This article was originally written for and published on Business Insider
Do you have an estate plan? Chances are you don’t, because it’s not something a lot of people even think about let alone go out and establish.
But that’s not true, and it really muddies the waters about what an estate plan actually is and is used for. The reality is that many, many people need to do estate planning — and that could include you.
Skipping this important part of your overall financial plan could put yourself, your assets, or even your family members at risk. Estate planning is designed to protect you and your loved ones.
That’s just one of many other reasons to look into an estate plan — even if you don’t consider yourself ultra-wealthy.
1. An estate plan consists of more than just a will or trust
The two most common pieces of an estate plan are wills and trusts. Wills help explain the instructions you wish your heirs and beneficiaries to follow after you die, and trusts can help enforce those wishes long after you’re no longer here.
But your estate plan isn’t limited to just these two items — and in fact, it probably should include the following, too:
- An advanced healthcare directive or healthcare proxies: These documents stipulate how you would like to be treated in the event that you are still alive, but incapacitated. This could include instructions like a Do Not Resuscitate order.
- Powers of attorney: This is a legal document outlining who could step in and represent you in legal, medical, or financial matters if you were unable to to do so, or unable to make your own decisions for whatever reason due to illness, injury, or simply old age.
Having a complete estate plan doesn’t just protect your heirs or your assets: it protects you, too, even while you’re still alive.
2. Having the right documents in place allows you to avoid probate court
Without a will, your assets, any property, and possessions you own — the sum total of which make up your “estate” — will pass through the probate court system.
This can be very costly for your surviving family members or heirs. More importantly, going through probate opens the door to litigation and disputes (which could further tie up the processing of your estate in the court system, costing even more money).
You don’t want your loved ones fighting over your assets or possessions after you’re gone. A will and the proper trusts as part of your overall estate plan can help prevent this, as it will give more clarity to your heirs about what you truly wanted and allow them to skip probate altogether.
3. The right planning will better protect your children
The other huge issue with probate court? Unless you have a will that establishes guardians for your minor children if something happens to you, that decision will pass to a probate court judge to rule on.
This might be the number-one reason for parents to ensure their estate plan is in place. You can choose guardianship now, and communicate with the person that you would choose to grant custody over your kids to ensure they will accept the responsibility of this role.
That can provide a lot of peace of mind, and, obviously, much-needed protection for your children if you were no longer able to care for them.
Trusts also play a big role in protecting minor children. You can place assets you wish to leave to your kids in a trust, which will be managed by a trustee if you were to die. The trust can stipulate specific rules and uses for the assets within.
Here’s an example of how that could work: You can state that your child’s guardian receives $X from the trust per year to pay for childcare expenses until your child is 18. At that point, perhaps your instructions would change to allowing your child to receive the funds directly but only for specified uses until they’re 25, at which point they can freely access whatever funds are left.
How to start the estate planning process
An estate plan is a vital piece of the protection planning you can do as part of a comprehensive financial planning process. Don’t dismiss it as something that’s not necessary for you.
Estate planning protects not just your assets but also your family, your heirs, and even yourself if you’re alive but incapacitated.
To get started, seek out an estate planning attorney familiar with the laws of your state. Estate laws (and taxes) will vary depending on where you live, so it’s important to work with an attorney who practices in your state of residence.
Ask for quotes from two or three firms, and then speak with each to get a feel for the kind of clients they work with. Ultimately, the best choice for you will likely be a combination of value and expertise in your specific circumstances.
Want more financial advice you can actually use? Check out Beyond Your Hammock, a fee-only financial planning firm that specializes in helping 30- and 40-somethings get clarity and start building wealth.