Estate Planning: An Overview

An estate plan is a group of legal and financial documents to help things run smoothly if you die or can't manage your affairs. An estate plan ensures your wishes are carried out, and it may minimize legal, tax, or financial consequences for your family. A basic estate plan includes several legal documents such as a will, powers of attorney, and possibly a trust.

Even if you've done estate planning in the past, it's a good idea to update your plan every few years or whenever you have a major life change.

Here's a brief guide to the most common documents in a typical estate plan.

Your will

A will describes what will happen to your money, real estate, and possessions when you die. If you don't have a will, your assets will go to your closest relative as specified in your state's laws.

Some property, known legally as "non-probate property," can't be handed down through a will—it goes directly to a co-owner or beneficiary. Non-probate property includes life insurance proceeds, property held in a trust, IRAs and 401Ks, pensions, "payable on death" or "transfer on death" accounts, and real estate owned with someone else as "tenants in common."

Everything else is probate property that should be provided for in your will. But your estate planning tasks should also include checking the beneficiaries of your non-probate property and updating them as needed.

In addition to bequeathing property, a will can name a guardian to raise your children and appoint an executor to settle your estate. To be legally valid, your will must follow your state's laws for how to execute a will.

Revocable vs. irrevocable trusts

Your estate plan may also include a trust. You can place both money and property in a trust.

Many estate planning trusts are revocable trusts. The way a revocable trust works is that during your lifetime you can act as trustee, moving property in and out of the trust and using the assets in the trust as if they were in your own name. After you die, nothing else can be added to the trust, and a successor trustee will administer the trust and distribute assets to the trust beneficiaries. Common reasons for setting up a revocable trust include avoiding probate, providing for minor children, and minimizing estate taxes.

A trust can also be irrevocable. This means you can't add to or change the trust once it's established, and someone else must act as trustee. Irrevocable trusts are sometimes used to plan for Medicaid benefits for long-term care. An estate planning lawyer can explain more about trusts and advise you on whether you need one as part of your estate plan.

Financial power of attorney

A financial power of attorney, also called a general power of attorney, appoints someone to manage your financial and legal affairs if you cannot. This might include paying bills, selling property, managing banking and investments, or applying for government benefits.

A financial power of attorney allows your children to step in if you have trouble managing money as you get older. It can also keep your life or small business running smoothly if you are temporarily out of commission because of an illness, injury, or even a vacation.

Healthcare power of attorney

Healthcare powers of attorney, or healthcare proxies, appoint an agent to make medical decisions for you if you cannot make them yourself. Your healthcare agent can be a friend or relative who you trust to communicate with healthcare providers and make good decisions.

A healthcare power of attorney gives you some control if you're ever unable to decide for yourself. You can talk to your healthcare agent in advance about the care and treatment you would want. Make sure the person you choose is willing to serve in this important role.

Advance healthcare directives

Living wills, or advance healthcare directives, describe your wishes for treatment and care if you are terminally ill and unable to communicate. A living will makes end-of-life decisions easier for healthcare providers and family members because they don't have to guess what you would have wanted.

It takes some time and thought to make estate planning decisions and take stock of assets and beneficiaries. But once the estate plan is done, most people feel a sense of accomplishment. And there's peace of mind knowing that if something should happen, you've done your best to protect yourself and your loved ones.