Estate Planning Essentials: 8 Steps to Protect Your Family

Last Updated Sep 2, 2009 3:57 PM EDT

Nobody likes to think about estate planning — except perhaps for estate lawyers. It's simultaneously morbid and boring, and you probably already have a long enough to-do list. The gutters are full of leaves and the kids need fall clothes — why worry about power of attorney?

But look at it this way: If the worst should happen and you don’t have your financial affairs in order, you’ll leave your loved ones a big headache, and possibly a financial burden. No one will be worried about home maintenance, but they will be forced to make crucial decisions about your estate at an emotionally charged time, with no idea if they’re doing what you had in mind.

“That’s usually when the fights begin,” says Diane Park, a financial planner in Minneapolis. “If you have the right documents completed beforehand, it can save time, it saves energy, and then you’re the one making your own decisions.”

Most importantly, taking care of the basics in advance will also help ensure that your money stays in the family and not in the hands of your least-favorite uncle: Sam. (Or even an old girlfriend. See tip No. 6 below.) Here are eight fairly simple steps you should take now to protect your family and your assets later.

1. Draft a will

More than half of American adults don’t have one. Big mistake. Even if you don’t have a Gates-sized estate, someone will need to handle your financial affairs after you die, and it’ll be easier if there’s a document spelling things out. This is especially important if you have children; the will should name a guardian for anyone under 18. You’ll also want to name a trusted person as executor of your estate. If you have young children, ask an attorney about creating a minor’s trust — assets you leave them will be held in the trust until they reach your state’s “age of majority” (18 in most states).



A simple will might cost $300 to $500 (the $43.99 downloadable Quicken WillMaker Plus 2010 is a good do-it-yourself version), but you probably have assets that will require paying an estate lawyer $1,000 to $3,000 for the job. To find a specialist, check with your state bar association or look for a local estate planning council. Review your will every two to three years, or whenever there’s a life event, such as a birth, death, marriage or divorce.

2. Ask an attorney about trusts

If you establish a living trust, your estate can bypass probate and its associated costs and hassles, but you probably need one only if your estate is worth more than about $2 million, you own real estate in more than one state or you want to keep the terms of your estate private. Otherwise, you might want to create a trust within your will to manage your assets after your death. This is a good idea if you fall into one or more of these categories: 1) You have minor children and don’t want to leave property directly to them. 2) You have adult children and aren’t confident they can responsibly manage their inheritance. 3) You want to protect your assets from ending up with a creditor or a child’s ex-spouse. Setting up a trust in a will should be included in a lawyer’s will-creation fee, but if you’re having it done separately, expect to pay $1,000 to $3,000.

3. Assign a power of attorney

This authorizes someone to handle matters if you’re unable to act on your own behalf. There are two types: financial power of attorney, which lets someone take care of things such as writing checks; and medical power of attorney, which allows someone to make decisions about your health care. Without this form, your loved ones might have to go to court to handle simple estate matters if you were incapacitated. “This is a really important and very inexpensive document,” says Stewart Welch, a financial planner in Birmingham, Ala. and co-author of J.K. Lasser’s New Rules for Estate and Tax Planning. “Most attorneys will charge $100 or less, or if they’re doing a will, they’ll throw it in.”

Decide whether you want a standard durable power of attorney, or a “springing” power of attorney that requires a doctor declare you incompetent or incapable before it’s active. Update this document about every five years even if it’s correct, since officials sometimes are hesitant about accepting an older form.

4. Set up an advance directive

Basically, this document lays out your end-of-life preferences, such as whether you’d want a feeding tube or to be placed on a respirator, if necessary. It can incorporate related requests such as a living will (explaining when you’d want to be allowed to die), medical power of attorney and Do Not Resuscitate orders. Creating one doesn’t require an attorney; find the advance directive permitted in your state at caringinfo.org. Some states require you to have this document witnessed, so make sure you follow the rules to make it official.

5. Be sure you have enough life insurance

If you have children dependent on you financially, you need life insurance to cover lost income after you die. Generally, term life is your best bet; Accuquote.com can give you premium quotes. (A good rule of thumb: have enough life insurance to equal 10 times your annual salary.) If you’re interested in permanent life insurance (such as variable or universal) with a built-in savings component, speak with your financial planner to find the right coverage.

6. Update your beneficiaries

You may not realize it, but beneficiaries on your 401(k), insurance policies, retirement accounts and investments trump your will. So even though you’ve left everything to your children in your will, if your ex-wife is still listed as your IRA beneficiary, the stash goes to her. “We see a lot of mistakes here,” Welch says. “People get divorced or they have additional children, and you can run into some big problems with the wrong beneficiary.” Review your designations about every two years or upon life events, such as the birth of a child. And make sure to choose a contingent beneficiary. Otherwise, if your primary beneficiary dies before you do, your funds will go to your estate, which can create tax and legal issues. It’s not unheard of for people to leave seriously outdated beneficiaries — when you enrolled in your first 401(k) at age 24, did you casually name your boyfriend as next in line? You might want to change that.

7. Organize your paperwork

Do you know where your tax returns, insurance policies, brokerage and 401(k) statements, and mortgage paperwork are? If you’re not sure, you can bet your loved ones won’t be able to find them when they need to, plunging them into estate-settling hell. Put everything together in one place and then tell your spouse or closest family member where that is. Aside from the documents mentioned above, also include: your Social Security and health insurance/Medicare cards, plus contact information for your doctors, lawyers and accountants.

8. Keep it in the right place

Never keep your original will in your safe-deposit box. Some states seal the box when someone dies until the estate has been settled. (And of course, settling the estate is easier with the original will in hand.) You can keep a copy of your will in the safe-deposit box, but the original belongs with your lawyer or in a fireproof box at home or in your office. You may even want to scan all your important financial paperwork and keep a virtual copy with a Web site like vitalesafe.com (it’s free for up to 100MB of space). Just be sure to share access with your closest family member, so he or she will be able to get in. “We have a client who lived in New Orleans during Hurricane Katrina,” Welch says. “All of her documents were destroyed, but we had a virtual copy of everything and that was a huge help.”

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