Who needs an estate plan? Probably you
Part of our Build your own financial plan series
Estate plan. Sound like a thing for the rich? Truth is you don’t have to be wealthy … or old or married or a parent to need one.
Unless you want the state to decide who gets your money, or family members fighting over who inherits your childhood Lego® collection, you need an estate plan that says who gets what when you’re gone.
What’s an estate plan?
It’s more than just a will. A good estate plan lays out who you want making financial and health care decisions if you can’t make them for yourself. You need one if you:
- have family, friends, or causes you want to support,
- want control over who gets what (and who doesn't),
- have kids who'll need a guardian,
- want to minimize taxes and fees on your estate, or
- have a business or own property such as a house or car.
5 key estate planning documents
This document allows you to clearly state your desires for distribution of your property and care for minor children. When you create a will, you’ll name beneficiaries, an executor, and guardian(s) for your children.
A trust is an arrangement that provides control over your property, both while you’re living and after you die. There are many different types of trusts, but the most commonly used trust in basic estate planning is the Revocable Living Trust. The trust names a trustee, who will be responsible for following your wishes about the property in the trust. It also outlines who will receive the property and when. You can decide to move your property into the trust either while you’re alive, or when you die using the will.
3. Financial power of attorney
This document, which is only effective while you’re alive, is a way to grant someone permission to make financial decisions and manage your legal and financial matters for you if you’re unable to do so yourself. This should be someone you fully trust to manage your money.
4. Health care power of attorney
With this designation, you choose someone who will make health care decisions for you if you’re unable to do so. This person may be called upon to make difficult decisions about medical treatment, so it’s vital that they have a clear understanding of your values and wishes.
5. Living will
Also called an Advance Directive, a living will is a guide for your doctors and caregivers to your exact wishes for your end-of-life medical care.
Tip: Make sure your beneficiary designations are properly updated for payable on death (POD) and transfer on death (TOD) accounts. Also, property owned jointly with others, such as your house, must be properly titled. These pass outside your will and bypass the probate process.
Why create a will?
If you die without a will, the state law (e.g. probate court) dictates how your property is distributed. The court will also decide who will be your executor and who will be named the guardian for your children.
Expedite the process.
Without a will, depending on how complex your estate is, the probate process could take a long time, often years. Which just creates an additional challenge for your family when they’re grieving. A will makes this process go faster.
The bills can add up quickly—court costs, probate expenses, fees for attorney, accounting, and appraisal. These can take a chunk of your estate. Having a will in place, especially combined with a trust, often significantly reduces probate expenses.
Tip: Protect your privacy with a trust. Your last will becomes public record when it’s submitted for probate (a public forum to resolve disputes raised by creditors or heirs). Probate documents list all your assets, appraised value, and the new owners of your assets—and this information can be seen by anyone. Who wants their whole (financial) life on display? If your property is placed into your trust, the information available to the public is limited.
2 ways to create your estate plan
1. Work with an attorney who specializes in estate planning.
Your financial advisor or tax professional may be able to recommend one, since they often work together on behalf of clients.
It’s always a good idea to consult with an attorney. Here are some specific scenarios that call for extra help:
- Your estate is significant.
- You own a business.
- Taxes may be due upon your death.
- Distributing your assets will be complex, especially if you lived in several states or outside your home country.
- You have young children who may require guardianship.
- You want to leave some (or all) of your estate to charity or friends.
- Your family dynamics are complicated.
Tip: Check with your employer to see if pre-paid legal help is part of your employee benefits. Like medical benefits, an employee pays a fixed amount each month or year in exchange for certain legal services.
2. Do it yourself.
If you participate in a retirement plan from Principal® or have one of our IRAs, you and/or your spouse have access to free online resources to prepare your own will, power of attorney, power of attorney for health care, living will, and more through our partnership with ARAG. To get started, create an account at principal.com/willprep.
When to review your estate plan
- Marriage or divorce
- Birth, adoption, or death of a child
- Death of a spouse or partner
- Change in beneficiaries
- Death of beneficiaries, executor(s), guardians, or trustees
- Purchase a new home or real estate
- Sale of a property previously included in your will
- Birth or adoption of grandchildren, or raising grandkids
- You move to another state, which can have different laws
- Estate and tax law changes
- Your financial situation changes significantly (income, value of assets)
- To change a provision in your original will
Document, store, and update
“As life changes, your estate plan should change, too,” says Heather Winston, CFP®, assistant director of financial advice and planning at Principal®. It’s also a good idea to put all the documents in a safe place and tell someone where to find them. (Watch one man’s story about his father’s passing: “When I’m gone, there’s a blue folder.”)
“I know someone who put her important papers in a safe deposit box—but forgot to tell anyone where it was located. That left the family scrambling to find the paperwork they needed,” Winston says.
She offers these suggestions:
- Give your local hospital and primary care physician copies of your living will and health care power of attorney (not just your family).
- Give your executor(s) a list of all your accounts and records.
- Review beneficiaries once a year, and your will or trust at least every 3–5 years.
Life happens, so it’s important to look at all your documents when you have a significant event (see ‘When to review your estate plan’).
- Use this estate planning workbook (PDF) from Principal to outline your wishes and information family members will need.
- Check/update your beneficiaries for life insurance, retirement plans, investment accounts.
- Watch this webinar: Estate planning: Can you DIY? We’ll talk through steps to create your plan, including whether you may be able to DIY. Use passcode: Principal.
The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.