Estate planning 101: Writing a will and other things you need to do before you die
It’s no one’s favorite subject (estate lawyers excepted), but planning how to transfer your assets after you die or become incapacitated is a crucial financial responsibility. You might call it, to use millennial-speak, the ultimate in adulting. Neglecting this step could leave decisions about the transfer of your money, possessions, and property (collectively known as your estate)—plus the well-being and care of your children and heirs—in the hands of strangers. And yes, it does happen.
If your minor kids receive any assets from insurance or inheritance, and you haven’t put in place a plan, “the court will basically appoint someone to be the guardian of their property, and that will not be a good thing,” said Bill LaPiana, a professor of wills, trusts, and estates at New York Law School, in a phone interview.
Let’s get one thing out of the way: Wills are not just for the wealthy. Whether you’ve socked away a few thousand dollars or a few million, you’ve got to plan not only for how those funds will be disbursed but also for who will take care of your kids (assuming that you have them and that they’re minors), who will make your health care decisions, and how your life insurance proceeds will be handled. (You do have life insurance, right? All parents should.)
So take a deep breath, read this article, and get it done. Keep in mind: This is general information, not legal advice. Most people can benefit from the help of a lawyer (as discussed below).
Write a will
This step is often the first thing people think about when it comes to estate planning, but it’s actually one of several steps. A will is a legal document that gives directions for what happens to property that belongs to you alone (such as your personal checking account or prized possessions) and that does not already have a designated beneficiary (that’s coming up next). After you die, the property covered by the will is administered by a court specializing in inheritance, often called a probate court. Your will also designates an all-important guardian for your children, should both parents die or become incapacitated when the children are minors. Without a will, the probate court will select a guardian for them.
Sometimes, the property covered by a will is just a small part of your estate. So while a will is important, writing one is just part of a larger process of ensuring your assets are thoughtfully distributed and your heirs are protected.
Update your beneficiaries
If you’ve got money in a 401(k), an IRA, or other investment accounts, you need to designate beneficiaries who will receive what’s in those accounts after you die. This “transfer on death” supersedes anything written in your will about that property. For some people, accounts like these form the bulk of their wealth, so updating those beneficiaries could prove more important than anything written in a will.
If you don’t designate a beneficiary, a probate court (see above) will decide who gets the assets according to state law—and the decisions may not match your wishes. Go online and into the “beneficiaries” section of each of your accounts: You may be surprised to discover that you haven’t named one at all! Do so now, and continue to update them regularly. You don’t want to make the mistake, for example, of leaving your parents listed as your beneficiaries after they’ve passed away, or your former spouse after you’ve divorced.
Consider establishing a trust
Establishing a trust can be a smart way to transfer your property to your heirs or charitable organizations while keeping the process out of probate court. Certain kinds of trusts can shield wealth from creditors and offer tax advantages. If you’ve got a life insurance policy to take care of your family after your death (as you should), consider setting up a trust to receive that money and distribute it to your children when they reach a certain age. This can be preferable to leaving kids (or adult children) with a lump sum before they have the maturity and experience to manage it, or to having a court-appointed guardian make financial decisions on their behalf. You’ll definitely need to lawyer up for this one.
Plan for incapacity
With life spans increasing, death isn’t the only event you have to plan for. You should also consider what will happen to you and your family if ill health or an accident leaves you incapacitated. You might want your spouse to be able to easily sell your jointly owned house, or a particular relative to make your medical decisions rather than a court-appointed guardian. “You need a good, well-constructed general power of attorney that survives disability,” LaPiana said, “so they can basically sign your name to anything that needs to be signed.” If you’re not married to your partner, making a plan is especially important because your state law’s default may be to leave decision-making power and property to relatives or next of kin. Putting your property into a living trust (a.k.a. a lifetime trust), with your partner as what’s known as the successor beneficiary and perhaps trustee, might smooth the transition of that property if you become incapacitated or when you die. “For an unmarried couple, that is absolutely critical,” LaPiana said.
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Did I mention how it’s often a good idea to seek the help of a capable estate lawyer? In some cases, it may be okay to write a will yourself (using one of several online services). But you’d still have to worry about any assets not covered by your will. “The advantage of hiring a lawyer is having someone walk you through what exactly you have to dispose of when you die, and how to structure it” in a tax-efficient manner, LaPiana said. If you need a referral, check out the rolls of the American College of Trust and Estate Counsel or the National Association of Estate Planners & Councils.
Do it now
Planning your estate—and keeping those plans up to date as your family and financial situations change—is critical. Go through these steps sooner rather than later, and revisit your decisions periodically, so that you can enjoy the peace of mind of knowing your family is always protected. In time, they’ll need that reassurance as much as you do.