Financial planning isn’t only about preparing yourself and your family for life — it’s also about planning for what will happen after you die.

An estate plan specifies who will inherit your wealth and possessions after you pass away. It also addresses what your family, caregivers, and the legal system should do in case you become incapacitated.

It’s never pleasant to think about the end of your life. However, death is inevitable. Creating a plan will make passing on your wealth to the next generation much simpler — both for them and for you.

What is an Estate Plan?

An estate plan is a road map for your successors as they manage and dispose of the assets you leave behind. That includes wealth, real estate, possessions, and anything else that belonged to you during your life. Most estate plans also seek to reduce the liabilities your successors will face for gift and estate taxes. Note that the current gift and estate tax limits are about $22 million for a couple, so most people will not experience gift or estate taxes upon their death.

An estate plan allows you to ensure that everything you have goes to the people or organizations that you want it to. You can ensure  sentimental objects go to certain people and decide how you want to divide your wealth, including whether you want to leave anything to charity.  If you don’t put an estate plan together, the state dictates what will happen to your assets — which may or may not be what you want.

Your estate plan can outline your last wishes, including how you want to receive care at the end of your life and who you want to make medical decisions for you. If you have children, you can use your estate plan to specify who you want to care for them — both physically and financially.  Recent estate plans also include language on digital assets, which can range from domain names, electrically stored photos and videos and social media accounts.

Estate planning has practical benefits as well. It can reduce your heirs’ tax liability. It can also reduce the amount of time and energy they spend in probate, the judicial process in which a state divides someone’s assets among their beneficiaries.

So why don’t more people create estate plans? Although death is an unavoidable part of life, most of us think it is far away and we can put it off. Plus, estate planning is not cheap, and can be complicated depending on what state you live in.

Wills

Wills are documents that allow you to specify exactly how you want your assets distributed after your death. They also give you a chance to name guardians for minor children.

People without wills die “intestate,” which means their state’s legal authorities will decide how to distribute their property and financial assets. Even if you have made your wishes known to your family members or friends, the state is not required to adhere to them unless they are spelled out in wills that follow state regulations.

In your will, you will first designate your executor, who will administer your will. Executors must follow your instructions for which of your beneficiaries will receive which assets, and how, and when.

If you have minor children, your will is the place to designate legal guardians for them. If you wish to give guardians particular instructions, you can do so in this document as well.

Having a will does not necessarily mean that your heirs and beneficiaries will avoid probate. Technically, if an asset allows you to name a beneficiary, it will not need to go through probate. Retirement accounts, insurance policy payouts, and accounts with transfer-on-death (TOD) instructions are usually not subject to probate. These types of accounts are directed by beneficiary designations, so make sure you revisit these periodically and after a major life change, such as marriage, divorce, or death of a spouse.

Real estate, valuable items, and accounts without TOD instructions may need to go through probate. The cost of probate varies by state. In some states it is very cheap and efficient, while in others it can be costly and time consuming.  You can help avoid probate by making sure that your will is consistent with all your other estate planning documents.

Work with an attorney to prepare your estate planning documents so that you avoid mistakes that could land your loved ones in a long, stressful, and public judicial process.

Living Trusts

Wills may be sufficient for small estates or in states where probate is straightforward. But if you have a larger estate or reside in a state with costly probate, consider a living trust.

With a living trust, you place your assets in trust during your lifetime. You can modify a revocable trust throughout your life. Then, upon your death, your assets are transferred directly to one or several trusts that will have “successor trustees.” Successor trustees can also manage property or assets on your behalf if you become incapacitated during your life.

This arrangement gives you more control over your assets during your life. It also avoids probate, which maintains your family’s privacy and avoids bureaucratic headaches.  

If you have several people you want to designate as beneficiaries, you can create separate trusts for them. These trusts can be insulated from your beneficiaries’ creditors and divorcing spouses.

Talk to an estate planning attorney about whether a living trust might be a wise decision for your family.

Other Assets

Retirement accounts, life insurance policies, and any accounts with TOD provisions will be directed to the beneficiaries listed on those accounts. These policies are not directed by  estate planning documents.

For this reason, it is important to periodically review your beneficiary designations on these accounts. This is particularly important when you’re facing a big life change, such as a marriage, divorce, retirement, or child turning 18. Make sure you’ve named as beneficiary the person or people you want to receive your retirement assets or life insurance benefits.

Powers of Attorney for Healthcare and Property

If you become incapacitated during your life, a power of attorney tells courts, financial institutions, and medical institutions who you want to make decisions on your behalf. This person can speak for you when you are not able to speak for yourself.

In health care, your advance directive or healthcare power of attorney specifies who you want to make decisions about your medical treatment and care. A financial power of attorney gives another person control of decisions and access to your  financial assets. In both cases, a power of attorney must be in writing and in accordance with state regulations.

Like wills and living trusts, advance directives aren’t just for older adults. Any of us could become incapacitated and unable to manage these decisions. It is good to have your wishes clearly laid out.

If you have not yet started an estate plan, or if you have undergone a life change and need to update your plan, have detailed conversations with the people to whom you give power of attorney. Think carefully about how you want your assets and medical treatment to be managed.

Then share your feelings not only with your family members and beneficiaries, but with an estate planning attorney who can help you put those wishes in writing.