What Is Estate Planning & Why Is It Important?

Estate planning is the process of documenting your wishes and how you want them to be carried out following your death. It’s an essential part of your end-of-life plan. Still, many people aren’t sure what an estate plan entails or why it’s so important.

In this guide, we’ll explain why estate planning is so vital. We’ll also provide insight on the best time to get started on an estate plan and ways you can make the process more affordable.

What is an estate?

An estate encompasses the personal belongings, money, and assets you own at the time of your death. Broadly speaking, your estate includes: 

• Real estate, including land and vacation homes
• Bank accounts
• Life insurance policies
• Stocks
• Retirement accounts
• Personal belongings, like jewelry or cars

What is an estate plan?

An estate plan is a series of legal documents outlining how you want your affairs managed after you pass away. An estate plan may address questions and concerns regarding matters like: 

• Guardianship, or who will care for your minor children or special needs dependents if you pass away.
• Heirs and beneficiaries, or who will inherit money and property after your death.
• Power of attorney, or whom you trust to make financial and legal decisions if you become incapacitated.
• Healthcare proxy, or who will make medical decisions on your behalf if you become incapacitated.

Many people work with an estate planning attorney or financial planner when creating their strategy. Doing so ensures your plan is legally binding and complete with instructions for all your assets.

What’s the difference between a will and an estate plan?

A will comprises directions for money and property, whereas an estate plan provides an overarching plan of action for your belongings, your loved ones, and yourself.

A will is only one of the many documents that make up an estate plan. Many people make a will and assume it’s enough to protect their loved ones and ensure their final wishes are carried out. However, an estate plan is more comprehensive than a will is alone.

Why are estate plans important?

Estate plans are important for legal, financial, and personal reasons. For example, an estate plan can help ensure that you, your family, and your hard-earned assets are protected before and after death. 

Estate plans help eliminate the mental and emotional burden of distributing assets—and the arguments that can unfold between family members if there are no clear instructions. A valid estate plan can also help protect your heirs from a hefty estate tax burden and ensure your wishes are carried out, even if you’re no longer able to express them.

Finally, estate planning can ensure your assets—and your loved ones—avoid the stress of probate court. Without an estate plan, a judge may determine who receives your assets, how your cash is distributed, and who gets to raise your minor children.

Who needs an estate plan?

Generally speaking, anyone who wants their final decisions carried out needs an estate plan. Even if you have a will, it’s a good idea to create a comprehensive estate plan that includes advance health care directives, power of attorney documents, and beneficiary designations. Through estate planning, you’ll ensure all these difficult decisions are made while you’re still alive and able to make them.

What are the essential estate planning documents?

Generally, estate plans contain the following legal documents: 

• A living will: Also known as a medical care directive, a living will is a type of will detailing the medical treatments and services you consent to receive if you’re not able to make medical decisions yourself. It may also include information regarding life support, pain management, or organ donation  
• Last will and testament: A last will and testament is a legal document explaining how you would like your assets and belongings distributed after your death. Generally, you’ll need to select an executor to carry out your wishes, though one of your beneficiaries can also be the executor.
• Financial power of attorney: Financial power of attorney allows you to put another person in charge of your financial affairs if you’re unable to manage them yourself. This individual is empowered to act in your name and on your behalf while paying your bills, managing your cash, and accessing your financial accounts.
  
  If you don’t want to give one person complete control over your finances, you can designate limited power of attorney instead. The individual you choose can make decisions on your behalf, but only regarding scenarios explicitly noted in the document.
• Medical power of attorney: Like a financial power of attorney, medical power of attorney gives one person the power to make medical decisions if you become incapacitated. You can pair your medical power of attorney document with a living will to create an advanced healthcare directive, which provides comprehensive healthcare instructions.
• Trusts: A trust is a legal agreement that allows a third party—known as a trustee—to manage assets on behalf of your beneficiaries. When you set up a trust, you place certain assets in it, like money or property. At the time of your death, your trustee will pass the assets to your heirs based on the trust’s guidelines.

You can choose from several different types of trusts, ranging from special needs trusts for disabled loved ones to contingent trusts, which only allow your heirs to access the assets after fulfilling certain conditions. For instance, you can name your child the heir to a trust—but only allow them to access the assets in the trust after they turn 18 or graduate from college.

When should you start estate planning?

Ideally, you would have created your estate plan as soon as you became a legal adult, then revised it every three to five years. However, you can begin your estate planning checklist at any time.

Just remember to update your estate plan following major life events. For instance, if you created your estate plan when you were single and childless, you will likely want to revise your plan after getting married or having children.

How much does estate planning cost?

Estate planning costs can vary widely, especially if you create your estate plan with the help of an attorney or financial planner. For instance, some attorneys charge an hourly rate, which could increase your costs dramatically if you have a complicated estate with a large number of assets.

You may also ask your employer if they offer legal plan benefits that could reduce the cost of estate planning. Also known as legal insurance, a legal plan benefit may provide enrollees with access to a network of attorneys who know the ins and outs of estate planning.

Estate planning leaves you and your loved ones prepared

No one wants to think about the end of their life. However, creating an estate plan can provide security and comfort for you and your loved ones.

With that in mind, take some time to start thinking about your estate plan and the decisions you want to make while you’re able. Then, work with a trusted attorney, tax professional, and financial advisor to develop a plan that ensures your final wishes are carried out when it matters most.