The Basics of Estate Planning

Estate planning refers to the process of setting up a plan that clearly defines what happens to everything an individual owns after their passing. The estate includes everything from a person's house, car, real estate, accounts, investments, and personal possessions. If an individual does not have a plan on how and whom to distribute their estate after their death, the state will determine the beneficiaries and distribute the assets according to the law.

Having an estate plan makes the process of distributing assets much easier. It also allows individuals to decide what will happen to their estate in sudden death or disability. The first step of estate planning is to inventory all physical assets, including owned real estate, vehicles, collection items, art, and other valuable items such as electronic devices or home equipment.

Secondly, it is important to add all non/physical assets to the list, including bank accounts, retirement plans, life insurance, health insurance, and other policies. Some policies or accounts may already have a designated beneficiary. These designations prevail over a will or trust, so it is useful to review them and ensure they are the desired beneficiaries. A list of debts is also necessary. This should include everything from loans and mortgages to credit cards.

The next step is to ensure that the beneficiaries chosen for retirement accounts and life insurance are up-to-date. If that is not the case, it is important to contact the companies and update them. Finally, some accounts, such as bank savings accounts, may allow individuals to transfer on death designation (TOD). This allows the asset transfer to the designated beneficiary without the need for probate.

The probate is a process during which the court reviews and settles the distribution of the estate to the inheritors. The probate can be a long and costly process, so it is useful to avoid it when possible.

Once the inventory is complete and the beneficiaries are chosen, it is time to draft a will or a trust, ideally both. A will is a legal document where individuals can state how they want their assets to be distributed, appoint a guardian for minor children, and even detail how they want their funeral to be held. However, a will goes through the probate process. The assets will not go immediately to the beneficiaries, except those with specified beneficiaries like retirement accounts, life insurance, or accounts with a TOD designation.

One way of avoiding probate is to establish a living trust. This is a legal document that appoints a third party that will handle the trustor's assets on behalf of the beneficiaries. The advantage of a living trust, aside from not being subject to probation, is it can be revocable, meaning that the trustor can change it until their death. Furthermore, the trustor can determine the timing of the distribution of their assets. However, it is not possible to name guardianship of minors in a trust. It is useful to have both a living trust and a will in these cases.

Finally, a few additional documents are helpful if an individual is incapacitated or unable to communicate their wishes. A power of attorney appoints a third party who has the authority to make decisions regarding the property, finances, or medical care of the principal. A living will is a document that outlines the type of medical care an individual wants to receive in a situation where he cannot make decisions. With a healthcare proxy, an individual can choose another person who can make health care decisions on their behalf.