Estate Planning 101: What You Need To About The Basic Documents, Wills, & Trusts

In this week’s video we’re going to look at an introduction to estate planning. This will kickoff a series of estate planning posts that will explore more in depth concepts surrounding it.

Estate planning is often the most overlooked area of people’s financial lives. It’s thought of as expensive and boring, or ignored altogether because people think they do not have enough assets to make it worthwhile. 

This blogpost series is going to dispel some of those misconceptions. We’re going to walkthrough the following:

  • Why you need it
  • The common terms and definitions
  • What is encompassed in an estate plan
  • What trusts are and how they work
  • How to enact the plan

This post will cover the first three bullet points above.

What Even Is An Estate Plan? 

Your estate includes everything you own and owe. A nonexhaustive list would include your equity in any businesses, your home, any other properties you own, your personal possessions, and any money you owe or are owed. When you take your own inventory, even if you don’t have many of the things listed, you still need a plan to determine where these things will go. 

The common misconception is that estate planning is simply a roadmap of where your possessions will go after you’re gone. However, this is not the complete picture. It can also determine the following:

  • Who will care for your children
  • Who will take care of you if you are no longer able to care for yourself
  • Who will handle your affairs if you cannot – pay bills, protect your assets, etc.
  • Who will care for your pets
  • Much, much more, but you are starting to get the idea

Now, we’re going to take a look at what documents you’re going to need to facilitate this plan and get into some of the definitions you’re going to need to know.

Documents Included In An Estate Plan

No two estate plans are exactly the same, but the main documents that most plans include are the following:

  • A Last Will – is a document that lays out your last wishes in the event you pass away. It will determine where your estate’s assets will go and to who. You can name a guardian of your children in it and who will take care of your pets. 
  • A Living Will – is a document that is part of the advance directive which allows someone to make decisions for your health if you cannot make them on your own. 
  • Power Of Attorney – this document assigns someone the power to make financial or legal decisions on your behalf. If your cognitive abilities begin to deteriorate or your health declines significantly, this document will ease the burden on your family significantly in that event. 
  • Health Care Directive – used to name who will make medical decisions for you if you are unable to.
  • A Living Trust – this is a simple structure that functions like your will. It will determine where your assets will go and to who in the event of your death. The main difference and advantage is that these assets avoid the probate process. We’ll get into the different types of trusts later in this series. 

What Actually Happens To An Estate After You Die? 

Let’s talk about what events actually transpire after your death in terms of your estate. In doing so, we will start to reveal the true importance of why an estate plan is so important. 

Like we discussed above, everything you own is included in your estate at the time of your death. When you pass away, assuming you have not created a trust, your estate goes through probate. A will is not sufficient to avoid this process. So what is probate?

Probate is the process where a court determines what happens to your assets now that you are gone. If you have a will, the court will use it as a guide to determine who gets what. In the absence of a will, the court will rule that you have died intestate. Then, the court will determine where your assets will go in accordance with local laws. 

I don’t think it’s unreasonable to assume that next to no one wants a court to determine where their things will go after they die. This is why having a will is so important. However, we can make this process even better. 

With proper estate planning and assets being properly titled in a trust, you can subvert the lengthy and arduous process of probate entirely. 

Who Handles Your Estate? 

So, let’s continue with some other terms and definitions that you need to be aware of. When you create your will, you will name someone as the executor of your estate. This person manages your estate through the probate process. After your passing, they will take care of unpaid bills, your taxes and return, debt, and any other unsettled matters relating to your estate. They will also oversee the distribution of your estate to the correct beneficiaries. To be clear, they do not have to pay out of their own pocket to satisfy your debts and final taxes, that will come from your estate’s funds. 

Typically the executor is one of your children, your spouse, or a sibling. Be advised that being the executor is a large responsibility, their tasks are not trivial, and you will want to ensure that they are trustworthy.

Revocable vs Irrevocable

This is one of the topics that gets talked about the most. It is crucial you know the difference between the two.

A Revocable trusts simply means that is can be changed or updated at anytime as long as you are alive and well. You may hear them called Revocable Living Trusts. They are great for people who want to maintain control of their estate while they are alive. Then once you die, the trust becomes Irrevocable.Irrevocable Trusts are the exact opposite, meaning that they cannot be changed once they are put in force (in a few situations you can). This means you lack the flexibility, but they come with some great benefits that make it worth it.

Knowing this will help you have a good foundation on what estate planning really is.