Last updated July 18, 2023
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Thinking about the final stages of life is an uncomfortable exercise that many of us prefer not to dwell on. It’s easy for our minds to avoid the topic and delay the necessary preparations.
However, planning your estate now makes it easier for you and your loved ones when the time does come.
This guide will take you through a step-by-step process for planning your estate. From creating a Last Will and Testament to understanding estate tax laws, we break down all the documents you’ll need and why they’re essential for creating an effective estate plan that represents your wishes.
Planning your estate
Nearly everyone has an estate, even if it’s just one bank account. Your estate consists of everything you currently own: your house, your car, your possessions, as well as money and debts.
These are your assets and debts, and you will need to include them in your estate plans.
Estate planning is the process of determining the maintenance, management, and distribution of your assets when you pass away or become incapacitated.
By creating your estate plans early, you can:
- Prepare in advance for emergencies
- Leave heirlooms and gifts to family members
- Ensure your loved ones receive your savings
- Make your medical wishes known
- Ensure your children receive proper care
What’s in an estate plan?
An estate plan should contain any relevant information to the management of your assets and debts, health care, and wishes for after you pass away.
Essential documents to include in your estate plan are:
You may also want to include Gift Deed Form, Just-In-Case Instructions, and Child Medical Consent forms in your estate plan. The more information there is for those representing you, when you can’t represent yourself, the easier it is for them to quickly and accurately adhere to your wishes.
Step 1: Set your estate planning goals
Before beginning your estate planning, take a step back and look at the big picture of what you expect it to achieve.
Estate planning is more than just creating a Last Will and Testament.
Having a clear understanding of what you want your estate plan to accomplish helps create focused goals that align with your personal wishes.
Some common estate planning goals include:
- Ensuring financial support for your family
- Choosing the beneficiaries of your estate
- Naming guardians for any dependants and having a financial plan for their support
- Dictating the future management of a business
- Leaving your assets to a charity
- Requesting specific funeral arrangements, senior care, or health care preferences
- Specifying your preferences in the case of a medical emergency or incapacitation
Understanding and maintaining your goals throughout your preparations helps you achieve the outcome you want.
Step 2: Document your assets and debt
Prior to deciding how you’ll distribute your assets, you’ll need to know what you’re working with. Document all your assets and debt in order to determine how much of your estate you can leave to your loved ones.
Create a list of your debt
Debt is money you owe to another party. Your assets are used to clear any outstanding debt before they can be passed on to loved ones.
As such, it is important to keep your debt in mind when anticipating how much you can leave to others.
Debt can include:
- Credit card balances
- Student loans
- Vehicle loans
- Home equity lines of credit
Create a list of your assets
Assets are anything you own that has financial value. In your estate plan, you can leave your assets to family, friends, groups, and charities for after you pass away.
Compile a list of your tangible and intangible assets and weigh them against your debt.
Tangible assets include material things, such as:
- Houses and other real estate
- Vehicles (e.g., boats, cars, and motorcycles)
- Personal valuables (e.g., books, jewelry, tools, and household furnishings)
- Collectibles (e.g., art, coins, stamps, trading cards, and antiques)
Intangible assets include non-material things that you can’t touch or hold, such as:
- Bonds, stocks, and mutual funds
- Checking and saving accounts
- Retirement plans
- Life insurance
- Businesses owned
Give special consideration to assets like aircraft, alcohol, boats, firearms, livestock, and pets if you intend to leave them to someone. Any transfer of these kinds of assets will need to follow your state’s laws.
You should also make a note of anything you wish to give to a beneficiary specifically. This helps ensure it won’t be sold to cover any outstanding debts you may have.
Calculate the value of your assets
After creating a list, subtract your total debt from the full value of your assets. The remainder is what you have left to distribute amongst your loved ones, also called beneficiaries, in your Will.
Remember that this number can change based on payments you make, assets you sell, or debts you accumulate.
By knowing where you stand financially, you’ll have an accurate view of your residual estate.
Step 3: Create your Last Will
A Last Will and Testament allows you to control and communicate how to distribute your estate after you pass away. It’s the document in your estate plan with the most authority, and a probate court (the segment of the court system that handles wills and estates) uses your Last Will as a guide when settling your estate.
A Last Will is also the document you need to appoint a guardian for your minor children, set aside money to care for any pets you leave behind, and leave assets for your beneficiaries.
Why is a Last Will important?
A Last Will ensures control of your estate stays in your hands and that your wishes are met after you pass away. You can use a Last Will to specify which of your assets go to family, friends, groups, and charities.
It also ensures your minor children end up in the care of a guardian of your choosing, rather than a relative picked by the state.
If you don’t have a Last Will and, therefore, haven’t appointed an executor, the state will appoint an administrator of your estate. Under these circumstances, the administrator will distribute your assets by following a predetermined formula without considering your family circumstances.
If you do not have a Last Will and have no living relatives at the time of your death, your property will go to the state.
What’s an executor and why are they important?
Choosing the right executor for your Last Will is a challenging but essential decision because they bear a lot of responsibility on your behalf.
An executor is the person who ensures the requests or terms within your Last Will and Testament are carried out precisely as you wish. They’ll often oversee your End-Of-Life Plan as well.
Your executor will:
- Distribute your property and assets to your beneficiaries
- Arrange for debt repayment
- Recover money other parties owe you
- File necessary forms
- File your final tax return
- Act on behalf of your business interests
- Arrange for the correct parties to receive any charitable donations or gifts
- Handle the arrangements made in your End-of-Life Plan regarding your memorial service, remains, etc.
An executor should be someone you can trust, who can bear the weight of the responsibility, and who is willing to act as your representative. They’re often a spouse, friend, or relative.
Step 4: Create your Power of Attorney
There’s more to estate planning than preparing a Last Will for when you’re gone. Creating a Power of Attorney helps you with important matters while you’re alive or if you become ill or incapacitated.
A Power of Attorney is a document that gives one or more people (called an attorney-in-fact) the authority to make financial and property decisions on your behalf while acting in your best interests.
An attorney-in-fact can handle your banking, purchase or sell real estate for you, sign cheques from your account, and many other matters you specify.
An attorney-in-fact’s authority over your affairs comes to an end when you pass away.
A Power of Attorney is helpful for when you:
- Expect to be out of the country for extended periods of time
- Have a medical condition that affects your ability to make decisions for yourself
- Own a business and are concerned about its operation in the event of your absence
- Wish to set precise limits on the handling of your finances and property if you are ever incapacitated
Choosing your attorney-in-fact is just as important as choosing the executor of your Will. Your attorney-in-fact needs to be a mentally able adult, who is not involved in any bankruptcy proceedings when you assign power to them.
To minimize any conflicts of interest, they also can’t own or work at an extended care facility or nursing home in which you are a resident.
Most importantly, an attorney-in-fact needs to be someone you trust as they will be making important decisions on your behalf.
Step 5: Create your Health Care Directive (Living Will and Medical Power of Attorney)
We don’t always know what the future has in store for us. By creating a Health Care Directive, you’re better prepared in the event you need to make difficult medical decisions.
Your directive contains two documents: a Living Will and a Medical Power of Attorney.
A Living Will allows you to plan your medical treatment in advance. It ensures your bases are covered if something unexpected happens and you’re unable to express your personal health wishes.
A Medical Power of Attorney is a document you use to appoint someone to make medical decisions on your behalf. For example, suppose you’re incapacitated or unable to consent to medical treatment. In that case, your medical attorney-in-fact will use your Living Will as a guide for making decisions about your medical care.
Why is a Health Care Directive important?
Creating a Health Care Directive not only gives you more control over your medical wishes, it also spares your family members from making difficult medical decisions in an overwhelming situation for them.
By including a Medical Power of Attorney in your directive, you also have the opportunity to discuss your medical preferences with someone you trust before any unforeseen medical circumstances present themselves.
Which details does a Health Care Directive cover?
A Health Care Directive contains the details and contact information of the person you granted Medical Power of Attorney. This is so medical personnel know that your medical attorney-in-fact is someone you trust to make decisions on your behalf during an emergency.
It also outlines the types of medical care you want if you’re in a terminal condition, permanent coma, or persistent vegetative state. The types of medical care you may want if in these conditions include:
- Comfort care: Treatment with the sole objective of relieving pain. It may lengthen or shorten your life and doesn’t include artificially administered food and water.
- Life support: Any life-prolonging procedure that helps to restore, replace, or maintain a spontaneous and vital bodily function (e.g., assistance with maintaining breathing or blood pressure)
- Tube feeding: Receiving food, water, and medicine through a tube directly attached to your stomach or small intestine.
Step 6: Create your End-of-Life Plan
Now that you have an outline for your medical care and assets, it’s time to think about what happens to your body when you pass away. This is where an End-Of-Life Plan is valuable.
Whereas a Last Will states how you want your assets divided, an End-of-Life Plan specifies how you want your funeral and remains dealt with. You use an End-of-Life Plan to outline:
- Funeral or memorial service arrangements
- What you want to happen to your body (e.g., burial, entombment, cremation, or donation to science)
- Who your executor is (usually the same person you appoint for your Last Will and Testament)
- Whether you want to publish a death notice or obituary
- Any organ donations
- Payment of funeral arrangements
If you’re planning to donate your organs, keep in mind that simply stating your intentions in your End-of-Life Plan isn’t enough. Organ donors need to register online or with their local Department of Motor Vehicles (DMV).
An End-of-Life Plan also provides you a place to share any final thoughts and messages. You can write a general message to all your family and friends or direct messages to specific individuals.
Step 7: Create any other documents you may want
You have the foundation of your estate plan with a Last Will and Testament, Power of Attorney, Health Care Directive, and End-of-Life Plan. However, there are a few more documents that may assist you even further.
To create an even more detailed estate plan, consider creating a Gift Deed, Just-in-Case Instructions, and Child Medical Consent.
A Gift Deed Form is used to give sums of money or transfer property ownership to a person or organization. It’s common to use a Gift Deed when giving a gift to a family member or making a donation to a charity.
However, it is important to note that any gift valued at more than $15,000USD will be subject to a gift tax.
A Gift Deed is different from a Last Will and Testament. In a Last Will, your beneficiaries receive your assets when you pass away, while a Gift Deed transfers assets to another person while you’re still alive.
Just-In-Case Instructions are a single document containing your personal, legal, and financial information. The instructions act as a quick reference for someone taking care of a wide range of tasks on your behalf.
Valuable information for your Just-in-Case Instructions include:
- Personal details: Family and employer’s contact information and any relevant family medical information
- Property: Current residence (e.g., address, location of keys, alarm system codes), vehicle details, and real estate details
- Health care: Family doctor’s contact information, insurance coverage, and medications
- Pet care: Dietary restrictions, medications, and schedules
- Financial information: Banking, investments, debts, billing, and tax information
- Essential documents: Birth certificates, passports, social security number, Last Will and Testament, End-of-Life Plan, and Power of Attorney
- Storage and access: Access to personal safes, safe deposit boxes, self-storage units, and electronic devices
Child Medical Consent
Child Medical Consent makes it easier for a caregiver to quickly access medical care for your child. This document gives a babysitter, grandparent, or another temporary guardian the authority to consent to a child’s medical treatment if the parents or guardians are unavailable to do so themselves personally.
A Child Medical Consent document should include:
- The names and addresses of the parent(s) or guardian(s) providing the authorization
- The children’s names and birthdays
- Health information
- The temporary guardian’s identity
- A description of the authorized medical treatments
- A statement that there are no court orders that would prevent the parent(s) or guardian(s) from legally making such an authorization
- Signatures of the parent(s) or guardian(s) in the presence of two witnesses and a notary public
Step 8: Gather important physical and digital paperwork
Organizing your documents helps the execution of your estate go more smoothly when the time comes. Gather copies of all the important documents that you may need for your estate plan.
Important documents may include:
- Marriage, divorce, and separation documents
- Adoption and birth certificates for children
- Property deeds and titles
- Business and investment share certificates
Having these documents alongside your estate planning documents can assist with proving ownership or relationship changes in the event of a dispute.
By laying out clear and legally sound estate plans and having all relevant documentation, you can help to make the process easier and less stressful for your loved ones.
Step 9: Know your state’s estate tax laws
It’s important to know whether you’ll need to pay taxes on your estate. An estate tax is a tax on assets (e.g., money, stocks, real estate, etc.) you transfer to your beneficiaries at the time of your death.
Who needs to pay estate taxes?
In the United States, every state is subject to a federal estate tax, while only some states have their own estate tax laws. Only estates with a value exceeding the exclusion limits set by law are subject to the tax, and the tax only applies to the portion of the estate that exceeds the limit.
For you to be subject to federal estate taxes, your estate’s value needs to exceed $11,700,000 (as of 2021). However, the exclusion limit on state estate taxes is usually much lower and varies from state to state.
The following states have their own estate tax laws:
You don’t pay federal estate tax at the time of your death on assets that pass directly to your spouse. Those assets may later be taxed when your spouse passes away.
If your estate is taxable, your executor needs to file a Form 706 with the Internal Revenue Service (IRS) within nine months of your death.
Step 10: Store your estate plans and inform your representatives
Provide copies of your documents for your attorney-in-fact and representatives. You should store copies of your document in a safe place, such as a safety deposit box, trustee company, or bank. Also, don’t forget to tell your representatives the codes or combinations to access the documents.
You may also wish to include a list of passwords for your digital accounts, such as:
- Social media accounts
- Bank accounts
- Online business or real estate portfolios
When to update your estate plan
Your situation is bound to change as the years pass by. So too may the goals you wish to achieve with your estate plan. That’s why it’s important to revisit your plan from time to time and make sure it’s up to date. A plan that doesn’t reflect your current needs will have limited effectiveness.
You should update your estate plan after major life events, such as:
Always let your representatives and attorney-in-fact know of any changes to your estate plan.