Estate Planning Tasks and Tips
Last updated in May 2018
Planning for what happens to your possessions and money after you die is more than just sobering. There are many decisions to make and lots of paperwork—which explains why most Americans don’t have even simple wills. But once you’ve made an estate plan, you’ll find it calming and reassuring to you and your family.
To compile basic dos and definite don’ts, we asked a dozen helpful estate-planning experts to share their top strategies for saving hassles and money—and for their warnings about common mistakes.
The goal is to communicate your end-of-life healthcare wishes and document what you have and who gets it after you die. You’ll want the fastest and least costly way to transfer it to your heirs or charities, minimizing payouts to probate courts, attorneys, accountants, and Uncle Sam.
We don’t usually publish disclaimers with our advice, and although we spent a lot of time talking to lawyers, we’re not estate-planning attorneys. In other words, don’t mistake this article for legal advice.
Want more estate planning info? Our friends at Kiplinger provide great personal finance info in their magazine and online. AARP and legal publisher NOLO offer planning tools and articles. While some of us can do our own estate planning, most will need to hire an expert; we offer advice on that, too.
Get it done.
Don’t wait until you’re gravely ill to do your estate planning. All the experts we talked to insist that it’s much more difficult to prepare documents when clients are close to death or in nursing homes. Make big decisions when you’re of sound body and mind; disabilities can cloud judgment and create legal challenges or delays for your beneficiaries.
Unless you’ve made a will or living trust, or assigned beneficiaries to your accounts, your assets will automatically transfer to what the law considers your default heir. If there’s any ambiguity about who that is or what you wanted, a judge will have to decide, which takes a lot of time—and his or her orders may not reflect your wishes.
Your will should cover many matters, lots of which we discuss below. If your estate is modest and your wishes for who gets what straightforward, you can probably write your own. Make a list of what you have (click here for a list), state who gets what, provide contingencies in case heirs die before you do—then find two witnesses and sign it all in front of a notary. Write it in your own words or use a template available from websites like RocketLawyer ($20 for a simple will) or LegalZoom ($69 for a simple will; $149 for a will, living will, and medical power of attorney).
But unless your situation is very straightforward, have an experienced lawyer prepare your documents. As one attorney observed, “Some lawyers love DIY wills for all the extra fees they generate... The problem with lousy estate planning is no one will know you screwed up until you’re dead. Then there’s no going back to fix it.”
If you’re married, prepare separate wills.
Estate attorneys do not like joint wills. When the first person in a joint will dies, the estate goes through probate, which locks in the terms of the will until the second person dies. Life circumstances can change during those in-between years—the surviving spouse might remarry or have additional children, additional grandkids might be born, assets come and go. Changing a joint will (say, to add a grandchild) after a death is complicated; changing an individual one for the surviving spouse is very easy.
Not married but have a life partner? DEFINITELY write a will.
Without one, there’s a big risk that property held in your name will transfer to your relatives, effectively cutting out your partner. Also establish shared assets as having joint tenancy with rights of survivorship.
Assign guardianship for kids.
If you don’t record a choice for who will raise your kids, then a family court will have to make it. Before locking in your decision, ask the designated guardian for permission, and give him or her time to think it over. Consider naming a backup guardian in case circumstances change. If the guardian doesn’t live nearby, specify who will take care of children until they can arrive.
Write a living will and designate a healthcare surrogate.
Also called an “advance directive,” these document the actions you do and don’t want medical providers to take if you’re incapacitated. Main points to cover: conditions and for how long to allow artificial life support, attempts to resuscitate if you stop breathing or your heart stops, or use of feeding tubes. Consider asking your family doctor to help write it.
Assign someone as your decision-maker (“healthcare surrogate”) in case you can’t speak for yourself, and complete a medical info release so your treatment and history can be discussed with your surrogate and anyone else you identify.
The free advance directive forms available from the National Hospice and Palliative Care Organization are a fantastic resource.
Send copies of your living will to your immediate family, doctors, and healthcare surrogate. Include explanations and the philosophy behind your choices. If you don’t want long-term life support, explain why. It will be easier for your family to work with healthcare providers to honor your wishes if they understand them.
Assign a financial power of attorney.
Establish who will manage your finances and pay your bills if you cannot. Unless you have significant assets or own a business, this is simple. The website Powerofattorney.com offers sample forms you can use. Indicate when and how your power of attorney takes effect, and dictate whether your designee gets access to your finances right away or only after a specific event, such as a hospitalization or mental incapacity. Upon your death, financial power of attorney ends and your estate’s executor takes over.
Designate an executor.
Once you die, someone needs to pay your final expenses, collect money owed to you, file your last income tax return, and distribute remaining assets. Your executor can be anyone—an heir, attorney, accountant, or friend. Because it’s often a big job, pick someone who is task-oriented and good with paperwork. If your executor is not an heir, it’s customary to pay him or her. If it’s an attorney, your estate will get billed his or her hourly rate; if not, establish the payment arrangement in your will or leave it up to your heirs.
Make lists of what you have and how to access it.
Provide copies of your end-of-life documents to loved ones: power of attorney, healthcare surrogate, living will, medical info release, will or living trust.
Create a roadmap to your major assets and accounts. Various financial software packages can help you with list-making. For example, at Mint.com you enter details about your accounts and it maintains a view of all your balances in one spot. Like an online banking site, your information is protected by a user ID, password, and encryption. But unlike bank sites, information is held in “read-only” form, so there’s no access to funds.
Also maintain a paper trail to your digital assets and existence. Use our roadmap to create your list, save it to a password-protected document, and share it with your will’s executor, estate attorney, primary heir, or close friend.
Don’t accidentally disinherit a child.
Estate-planning attorneys repeatedly warned us of this all-too-common occurrence: A parent leaves his or her entire estate to a current spouse or partner, effectively disinheriting children from a previous marriage or relationship. In your will, explicitly state how assets will transfer to family and others.
For retirement accounts and life insurance policies, keep beneficiary info up to date.
Another common inheritance accident: If you years ago named your spouse as beneficiary of a retirement account or life insurance policy, were later divorced, and forgot to update it, he or she likely will inherit it. Because retirement accounts and life insurance policies are considered legal contracts, their directives trump even your will.
Set up investment and savings accounts to immediately transfer to your heirs upon your death.
Note in your will who gets what, but to avoid delays by probate processes, direct banks and investment firms to make your accounts immediately transfer on death (TOD) to designated heirs; or reorganize your accounts so they are titled jointly. (Careful: This may mean your dear children have access before you die.)
The best way to leave money to charities is by naming them as IRA beneficiaries.
While you don’t pay income taxes on money you contribute to an IRA (or pay taxes on Roth IRA disbursements), your heirs will pay income tax when they inherit your retirement accounts. But you can avoid giving Uncle Sam a cut by naming a tax-exempt charity as beneficiary.
Consider a stretch IRA trust.
Your retirement funds are largely exempt from debt collection and other lawsuits, but when you die that protection ends. You can continue this legal shelter—and possibly let heirs postpone paying income tax on inherited funds—by setting up a trust that’s controlled by your beneficiaries but keeps the money in an IRA, exempting it from bankruptcy, creditor, and divorce claims. The formation of the trust dictates how long the assets remain in the “stretch” IRA; unless tax laws change, it can stay protected for decades. The money continues appreciating, and heirs will avoid paying taxes on it until they reach an age when they’re required to take distributions from it or when they decide they need the money.
Set up living trusts to avoid a lengthy probate process.
When assets pass through probate, heirs wait months to receive them—and they’ll receive less after the estate pays court and legal fees. Bypass probate by creating a living trust and transferring most of your assets to it while you’re alive. You control the trust until you die, when your heirs—named in the trust—take over, eliminating the need for a probate court to award your stuff to them. As you accumulate property, add it to the trust. Like a will, a trust specifies who gets what or what share each heir inherits. You can revoke a living trust or change your heirs any time.
If you own real estate investments, out-of-state real estate, or a business, a living trust is crucial for avoiding a lengthy probate. It’s also wise to create a trust if your heirs won’t receive equal shares of your assets. But if all of your assets are in retirement accounts, life insurance, or investment accounts, which don’t have to pass through probate, a trust is less necessary—you can just designate beneficiaries for each and they’ll get the money quickly.
There are many types of trusts—marital, charitable, testamentary, terminal interest property, generation-skipping, bypass, and more—each with its own benefits and too many for us to discuss here. Hire an experienced attorney to set up one.
Don’t wait too long to place your home in a trust or transfer it to family.
It’s a good idea to put your home in a trust, especially if more than one person will inherit it. This enables them to avoid probate delays and costs, and possibly protect the equity from some creditors. But don’t wait too long to do this. If you run out of money to pay medical bills or for long-term care, Medicaid will take over and after you die initiate an “estate recovery” process to capture your remaining assets for reimbursement. Some people transfer their homes to trusts or heirs to avoid sacrificing their home equity to Medicaid, but when you transfer your home to a trust, it can trigger a Medicaid ineligibility period of up to five years.
Be careful about adding heirs to your home’s deed.
To avoid probating their homes, many families add their adult children to their homes’ deeds or transfer them completely. This can also shelter your home equity from Medicaid if you need its help paying for medical or long-term care (see above), but you risk losing control of your property. If you convey full or partial ownership of your home, even if you and your kids agree you get to live there, if one of them dies their part of the ownership could pass to an estranged or in-debt relative, or even a stranger. And if someone you add to the deed goes bankrupt or divorces, your home might become ensnared in the resulting legal proceedings.
Another consideration: When someone inherits a home, it’s just part of the entire estate, which doesn’t face federal income taxes unless it’s worth more than $11.18 million. Inherited assets are subject to a step-up in basis, which readjusts the value of appreciated assets for tax purposes. This means that unless you have a very high-value abode, your heirs won’t pay capital gains taxes when they sell it; but if you list them on the deed before you die, they will pay capital gains taxes if the home appreciated in value.
Want to give most of it away before you die? Watch out for gift taxes.
Seeing family enjoy their inheritance while you’re still alive is great, but you can give away only some money to each person per year and avoid the gift tax. For 2018 you can give away up to $15,000 per recipient (couples can give away up to $30,000). There’s also a lifetime gift limit for total gifts made of $11.18 million for individuals and $22.36 million for couples. Give away too much and you pay gift taxes, not the recipient.
Some gifts are always excluded from the tax. Married couples can transfer wealth to one another. And you can pay anyone’s medical or educational costs without worrying about the tax, as long as you directly pay the healthcare provider or school.
College savings funds are great tax-free investment vehicles, but for grandkids consider setting up revocable accounts to maximize their eligibility for financial aid.
When awarding financial aid, schools look at the earnings and assets of the student and his or her parents, not other family members. If you are a grandparent, aunt, uncle, or nonrelative exploring college savings options for a protégé, and want to avoid lowering future financial-aid offers by putting assets in his or her name, fund a college savings account that retains you, not the kid, as account custodian.
Similarly, because most schools don’t include parents’ retirement savings in their financial aid analyses, maximize retirement savings contributions before putting money into college savings accounts.
Don’t make young children direct beneficiaries.
The Uniform Transfer to Minors Act governs inheritances for kids, requiring assets to be deposited into accounts managed by third parties until they reach age 18 or 21. Include in your will or trust instructions to disburse assets to your child’s guardian to help pay living and educational costs. But because even at age 21 Junior may be too young or inexperienced to manage a lot of money, think about including guidelines for how remaining assets are distributed. A common approach is to have the trust dole out an allowance until each heir reaches his or her middle 20s or 30 but lets them tap more funds sooner for tuition, home purchases, business startup costs, etc., subject to approval by the trust’s custodian.
Also avoid leaving large lump sums to financially irresponsible heirs.
Since your desire is to help them—not to enable gambling or shopping binges—consider placing their inheritance into a trust overseen by an independent third party and distributed over many years. As one estate planner told us, “You want them to see Paris, France, not Paris Hilton.”
If you have a lot of debt, discuss with your executor how to pay your remaining bills.
A mistake some executors make is to keep up with bills by paying them out of their own pockets. If there isn’t enough money in your estate to pay all your debts and bills, your executor won’t get reimbursed. In general, when someone dies, his or her debts do, too.
Avoid overpaying for life insurance.
Another form of overpaying is buying more coverage than you need. A good rule of thumb is to buy a policy that pays out an amount equal to your annual earnings times three, plus any debts. Insurance agents might recommend far more coverage than this—but then they get paid based on how much you spend.
Because they’re expensive, avoid annuities; term life insurance plans are almost always better buys. If you want a savings vehicle, invest elsewhere.
Shopping for long-term care insurance.
Medicare pays for skilled-nursing-facility stays of up to 100 days; after that you take over. Then, if you exhaust your assets, Medicaid will pay.
Nursing home care is extraordinarily expensive, but so is long-term care insurance. Premiums run several thousands of dollars per year if you’re under age 65; after that they skyrocket. There’s much debate among aging advocates and estate planners as to whether these policies are good buys. Because on average men spend only 11 months in skilled nursing care and women 17 months, the financial risk doesn’t seem worth the thousands of dollars a year in premiums; on the other hand, dementia care can last many years.
If you want coverage, consider purchasing it while you’re in your 50s to lock in a lower rate, and shop lots of policies to find the most affordable premium. Unfortunately, at any age those with serious medical conditions will encounter very high insurance rates—that is, if they can even find companies to insure them. And consider buying a hybrid policy, which combines coverage for long-term care with life insurance. That way, the policy pays off even if you never need long-term care.
Preplan your funeral, but don’t prepay it.
Write down your preferences for your funeral arrangements and give them to a likely survivor, or file a preference form with a funeral home. But don’t prepay toward your funeral. The agreements offered by funeral homes represent major financial commitments and are not prudent.
Donate your organs.
You can arrange to donate part or all of your body to improve the quality of life of others—or offer the gift of life itself. Donation of at least some body parts is an option for almost anyone, regardless of age or medical history.
To become an organ donor, have the department of motor vehicles state your intent on your driver’s license. You can also register online with Donate Life America. And inform your family of your wishes.
Get rid of extra stuff.
Not to be too clichéd, but you really can’t take it with you. Do your family a favor and pare down your possessions. You can offload unwanted clothes by reselling them, dump romance novels by donation, or shuttle an entire household’s worth of stuff via an estate sale. For advice on it all, plus decluttering strategies, see our section “Getting Rid of Your Unwanted Stuff.”
Communicate the reasons behind your decisions.
Obviously, it’s a touchy subject to discuss who gets what when you die, especially if you decide to leave more assets to one heir than another, or if you give most or all of it to charity. Decide whether it makes more sense to inform your family now or have your will speak for you later. Estate attorneys generally recommend setting expectations and eliminating uncertainty early on, which reduces the chances of legal squabbling later.
When discussing these matters, remain calm, positive, and sincere. Stress that you’ve given these matters much thought and that your wishes are what’s important.
At the very least, include explanations in your will. For example, spell out that you are leaving one survivor less money than another due to an earlier loan or gift. If you hope kids or grandkids will use part of their inheritance to travel the world, say so. Your will can be more than just a statement of who gets what, but also an expression of your values and philosophy about how your estate is spent.
Update as necessary every few years.
Births, deaths, and divorces happen. People move around. Assets come and go. Don’t accidentally disinherit a new grandchild or create the need for a lengthy probate process or legal fight by waiting to update your estate plans.
MANY THANKS TO SOME HELPFUL EXPERTS
We interviewed a dozen attorneys while writing this article, and are especially grateful to Kathi L. Ayers, Jeanne M. Corea, William Jacques, and Jeffrey D. Katz for their generous time, expertise, and perspective on the estate-planning process. Any mistakes are the fault of Checkbook’s editors.