-out process that can add anxiety to an already stressful life event. There are multiple ways to set up an estate to avoid or expedite the probate process. The more comprehensive your estate plan, the easier it will be for the people you care about. 

If you have children or others who depend on you, an estate plan helps ensure they are cared for as you would like them to be.  

How to Make an Estate Plan 

Many people hire an attorney specializing in estate planning to help ensure their estate plan is comprehensive and legally binding. Hiring an attorney can be expensive, however, and there are online services that, for a much lower fee, will facilitate you in making your own estate plan. Depending on the complexity of your estate, these services can be a good option. If you choose this route, you will want to take extra care to do what is required to make your estate plan legally binding.  

What Makes an Estate Plan Valid? 

An estate plan is valid if it conforms to its respective state law. Many documents—a will, trust, beneficiary, and guardian designations, as well as powers of attorney—are valid only if certain age requirements are met, the individual signing documents is of sound mind, and the required witnesses and signatures are present.  

What Information Do You Need to Make an Estate Plan?  

Whether you retain an attorney or create your own estate plan with an online service, you’ll need a fair amount of information at your fingertips before you set out to create your documents. You’ll also need to make some important decisions. Taking the time to put this information together in advance will help make the actual creation of the plan go smoothly. The following action steps will help you gather the right materials and prepare to make your estate planning documents.

1. List Your Assets and Liabilities 

Your asset list will include a physical inventory of cash, homes, real estate, vehicles, jewelry, collectibles (stamps, coins, trading cards), and items of sentimental value you want to pass to a specific person. It also includes financial assets like checking and savings accounts, life insurance policies, stocks, mutual funds and bonds, life insurance policies, health savings accounts, and business ownership information. For an increasing number of people, it may include digital assets like NFTs. 

Once you determine your assets, estimate their value. This can be done through appraisals as well as statements from your financial accounts.  

In addition to what you own, it’s a good idea to also have a list of what you owe, including mortgage, credit cards, and other debt. This can be helpful for executors and other individuals left in charge of your estate. This list will likely need to be revisited and updated regularly. 

2. Review Your Beneficiaries 

Beneficiaries are individuals you choose to receive your assets upon your passing. Life insurance and retirement plans may already have beneficiaries listed, but reviewing those designations periodically is a good idea, especially if you marry, divorce, or have children. Beneficiary designations will supersede any beneficiaries you’ve listed in your will, so it’s important that you keep them up to date. 

3. Choose a Guardian for Minor or Dependent Adult Children   

Even worse than the idea of leaving children behind is the thought that they will be raised by someone who doesn’t share your values. The decision of who would best raise your children if you can’t be there to do it yourself is as essential as it is difficult.  

As a part of your decision-making process, it can be helpful to list your wishes for child-rearing and goals for your children. Thinking in this way can help you determine the person who would best align with your values and, should it be necessary, give the guardian clarity about what you intended for your kids.  

4. Choose an Executor and Power of Attorney 

An executor is responsible for ensuring your assets are distributed to the appropriate beneficiaries you’ve chosen for your estate. Have a conversation with this individual to ensure they fully understand and can handle the responsibility. 

You’ll also need to decide who your financial and medical power of attorney will be if you become incapacitated or unable to take care of your finances or health.  

Be careful whom you choose for these roles. Both require the individual to take on substantial responsibilities in difficult situations. 

5. Evaluate Your Digital Portfolio  

Cell phones, computers, and tablets often require passwords for access; online accounts always do. Getting into essential online accounts and devices can be a nightmare for family members after a loved one has passed away. A list of passwords can eliminate the burden of trying to guess the right combination of letters and numbers or trying to get a company to reveal classified information. The same applies to all your social media accounts.  

Because it has become the norm for security reasons to change passwords frequently, setting up an app to track and remember passwords is probably an easier way to keep your list up to date. Just be sure to include the password to the app in your paperwork. 

6. Think About Other Wishes You’d Like to Communicate 

If you have wishes that don’t fall within the confines of a will and want to communicate as part of your estate plan, you can compose an informal letter of intent. This isn’t binding or considered a legal document but may serve as further guidance to your loved ones. The letter may include the following: instructions for your funeral, any final personal messages you want to send to loved ones, arrangements for beloved pets, specific sentimental belongings you want to give to individuals, information regarding digital accounts and passwords, and the location of important documents like mortgage paperwork, social security information, birth certificates, and other documentation.

When Should You Reassess Your Estate Plan?  

Life is full of changes, and your estate plan should reflect them. Any time a milestone event occurs, such as a marriage, divorce, birth of children, job change, or a drastic uptick or drop-off in your financial health, reassess your estate plan. Even if nothing major has happened in your life, it’s a good idea to review your estate plan periodically to ensure it still reflects your current situation. 

Find out how to use your home equity to live your best life

Learn More
CTA Image