Estate Planning Basics: How to Get Started
Estate planning isn't just for the wealthy or for retirees. Deciding what to do with your assets or property is an important part of your financial plan—and it will make things easier for your loved ones in the future.
Key Takeaways
Estate planning is crucial for ensuring that your assets and responsibilities are managed according to your final wishes.
Legal documents such as wills, trusts and medical directives can help you avoid court decisions and family conflicts.
Make a checklist to ensure you’re considering everything that’s important to you—and review it regularly to adjust for life changes.
An estate plan is an essential part of your finances, but many people don’t have one. In fact, only 32% of American adults have created a will, according to a 2024 survey.1
Of the survey respondents with no will, 43% said that they would only create one if prompted by a health crisis. In other words, some people might wait until it’s too late.
What Is an Estate Plan?
Estate planning might sound like something only wealthy people need to worry about. In reality, it's simply about ensuring your wishes are followed after you pass away and that the transfer of assets and responsibilities goes as smoothly as possible.
The planning process involves making decisions and then creating a set of legal documents that outline what should happen to your possessions, money and even your minor children.
Think of your estate plan as a road map that guides your loved ones in carrying out your final wishes. Without documentation, the distribution of your assets might be decided by the courts and state laws.
Why Is Estate Planning and Wealth Transfer Important?
Anyone with ideas about what should happen to their money, belongings or children after their death (or about who can make medical or financial decisions on your behalf if you’re incapacitated) needs a plan. If you die without a will, state laws will decide what happens to your assets—everything from your home to your children. An estate plan will give voice to your requests.
Here are a few reasons why estate planning is essential for you and your family.
Make decisions during emergencies.
Forms like an advance medical directive or a living will can let family members and health care providers know what you would want to happen in a medical emergency. That’s useful if you’re ever in a condition where you can’t speak for yourself.Avoid family turmoil.
Setting down your wishes in a legal document may decrease family confusion and disagreement about how to divide your assets.Provide care for your minor heirs.
If you’re a parent, a will allows you to nominate a guardian for your minor children if you pass away before they reach adulthood. Without a plan, the courts decide who cares for them without your input.Minimize taxes for your heirs.
An estate planning attorney may help you reduce the taxes owed upon your passing. Strategies may include transferring wealth ahead of time to heirs (outright or in trusts) or to charities.Protect your legacy.
You can ensure that your assets are distributed according to your values and intentions, rather than leaving it up to others.
What Documents Are Needed for an Estate Plan?
When you create an estate plan, the complexity depends on what you own and how you want everything handled. There is no one right way to do it, but here are some key documents that most people should consider.
1. Will or Revocable Living Trust: Direct Where Your Assets Will Go
The cornerstone of your plan should be a will or a revocable living trust, which will outline how your assets should be distributed and who will care for any minor children. (Read on for more on the differences between wills and revocable living trusts.)
2. Advance Medical Directive: Manage Your Treatment Wishes
Medical directives let others know what treatments you would or would not want if you can no longer express your wishes and can include the following:
Living will. You determine which kinds of health care treatments you wish to refuse or accept.
Health care proxy or health care power of attorney. You decide who has the power to make medical decisions for you should you become incapable of making them for yourself.
Do-not-resuscitate order (DNR). This document tells your family and health care providers that you do not wish to receive resuscitative treatments.
3. Durable Power of Attorney: Assign Someone to Manage Your Finances
A durable power of attorney allows you to authorize a person to act as your agent for financial matters (paying bills, monitoring investments, filing taxes, etc.) if you physically or mentally cannot. You can discuss the types of power of attorney with your chosen estate attorney.
4. Letter of Instruction: Express Your Wishes
This informal, non-legal document provides directions in addition to your will or revocable living trust. It may include other things that are important to you, such as personal thoughts and philosophy to be followed by the family, burial wishes or the location of important documents, and contact information for various professionals. A letter of instruction may be the most helpful document you leave your family members.
Beyond the core estate planning documents, you should make sure your loved ones have access to your important records and physical and digital accounts.
Property titles and deeds
Birth, marriage and other official certificates
Income and gift tax returns
Life insurance policies
Credit card and bank accounts
Pension and retirement accounts, including beneficiary designations
Other digital accounts, such as shopping, frequent flyer and social media accounts
Contact information for important people or companies you work with (attorney, trustee, advisor, insurance agent, accountant, doctor, etc.)
Comparing Wills and Revocable Living Trusts
Will | Revocable Living Trust | |
|---|---|---|
What is it? | Wills are legal documents that state how you want your affairs handled and assets transferred. | When you create a trust, you give a trustee authority to handle assets on behalf of your beneficiaries. |
Who’s in charge? | A will places your decisions in the hands of a judge presiding over the estate transfer. The executor you name will sort out the details. | You are the grantor and trustee while you are alive. Successor trustee(s) will carry out your wishes during incapacity and or after you die. |
How is the estate transfer handled? | Anything left by a will goes through probate court.* However, a will can make the probate process smoother. | The trust allows your property to go directly to your named beneficiaries without going through probate. |
What about minor children? | You can name a guardian for your minor children in a will. | You cannot name a guardian, but you can appoint someone to manage assets for a minor beneficiary. |
What about medical considerations? | Wills do not include provisions in case you become incapacitated. | You can name a successor trustee(s) if you become incapacitated. |
*Probate courts deal specifically with wills, estates, conservatorships and guardianship, among other similar matters. Consult with your estate planning attorney on the probate process in your state.
Do you know the difference between a will and a living will? Or a power of attorney and durable power of attorney? Get a refresher while you work through the planning process.
Estate Planning Glossary
Roles and Responsibilities: Who Should You Name?
Once you have your documents in place, you'll need to designate individuals to carry out your estate plan.
These roles come with significant responsibilities and are crucial in ensuring your plan is executed as intended. It’s important to choose people who are trustworthy and understand your wishes clearly. (You may wish to consider naming successors in each category to ensure a smooth transition in the event the individuals you named are unable or not willing to serve.)
Executor.
This person is responsible for managing your estate according to your will. They will pay final debts and taxes, distribute assets and handle other administrative tasks.Trustee.
If you've established a trust, the trustee or trustees will manage it on behalf of the beneficiaries according to the document provisions.Guardian.
If you have minor children, you need to appoint a guardian who will take care of them if something happens to you.Agents for power of attorney.
These are the individuals you've chosen to make health care and financial decisions for you if you become incapacitated.
Many families avoid talking about estate plans. Here’s how to start the conversation.
Family Estate Planning Tips
Get Started: Estate Planning Checklist
Estate planning doesn't have to be overwhelming. It’s all about taking things step by step and ensuring you cover all the bases. Breaking down the process into manageable steps can make it easier.
Take inventory.
List all your assets, including properties, bank accounts, investments (taxable and tax-deferred), liabilities, insurance policies and personal belongings.Determine your wishes.
Consider how you want your assets to be distributed and who should care for any dependents. Decide which individuals and charities you want included in your plan and who will carry out your wishes.Consult professionals.
It can be helpful to consult with an estate planning attorney, financial advisor or CPA who can guide you through the process.Draft your documents.
Create all the documents necessary for your estate plan. Keep them in a safe place, and let your representatives know where they are.Review your plan regularly.
Your personal situation might change, and so might your wishes. Review and update your estate plan documents every three to five years unless a life event occurs sooner, to reflect any new circumstances.
Authors
Financial Consultant
Plan Your Legacy
You’re never too young (or too old) to start planning. We can help you think through your estate and legacy considerations as part of an overall financial plan.
2024 Wills and Estate Planning Study, Caring.com, July 30, 2024.
This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your estate planning. You should consider all options before making a decision.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.