Estate Planning Basics: What Everyone Should Know


Estate planning is about protecting the people you love. That’s why everyone—not just the wealthy—needs an estate plan. The details of your plan naturally depend on your individual situation. But there are essential components every estate plan should include.

A strategy for your survivors

No matter how long you live, one day others are going to inherit everything you own. The following documents help ensure that your assets are distributed as you wish.

A will. If you die without one, state law dictates who will get your possessions. The state’s one-size-fits-all plan may not match your needs. In many states, for example, if you die unmarried, childless and without a will, all your assets go to your parents. You might prefer to leave your possessions to a close friend or to one of your siblings.

Your will doesn’t only cover your material possessions. It’s also the document in which you name a guardian for your minor children in the unlikely event you’re not there to raise them yourself.

If you choose not to have a lawyer draft your will, a do-it-yourself option like Quicken WillMaker can help you create all the legal documents you need to protect your family and assets.

Current copies of your beneficiary designation forms. By law, the beneficiary forms for your IRAs, 401(k) plans and other retirement accounts override your will. If your IRA beneficiary designation form names your sister, for example, and your will says you’re leaving the IRA to your cousin Joe, your cousin Joe is out of luck.

If your beneficiary forms are missing, your estate becomes your default beneficiary. In that case, these accounts are distributed according to the directions in your will, but on less favorable tax terms.

A person who is a designated beneficiary on a retirement account has his or her whole lifetime to empty the account. For a 40-year-old heir, that could be more than four decades. But a person who inherits a retirement account under your will must empty and pay taxes on the money much more quickly—sometimes within five years of your death, depending on your age when this happens.

A strategy for emergencies

Your estate plan should also include three documents that address issues your family will face should you ever become incapacitated:

A durable power-of-attorney. This document allows a person of your choice to act for you (write checks on your bank account, pay your taxes, etc.) when you’re unable to do so. Make sure it’s “durable” because a power-of-attorney that isn’t “durable” is only valid until you’re incapacitated; then it expires. In other words, a non-durable power-of-attorney would allow your agent to act on your behalf if you’re out of town but would be invalid if you were under anesthesia in a hospital.

A health-care proxy. If you can’t speak for yourself, this document gives someone else the legal right to make medical decisions on your behalf. Otherwise, a hospital and doctors will make these choices, not your family. (A health-care proxy doesn’t state your preferences. It says your agent knows what you want and is entitled to speak for you.)

A living will states what medical treatments you want and don’t want. Make sure your health-care proxy and your doctors have copies. A living will is important because it serves as a back-up for a health-care proxy: If anyone gives your agent an argument, your living will is written proof of your wishes.

A strategy for special family situations

Sometimes, it’s smart to leave assets to a trust for the benefit of your heirs, instead of directly to your heirs. A trust is a legal entity that holds assets and distributes them according to your wishes. Your estate plan may need to include a trust if:

  • You want to provide for a minor or disabled child. You can leave money to a trust and name a trustee who’ll oversee its investments and distributions to your heir. (Make sure you name a trustee who is likely to survive you.) Your trust instructions can spell out how the money is to be used and how long the trust is to last.
  • You have children from a previous marriage. You want your spouse to be provided for, but you also want to ensure that after his or her death these children will inherit any remaining assets. One way to do this is with a Qualified Terminable Interest Property Trust, better known as a Q-Tip Trust: At your death, your assets go into this trust, which pays lifetime income to your surviving spouse. When he or she dies, the trust assets are paid to your children from your previous marriage.

A sound estate plan helps you protect the people you care about most—both during and after your lifetime.