Jennifer Raess

Aug 07, 2023

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What is estate planning, and why is it important?

What do you think of when you hear the term “estate planning?” If you’re like two-thirds of Americans over the age of 18, you may assume it’s something you can do another time. In fact, the majority of U.S. adults don’t have a will and have not done anything to plan for their estate. 

However, you don’t have to own a mansion or business to make estate planning work in your favor. For those with any amount of net worth, estate planning alleviates the family strife of having to make important life and financial choices on your behalf. It also includes opportunities for tax savings and legacy planning.

Here’s more about why this task is so important and why putting it off can cause big issues for the next generation.

What is estate planning?

Estate planning is the process of deciding  who you want to get your assets and when and who will handle your affairs on your behalf when you die or become incapacitated and making those wishes known in writing. Common estate planning documents include  wills, trusts, powers of attorney, and healthcare directives.Not limited to just the wealthy, those without a taxable estate can benefit from estate planning for a time when you won’t be able to handle how your property, financial matters, and personal affairs are managed. Estate planning often includes the naming of one or more fiduciaries, who act on your behalf to make sure your estate plan is executed according to your wishes.

What does estate planning include?

Estate planning includes your plans for your estate, which may be as simple or as complicated as needed to communicate your wishes (though larger estates tend to include more complex estate planning strategies due to the added layer of estate tax planning). This typically involves directing to whom and when you want your finances and assets distributed and how you want any children and pets cared for in your absence.

Documents traditionally include the following:

• Will (sometimes referred to as a “last will and testament”): A legal document (subject to probate) that specifies how your assets and belongings should be distributed after your death. It also is a place for you to name a guardian over any minor children.
• Trusts: Legal entities that hold and manage your assets during your lifetime and provide for their distribution to beneficiaries according to specified terms after your death.
• Advanced healthcare directive / living will: A legal document that allows you to express your wishes concerning life-prolonging and /or end-of-life care.
• Healthcare power of attorney: A legal document that designates someone to make medical decisions on your behalf if you become incapacitated and cannot make them yourself.
• Durable power of attorney: A legal document that grants someone the authority to act on your behalf over your financial and legal matters and remains effective even if you become incapacitated.
• Beneficiary designations: Instructions provided on financial accounts or insurance policies, specifying who will receive the assets or benefits upon the account holder’s death.

These documents should encompass all health and financial needs as well as any childcare needs if applicable in the event you die or otherwise can’t make decisions for yourself. Common goals of these documents include the following:

• Creation of trusts to manage assets, provide for loved ones, or minimize estate taxes (among other reasons)       
• Minimize or even eliminate exposure to probate
• Ensure your assets go the right people at the right time and in the right way
• Proper disbursement of retirement accounts and life insurance death benefits

If set up correctly, estate planning gives you control , even after your death, over your estate and reduces the high costs and headaches of probate court. It can remove the burden of making difficult decisions from grieving family members; it’s compassionate and fiscally responsible.

Who needs to create an estate plan?

Everyone should do at least some estate planning, even if there are few assets to manage. If not handled directly through your own estate planning documents, a court will make decisions about how your belongings, money, and other valuables will be disbursed when you die based on your state’s intestacy laws. The court will decide who will be the guardian of any children and may get access to any money or benefits left to them as well. 

Finally, you will be leaving the decision of who has the authority to act on your behalf over any healthcare and financial decisions if you are unable to do so to the courts, rather than allowing you to be the one making this important choice.

Because your financial situation can fluctuate over time, what may seem like few assets now can grow by the time an estate plan takes effect. Small investments, for example, could balloon to great worth. Unused patents, licenses, or rental agreements may generate future revenue. Things worth very little now could need protecting later, so all assets should be included in an estate plan.   

If you’ve ever been kept awake at night with the worry of what will happen to your children, pets, or home when you die, you need an estate plan.

Who should plan your estate?

Estate planning requires a lot of careful consideration to get right. Since it’s both a legal and financial process, it works best when a professional is involved. Drafting the legal documents involved in estate planning is typically done by an estate planning attorney, but because that attorney is typically not as involved in your ongoing finances and goal-setting, it’s a good idea to speak to your financial advisor about your estate plan as well. 

They will have a more holistic understanding of your financial situation, and because people tend to meet with their financial advisors more frequently than with their attorneys, your advisor can help ensure your documents keep pace with changes in your life. Partnering with both an estate planning attorney and your financial advisor ensures you get the best estate plan for your situation.

When should you plan your estate?

Just like planting a tree, estate planning is something best done before today. If you’ve not started on your plan, however, it’s not too late. Anyone with children, pets, homes, or assets of any kind should make estate planning a high priority, so that you have it in place in advance of an emergency, sickness, or death.

Estate planning can usually be done fairly quickly, but it depends on the size and complexity of your estate. It may take longer to create strategies for larger estates and blended families. The best way to know how long of a commitment it requires is by reaching out an estate planning attorney so they can guide you through the next steps.

Starting now gives you the advantage of thinking through things clearly, without the additional pressure or emotion that comes with waiting until something goes wrong, like an accident or illness. Planning now also communicates to your family that they are valuable and worth putting first, even if you’re busy and have other things going on. 

Working with a professional who knows the best estate planning strategies can get you on a path to tax savings, too. Be sure to periodically review your documents with your estate planning attorney so you always have the most up-to-date estate plan for your situation. Plan a review with your financial advisor at least annually, and have a goal of reviewing your documents every three to five years. 

If you have a major life change, such as the birth of a child or a marriage, get your documents reviewed and make any necessary updates right away. Your financial advisor can use the latest estate planning software to guide you through what’s needed for your discussion with an estate planning attorney.

What is the purpose of making an estate plan?

The main benefit of estate planning is the peace of mind of knowing that the people and any causes you care about will be taken care of when you’re gone. Estate planning can also head off family strife, which is common when there isn’t clear guidance on who should inherit what. Many families with seemingly healthy relationships have been pulled apart after a death, as they argue about who should get which assets.  

It’s also the best way to anticipate legal challenges. Those without estate plans allow their property (and sometimes even their children’s upbringing) to become the business of the state and the court systems. They will make all decisions about your assets and kids according to intestate (the succession path outlined by the state for those without a will). All proceedings become public, and the process can be very long and drawn out for your loved ones. Probate court can often take years longer than the execution of a well-written estate plan.

If this frightens you, consider estate planning as a preventative measure to avoid much of the confusion or strain caused by your state’s intestacy laws.You can even use trusts to protect the privacy of your assets and the beneficiaries of your estate.

Those with blended families are especially vulnerable to not having their wishes honored upon their death or disability. Current state laws may prefer equal distribution of your property to all children and your current spouse, even if this is not what your spouse needs to keep their standard of living. If you want assurance that things will be taken care of as you wish, an estate plan is the best way to gain that assurance.

Deciding who will raise any minor children or pets is also an important matter that’s best handled when you’re involved in the decision-making. Estate planning gives you your say and doesn’t leave the question of “who will raise my minor children?” to strangers in a court system.

Finally, going through probate means  your estate administration becomes available to the public. With public announcements in newspapers and court documents that anyone can request, your family won’t have the privacy they might need at their most difficult time. An estate plan is more likely to address these matters discreetly and with sensitivity.

Next steps for a trustworthy estate plan

If you’re new to estate planning, the idea can be overwhelming. You don’t have to deal with it on your own, however. Today’s financial advisors have a wealth of experience to help educate you on estate planning topics and to guide you to reputable estate planning attorneys who can craft the ideal estate plan for your assets that you’ve worked so hard to accumulate.

Don’t know where to start? Consider this estate planning checklist, and then reach out to an estate planning attorney in your area.

FAQs

What is an estate plan?

An estate plan communicates your wishes for how and to whom assets should be transferred when you die. It also names one or more individuals of your choosing to manage your healthcare or financial affairs if you become incapable of making decisions for yourself. It may address the legal guardianship of children and pets and provides a way for you to express your desires for end-of-life care.

What is an estate?

Your estate contains all the assets or property you own, including cash, homes, investments, checking and savings accounts, retirement funds, cars and boats, collectibles, land and other real estate, businesses, or possessions with a cash or future cash value.

What’s the difference between an estate plan and a will?

A will is one component of a carefully-written estate plan. It covers what you want to be done with your assets when you pass away and allows you to name a guardian to care for any minor children. However, it is only one piece of the puzzle. Other important legal documents, in addition to the will, make up a comprehensive estate plan that allows for the handling of assets, planning for the minimization of taxes, and transferring property. An estate plan should  also include the naming of individuals to handle your healthcare and financial affairs if you are unable to do so and allow for you to express your wishes for any end-of-life care.

How do you know when to do estate planning?

You know it’s time to do estate planning if you haven’t done it before or your situation has changed since the last time you did it. If it’s your first time, don’t delay; reach out to a professional who understands the best practices to help get you started. If you’ve created a plan, but have had more children, added new assets, or have changed your relationship with your beneficiaries, it’s time to revisit.