Basic Estate Planning Documents

There's no joy in contemplating our own mortality, but if you give forethought and advance planning to the settlement of your estate, you can be reasonably sure it will be distributed the way you want. Estate planning can be depressing for the simple reason that you'll never live to see the fruits of your efforts. But that doesn't mean you should ignore it. Once you get it over and done with, you'll feel at least some comfort in knowing that your heirs aren't going to have to go through the considerable hassle of settling an estate that is bereft of a will and other estate-planning documents. Here are some of the basic matters you need to think about and documents you need to have prepared. If you already have these documents, make sure they're up-to-date. Federal and state laws change, estate tax regulations change, and your own family and financial circumstances change.

There are three basic estate-planning documents:

  • A will. This legal document tells who will manage your estate, who will get your belongings, and who will become guardian of your minor children when you die. Die without a will and the state makes these decisions—often at an added cost to those you love most.
  • Durable power of attorney, which delegates the power to legally handle your business and financial affairs should you become disabled or incapacitated. Without this, no one may be able to access your bank account, securities or any other property in your name without lengthy legal proceedings.
  • Advance directive is a catch all term that refers to health care directives, living wills, health care (medical) powers of attorney, and other personalized directives, all of which let you legally express your preference for continued health care should you later become terminally ill. A health care power of attorney (also called a designation of health care surrogate), names a spouse or trusted relative to make health care decisions for you in case you are physically or mentally incapable of doing so on your own.

Don't try to prepare these important documents yourself. Have an attorney do it. Unless your financial or family situation is unusually convoluted, it won't cost much. There are a lot of mistakes that we make in life that can later be rectified, but if you mess up on your estate-planning documents, even a séance cannot help.

Letter of instructions. A letter of instructions is an informal document that gives your survivors information concerning important financial and personal matters that must be attended to after your demise. You don't need an attorney to prepare it. Although it doesn't carry the legal weight of a will and is in no way a substitute for a will, a letter of instructions clarifies any special requests to be carried out upon death. It also provides essential financial information, thus relieving the family of needless worry and speculation. Just as with other estate planning documents, be sure your loved ones know where your letter of instructions is located.

Other estate planning strategies for the very well off. If you're fortunate enough to be worth a few million dollars, you need to consider ways to cut estate taxes. Although estate taxes are slated to be eliminated, many expect them to be reinstated. Also, many states have estate taxes—some even more onerous than the federal tax.

Here's how federal estate taxes work for married couples: Your spouse inherits your assets estate-tax-free. But once the second spouse dies, assets above a certain level may be taxed. Heirs also may need to pay income taxes on certain retirement accounts after estate taxes have been paid. You'll want an attorney to help you figure out how to cut the impact of taxes on your estate. Common options include making gifts to family members and charities.
Consult an experienced estate planning attorney and insurance agent before you make this move. Professionals also should consider the impact of your estate plan on long-term care decisions.

Spread the word. Make certain loved ones have copies of all important estate planning documents. Periodically review them to make sure they're up to date and laws haven't changed.