Eight Essential Estate-Planning Steps

by Bobbie Shocket Lazarz

Estate planning is just a technical term for arranging what happens to your property after your death, as well as planning for your financial affairs if you become incapacitated. That's why everyone needs a basic estate plan--no matter how old you are or what your net worth is.

Here's how to start your planning:

1. Get organized

For starters, organize all your financial files to take account of everything you own and everything you owe.

File your papers by category, such as savings accounts, life insurance, and IRAs (individual retirement accounts). Getting your records in order is an essential step in your planning and also will give your family easy access to important records when they need them.

As you file your papers, weed out old documents such as expired insurance policies that have no possibility of claims, outdated mutual fund annual reports, and records from vehicles you no longer own.

Next, look through your records to determine what important information you're missing. For example, make sure you have all your current investment statements, insurance policies, and retirement plan information.

2. Calculate your net worth

Once your files are in order, create a net worth statement. The best way to do this is to enter your information into a personal finance software program. That way you'll be able to easily update your information and keep track of your situation.

For your assets, include the current value of your home, vehicles, personal property, savings, investments, retirement accounts, and any life insurance cash values or any other assets.

For your liabilities, include any mortgage, credit card balances, loans against life insurance policies, or other outstanding debt. Then see where you stand by subtracting your liabilities from your assets.

3. Prepare for the possibility of incapacity

Create or update three documents that are essential if you become temporarily or permanently incapacitated.

A durable power of attorney for finances allows you to designate someone you trust to manage your financial affairs. A durable power of attorney for health care allows you to appoint someone to make decisions about your medical treatment. And a living will spells out your wishes regarding the use of life-sustaining procedures.

Without these documents a court may have to intervene in your personal affairs if you become incapacitated. Check with an estate-planning attorney for information or check if your state Department of Health has ready-to-use forms.

4. Write or update your will

If you die without a valid will your assets will be distributed according to state law, not necessarily according to your wishes.

Some of your property may directly pass to your beneficiaries in other ways, such as through a trust, insurance policy, joint ownership, or a retirement plan. However, any property you don't leave through these methods is governed by the state intestacy laws.

In fact, if you're married and have children it's not safe to assume everything will go to your spouse. That's because in many states your assets are divided among your spouse and your children, even if your children are minors, with restrictions on how the children's share can be spent.

Even worse: A court could end up choosing a guardian for your children. And if you die with an outdated will--say your family situation has changed or you have new family members--your intended heirs may be left out in the cold.

Furthermore, the intestacy laws in most states make no provisions for those who aren't related to you by blood, marriage, or adoption. Consequently, you'll lose out on the chance to leave anything to anyone unrelated to you under the state definition, including stepchildren, unmarried partners, and friends. Likewise, you'll miss out on the opportunity to leave a bequest to charitable organizations.

5. Check your designated beneficiaries and how your assets are held

Review your designated beneficiaries on your investments, retirement plans, annuities, and life insurance policies. The designations on these documents supersede your will instructions. So checking that your beneficiaries reflect your current wishes is essential.

Also review the title registrations on all your assets to ensure they meet your current needs and to ensure that your property will be passed to your beneficiaries in the most tax-efficient manner. Some of the ways you can own assets are as sole owners, joint tenants with rights of survivorship, and tenants in common.

6. Take steps around probate with a few forms

One way to transfer some of your assets directly to your beneficiaries and avoid probate costs and delays is to simply fill out a few forms.

For savings and money market deposit accounts, checking accounts, CDs/share certificates, and Treasury securities, you can complete a pay-on-death form. For brokerage accounts, if allowed in your state, you can complete a transfer-on-death form.

With these designations your beneficiary has no right to the assets in your accounts until your death, so you retain complete control during your lifetime. That means you can make transactions and withdrawals or change the beneficiary anytime before death.

7. Consider whether trusts should be part of your estate plan

Consult an estate-planning attorney about whether any of the different types of trusts may be appropriate for you.

Technically, a trust is a legal relationship in which a person or trust company holds property for the benefit of him or herself or another beneficiary.

Trusts can help you take care of your surviving loved ones, including those with special needs, as well as allow you to exercise some control over how your assets are used after death. Trusts also can help you avoid probate, make charitable gifts, or help manage your affairs if you become disabled. If you have substantial assets, setting up certain types of trusts also can help reduce estate taxes.

8. Keep your plans up-to-date

Tax laws are extremely complex and it's impossible to predict what the rules will be in the future. So it's essential to stay informed of new developments. When there are changes, review your plans to make sure they still meet your needs and that they comply with the new federal and state estate tax laws.

If you get married, divorced, have children, move to another state, or experience other significant changes in your life, update your will and other estate planning documents. Likewise, if the executor named in your will or any of your beneficiaries are seriously ill or have passed away, make any necessary changes in your estate plans.

Bobbie Shocket Lazarz, Certified Financial Planner Professional TM, MSW, MBA, has been educating credit union members about personal finance for 15 years.

August 21, 2006