Here's What to Include in Your Estate Plan—Plus, How It's Different from a Will
Just the thought of drafting end-of-life documents poses a challenge to most of us: "Do I want to think about a will at this point in my life, and do I want to consider how long my life may be? To whom should I bequeath this or that?" And that's why, in all likelihood, only 50 percent of Americans have a will in their name. "The topics are psychologically the most stressful a person can deal within life," says trusts and estates attorney Jon Gallo, of Los Angeles. But if you become incapacitated without an estate plan, you're giving a court the power to make intimate, crucial decisions about your legacy. Likewise, if you pass away without a will, a judge will use a cut-and-dried formula to distribute your money, property, and other valuables as part of your estate. Without these documents, family members could dispute over your estate.
Both of these types of documents allow for your wishes to be granted, regardless of your personal circumstance. Here, we explain the difference between the two and how to choose one over the other (or, instances in which you need both).
Drafting an Estate Plan
An estate plan usually consists of several documents: the will itself, a trust dictating how property left to minors will be managed, and powers of attorney naming someone to make financial and medical decisions on your behalf if you become incapacitated. (You and your spouse should have separate wills, even if the terms are nearly identical, to avoid any problems with jointly held property.) Together, these documents are effective during your lifetime as well as other documents that aren't in effect until your death.
An estate refers to all of your assets, including real estate, cars, bank accounts, personal valuables, and insurance policies. Take inventory of all your assets: Make a list of the most valuable and sentimental to the least valuable and sentimental; you should also include the appraisal of heirlooms, as well. Therefore, an estate plan ensures that all of these aforementioned assets are handled appropriately in the event you are no longer able to handle them yourself as well as when you pass. Additionally, you want to minimize how much you would have to pay in taxes or court costs within your estate plan. This may need to be done on a regular basis, especially if your finances change over time or you want to update your beneficiaries.
If your financial life is simple—you own a house, a car, a retirement account, and term life insurance—you may feel comfortable drafting your own plan before presenting it for legal authorization. If you need more guidance, or if your personal or financial situation is even slightly complex, hire an estate planning attorney to write yours.
Drafting a Will
A will, on the other hand, only takes effect after death. These are limited to how your assets should be handled after you pass away. "Many people are put off by the idea of hiring a lawyer, but doing so can avoid many problems," says Kathie Barnes, a certified financial planner in Phoenix, who suggests choosing an estate planning attorney familiar with the laws in your state. Most lawyers charge between $500 and $1,000 to prepare a will with a simple trust and powers of attorney, though the cost can be as high as $5,000 if you have substantial assets requiring estate-tax planning.
Generally, a will must be appointed by at least one executor. Upon your death, the executor will inventory your assets, pay any outstanding debts, and distribute your possessions according to the will's terms. Most people ask a spouse or a trusted friend or relative to handle the responsibility. The will must also be dated and signed in front of two witnesses who stand to inherit nothing.
Choosing One or Both Documents
The sooner you begin working on an estate plan and will, the better it will be should the time come when the instructions should be enacted. Gallo recommends to review your will and estate plan every few years to make sure the guardians, trustees, and executors you named are still appropriate and that the document's terms still reflect your wishes. Moreover, you should update your will whenever you experience a big life change, such as having another child, moving to a different state, or getting divorced or remarried. You should also re-examine your will if your finances change significantly, say, if you start or sell a business or inherit a large sum of money. (At the same time, be sure to update your beneficiary elections for any retirement plans, brokerage accounts, and life-insurance policies as well.)