Many investors consider estate planning one of the most difficult aspects of creating an overall financial strategy. But the benefits far outweigh the challenges. An estate plan can provide peace of mind as you determine how your assets will be distributed after your death—including who will inherit them, who will control their distribution, and when your beneficiaries will receive them.
You'll want to start by accounting for all of your holdings, including real estate, business interests, securities, life insurance policies, bank accounts, and retirement plans. Once you have a complete picture of your estate, you can begin to make decisions regarding who should inherit your assets and how.
CREATE A WILL OR REVOCABLE LIVING TRUST
A will is a fundamental piece of any estate plan and contains your instructions for distributing the assets you own individually (without beneficiary designations), or your share of assets held as tenants in common, at the time you pass away. "A will should be comprehensive but doesn't need to mention every item you own," says Christine Fahlund, CFP®, a senior financial planner with T. Rowe Price. "In fact, because many of your assets, like jewelry, may change over time, a lack of specificity can be advantageous and can help you avoid having to update your will on a continuous basis." To communicate your wishes regarding certain items, you may want to write a memorandum in which you describe to your heirs the assets you own along with the names of individuals you wish to receive such assets upon your death. While not legally binding, it can document your wishes. An exception would be any particularly large asset—for example, a house—which definitely should be mentioned in your will if you have special desires for its distribution.
Fahlund notes that a popular alternative to a traditional will is a revocable living trust. A trust is a legal agreement in which the trustee (or co-trustees) holds the title to a specific asset on behalf of someone else (the beneficiary). With a revocable living trust, you can put all of your assets into a trust on behalf of your beneficiaries while you are still living. In addition, you can name yourself or someone else as trustee, depending on who you want to manage your assets. "Revocable living trusts provide flexibility because you can change the terms—including the trustee and beneficiaries—at any time," says Fahlund. "Another benefit is privacy. Traditional wills generally are a matter of public record, while revocable living trusts usually are not."
Click each question to reveal the answer
DESIGNATE YOUR BENEFICIARIES
Designating beneficiaries for your retirement accounts can be an attractive, efficient way to transfer wealth to your heirs outside of a will or trust. "However, you may prefer to have these assets pass to your heirs according to instructions included in your will or revocable living trust," says Fahlund. "This can be accomplished if you name your estate or a revocable living trust as your beneficiary." (It may also occur if your beneficiary designation "fails," such as when no beneficiary survives you.) Fahlund recommends submitting your beneficiary forms immediately to your financial institution when you open an individual retirement account (IRA), begin contributing to a 401(k), or buy a life insurance policy, naming both a primary and secondary beneficiary. "It's a good idea to review your forms regularly and file new ones if you need to make updates following major life events, such as the birth of a child, the death of your primary beneficiary, or a change in your marital status," Fahlund adds.
Click each question to reveal the answer
MAKE EVERY DETAIL COUNT
"Often people start their estate plans but never finish them, creating the risk that the final disposition of their assets may not reflect their wishes," says Fahlund.
If you overlook the retitling of an account or don't submit important paperwork, your wishes may not be carried out. "Effective planning is the key to successfully passing your assets in the manner that you intend," Fahlund concludes.
ILLUSTRATION BY JAMES STEINBERG