Estate planning is about protecting the people you love, regardless of your age and income. That’s why everyone—not just the wealthy—needs to have a solid plan in place. 

But what exactly is an estate plan, what should it include, and what might happen if you never get around to creating one? Knowing the answers to these questions can give you the basic tools you need to put together a solid plan for your assets that benefits your estate, your family, and you. 

What Is Estate Planning? 

Estate planning is a process that spells out what will happen to your property and your assets when you die—or when you become incapacitated and can no longer manage your own affairs. An estate plan can include anything from personal belongings such as clothes and jewelry, to cars and houses, to retirement accounts and life insurance policies. 

An estate plan has three overarching functions:

  • Provide financially for your family once you’re gone or incapacitated
  • Designate guardians for any minor children
  • Reduce taxes on what you leave behind

 According to Madison Blancaflor, a reporter for the financial advice website Bankrate, “Establishing an estate plan early on and readjusting your plan as needed throughout your lifetime can help you prepare for the future and leave a legacy for the people you love.”

What Should an Estate Plan Include?

Your estate plan will be unique to your particular financial and family situation, but there are several key documents that most plans should include: 

A will. A will is a legal document stating your wishes for who you want to inherit your assets when you die. It’s also the document in which you name a guardian for your minor children if the unthinkable happens and you’re not there to raise them yourself. If you die without one, the laws of your state will determine who gets your possessions. 

One reason it’s important to have a will is because your state’s plan may not match your needs. This is especially true for unmarried couples and blended families. In many states, for example, if you’re unmarried and you die before your partner does, all your assets will go to your parents—not your partner. 

If you’re part of a blended family and you don’t have a will, your assets may wind up with your current spouse and children from that marriage, leaving your children from your previous marriage out in the cold. 

A living trust. A will provides instructions for how you want your assets to be distributed, but it doesn’t avoid probate, i.e., the court-supervised process for distributing your assets. Although probate is a common legal process, it’s infamous for being time-consuming and expensive. It’s also public. When you create a revocable living trust, you can bypass probate altogether. 

“A revocable living trust is established while you’re alive and holds all assets in which a beneficiary is not named,” explains personal finance writer Dayana Yochim, in an article for The Motley Fool. “After you move your assets into it, things pretty much proceed as normal. Although the trust is the legal owner of your bounty, if it’s a revocable living trust, the trustee (typically you) still calls all the money-management shots, and the beneficiary (you again) is free to live off the trust’s largesse.”

Think of a living trust as a virtual parking lot for your assets. They’ll remain somewhere safe while you’re alive, and you can make changes whenever you wish. Once you’re gone, your living trust won’t die with you. Instead, management of your trust will be passed on to your designated successor trustee, who will look after the trust and distribute your assets to your beneficiaries according to your wishes. 

Current copies of your beneficiary designation forms. Did you know that the beneficiary forms for your IRAs, 401(k) plans and other retirement accounts override your will? It’s an important element of estate planning that many individuals new to the estate-planning process initially overlook. 

If your beneficiary forms are missing (or you never got around to filling them out), your estate becomes your default beneficiary. Your assets will still be distributed according to the directions in your will, but on less favorable tax terms. In addition, any beneficiary who inherits your retirement account under your will must empty and pay taxes on a timeline—sometimes within five years of your death. However, a designated beneficiary on your retirement accounts has all the time they wish to make use of their inheritance. 

A power of attorney. A power of attorney is a legal document authorizing a trusted representative to act on your behalf when you’re unable to do so. There are three main types:

  • A durable financial power of attorney states that if you become incapacitated, the trusted individual you previously appointed is permitted to manage your finances.
  • A healthcare power of attorney, also known as a healthcare proxy, states that if you become incapacitated, your trusted individual can make or communicate decisions about all aspects of your healthcare.
  • A springing power of attorney allows your trusted representative to “spring” into action when you become incapacitated—but not while you are still able to make decisions yourself. 

A living will. A living will allows you to specify what medical procedures you would or would not like to be performed if you become incapacitated (e.g., a  do-not-resuscitate (DNR) directive). It differs from a healthcare power of attorney in that it specifies what you would like to happen if you’re unable to act, not who is authorized to make medical decisions on your behalf. When planning an estate, some individuals choose to combine a living will with a healthcare power of attorney into one document, known as an advance healthcare directive. 

A letter of intent. A letter of intent is a non-legal document that provides certain instructions and requests, usually of a more personal nature, that don’t belong in a will. “Use it to convey your wishes for things you hope will be done, says Marilyn Lewis, a contributing editor for MoneyTalkNews. “For example, you may have detailed instructions about how you want your funeral or memorial service to be performed.”

How Much Does Estate Planning Cost? 

If you hire a lawyer. The cost of a lawyer will depend on a number of factors, including state and local business practices and the experience level of your attorney—especially if you choose someone who specializes in estate planning. 

Most likely, your lawyer will charge either a flat fee or an hourly rate. According to lawyer and estate planning expert Mary Rudolph, the flat fee for a simple, bares bones will can run as low as $300, but a price tag of around $1,000 is more common these days. Hourly, most lawyers will charge about $150-$200 per hour.  

If you use a willmaker or other type of estate planning software: If your estate is complicated and/or you have a lot of costly assets and property, it’s probably best to hire an estate planning lawyer. However, if your lifestyle is fairly minimal and your estate is uncomplicated, you may want to consider using estate planning software such as Quicken WillMaker, which will run you about $80 (bonus: the publisher of WillMaker, Nolo, offers a directory of lawyers that users can hire to review their wills if they’d still prefer to have a legal expert weigh in.). 

What Happens if You Don’t Have an Estate Plan? 

If you never get around to drafting your will, the courts and state law will decide what to do with your estate. Unless you want a stranger deciding how to manage your health and your assets, it’s important to put an estate plan in place before you need one. Even if you’re in great health, you never know what unforeseen circumstances will arise—and you don’t want your beneficiaries left holding the proverbial bag if you pass on or become incapacitated unexpectedly. 

So make some time to start putting together a plan today. A little planning now can make all the difference for your loved ones’ financial future.  

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