What Is Estate Planning and Why Does It Matter

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As you get older, doing some estate planning — or revisiting the estate documents you already have in place — may not be at the top of your to-do list. It should be, though.

This is because estate planning doesn’t just ease your mind about what happens to bank and retirement accounts, real estate and other assets after death. Proper estate planning also has a lot to do with how your life can go after you retire.

An estate plan can protect you if you become incapacitated and unable to make medical and financial decisions for yourself. A properly funded and managed trust can help ensure the money you saved won’t be frittered away by loved ones or seized by their creditors. Here are some estate planning basics:.

What Is Estate Planning?

According to the Internal Revenue Service (IRS), your gross estate for tax purposes consists of “an accounting of everything you own or have certain interests in at the date of death.” Your estate may include:

Real estate
Cash and securities
Life insurance
Annuities
Business interests
Other assets like personal collections

Estate planning allows you to design a strategy unique to your individual, family, and/or business situation, including tax and liquidity planning.

“You really do not create an estate plan for yourself, just like you do not take out a life insurance policy for yourself,” says Kyle Krull, an estate planning attorney in Overland Park, Kansas. “In both instances, you’re doing it to protect everyone you love and everything you have from chaos, inconvenience and potential family feuds.”

Do Most People Take Advantage of Wills and Estate Planning?

A recent survey from Caring.com found that 47% of respondents ages 55 to 64 don’t have estate planning documents, such as a will or living trust. Of those 65 and older, 32% don’t have one or both documents in place.

More than half of those surveyed said the main reason they put off estate planning was that they “just haven’t gotten around to it.” Others assumed they didn’t have enough assets to leave or were worried that it takes too long to set up an estate plan.

Fortunately, estate planning doesn’t have to be confusing. Our estate planning guide provides crucial information you need to prepare or revisit your estate plan, including:

The four documents you need it your estate plan
How to set up estate planning trusts that can protect your assets
How to minimize risk to assets you wish to pass on to others
How estate or inheritance taxes could affect your heirs
Strategies for long-term care planning and asset protection
What snowbirds need to know about property owned in another state
How to choose an estate planning attorney

What Can Happen Without Proper Estate Planning

If you die “intestate” — that is, without a will — the laws in your state will determine who inherits from you. If your assets exceed your state’s applicable “small estate” limit, you can expect your estate to pass through state probate court, the formal legal process that appoints an administrator to manage the estate. It’s the administrator’s job to distribute assets to court-selected beneficiaries.

The court basically follows your state’s laws of descent and distribution with no consideration for your family dynamics or any wishes you may have expressed to others. Your estate also may be subject to estate taxes that might otherwise have been avoided with proper wills and estate planning.

“Some people think that having a will is sufficient to avoid probate. It’s not,” says Maureen Lyons, an estate planning lawyer in Riverside, California. “A will just allows the testator (decedent) to ‘override’ the state defaults by naming an executor and beneficiaries. If you don’t have a will, then the state probate code fills in the blanks regarding who gets what.”

Estate Planning Basics

A basic estate plan comprises of at least these four documents:

Last Will and Testament

A will provides for the distribution of certain property owned by you and allows you to choose how to distribute or dispose of property in just about any manner you choose. Some exceptions to free choice may apply, though, such as state laws that could prohibit disinheriting a spouse or children. A will doesn’t govern the disposition of titled or jointly titled property with rights of survivorship or assets with designated beneficiaries, such as payable on death accounts, life insurance, retirement plans and accounts, and employee death benefits, which pass outside your probate estate.

Power of Attorney for Finances

If you become incapacitated, a durable power of attorney allows the person you name as your “agent” or “attorney-in-fact” to make financial and certain legal decisions on your behalf, including things like:

Accessing, opening or closing bank accounts
Filing your tax returns
Affecting the sale of securities
Selling real estate

Durable Power of Attorney for Healthcare

Also called a healthcare power of attorney, medical power of attorney or healthcare proxy, the durable power of attorney for healthcare allows you to name a person who can make medical decisions for you based on your instructions if you become incapacitated and unable to make those decisions yourself.

Advance Health Directive

An advance health directive expresses your specific wishes for medical treatment if you are incapacitated. Having such a directive in place helps ensure that your wishes are followed and also can reduce the strain on family members who otherwise would be making critical decisions without your input. The durable power of attorney for healthcare is a form of advance directive. So is a living will, which comes into play when you have a terminal illness or are in a state of permanent unconsciousness.

In addition to these four documents, estate planning also may include:

One or more trusts designed to avoid probate and distribute and/or protect assets

An asset protection strategy for long-term care planning

A business succession plan or other business-related documents

Final wishes for funeral arrangements, pet care and other personal matters

How Often Should I Revisit My Estate Plan?

Life can change a lot in just a few years. Maybe you’ve remarried, moved or bought property in another state. Perhaps you have new grandchildren. It’s a good idea to review your estate plan with your estate planning attorney every two to four years, or more often if you’ve experienced significant change.

Hiring an Estate Planning Attorney vs. Using DIY Documents

It may be tempting to purchase fill-in-the-blank wills, powers of attorney and other documents online. After all, these forms are a lot less expensive than paying an estate planning attorney.

However, unlike an attorney experienced in estate planning for blended families, estranged children, long-term care needs and many other situations, DIY forms may not dig deep enough to avoid potential problems that can arise.

If you’re single with no kids and don’t own more than a house, car, and bank and retirement accounts, you may be able to cover estate planning basics by setting up survivorship titling and beneficiaries on bank and retirement accounts. You may even be able to use state bar association-approved forms for durable healthcare and financial powers of attorney, along with an advance directive.

However, in all cases, you should still ask an estate planning attorney to review your estate plan to make sure it’s set up properly and according to state law.

How to Choose an Estate Planning Attorney

When it comes to identifying the right estate planning attorney for you, you have options:

If you ask trusted friends and family members for referrals, be sure to verify the experience, credentials and reputation of any recommended estate planning attorney.

Search your state bar association, or the state agency or judicial branch that is charged with attorney licensing and disciplinary actions.

You also can search directories such as Avvo and Lawyers.com, which include independent ratings and client reviews.

Estate Planning: One Size Doesn’t Fit All

Nearly 60% of people will need some form of long-term care services, according to the U.S. Department of Health and Human Services.

“The biggest threat to most people’s wealth and legacy isn’t usually estate taxes. It’s probably the cost of long-term care,” says Lyons. This is why you should implement a long-term care strategy as part of your estate plan, especially if you don’t have long-term care insurance.

Elder law attorneys typically have more training in addressing the long-term care component of estate planning. Strategies can include moving assets into an irrevocable trust or other methods to protect funds for nursing home and other long-term care costs.

Your estate plan should — and can — be designed to address your unique needs and situations.

Think of a friend with a life and family much like your own. Maybe you’re both married, around the same age, earning similar incomes and have grown children as you approach retirement. However, your estate planning needs could be very different.

Maybe one of you wants to set up a trust for a child with special needs. The other may have a grown child who would blow through an inheritance without restricted distributions and a trustee’s oversight. Maybe you remarried and want to ensure that your kids from the first marriage won’t be disinherited if you die first and your husband or wife remarries.

What Snowbirds Should Know About Estate Planning

Each state has its own probate laws that apply to owned real estate. This means if you own property in another state or spend a lot of time living in a different state, proper estate planning can make life a lot easier on grieving family members when you die.

For example, let’s say that you and your spouse buy a second home, a condo in Florida, where you plan to spend the winter months. You take the title to the home as joint tenants with rights of survivorship. When the last spouse dies, the real estate in Florida would have to go through Florida probate, just like any real estate similarly owned in your home state would have to go through probate there.

One common solution? “Create a revocable living trust and title all of your real estate in it to avoid probate in both states,” says Krull.

It’s also a good idea to consult with an estate planning attorney in any state where you reside during even part of the year. You’ll want to get durable powers of attorney for finances and healthcare and an advance directive drawn up according to that state’s laws.

“While the laws of most states provide that legal documents properly prepared in one state will be honored in another state, it is ‘cheap insurance’ to cover your bases wherever you spend time,” says Krull.

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