What are the Main Steps in Estate Planning? 8 Step Checklist

What are the Main Steps in Estate Planning? 8 Step Checklist

What is Estate Planning?

8 steps to comprehensive estate planning.

Estate planning is more than deciding who gets your stuff. Estate planning is about deciding who gets what, when, how, and how much.

But estate planning is also about protecting yourself, your assets, your decisions, and your rights during your lifetime.  

8 Steps to Comprehensive Estate Planning

1. Inventory Your Estate

The first step to estate planning is to know what you have and what you owe.

You might not think you have enough to plan.  But take a look at what you have and you may be surprised

Write down the description and value of your tangible assets.  Tangible assets are things you can touch and move like:

  • Cars
  • Furniture
  • Collectibles
  • Clothing
  • And other personal property

Then you need to write down the description and value of intangible items like:

  • Cash on hand and in checking, savings, and other accounts
  • Stocks, bonds, and mutual funds
  • Retirement accounts
  • Healthcare savings accounts
  • Business ownership
  • Royalty interests

You may be able to get help in valuing the property by using recent appraisals and financial institution statements.

If you don’t have a fair market valuation of the property, then try to guess how your heirs would value it.  For example, furniture and clothing are usually valued at garage or estate sale prices, not private resale.

2. Examine the Needs of Your Family – Step 2 to Estate Planning

The second step in comprehensive estate planning is to look at the needs of your family.

Your family is going to need money to survive and replace your income.  By looking at the needs of your family, you can protect them from poverty.

Do you have enough life insurance?  Have you sat down with your agent and ran a projection of how much your family will really need or did you guess?  They will have to pay the mortgage, bills, higher education tuition, and more during their life. Is it enough?

Do you have children under 18? You need to be sure to name the person, the guardian, who you want to finish raising your children. You also need to name somebody to be in charge of the money. It doesn’t need to be the same person.

Now that you know the needs of your family and what you have, the third step to estate planning is to create legal documents.

Durable Power of Attorney

These may be the most important documents in your estate plan. These affect you during your lifetime. 

Who is in charge if you aren’t?  Family? Friends? A Judge? The Government?

The foundation of an estate plan is durable powers of attorney. The foundation is a durable power of attorney (for finances and legal matters) and a durable healthcare power of attorney.

A family can’t “get” a Power of Attorney when they suddenly realize that an elderly relative is no longer able to manage their affairs. A power of attorney is something that must be given.

You will lose control of who makes decisions on your behalf if you’re incapable of making your own decisions.  The plan the State has for this is called a “Guardianship.”

You need to think about who you would want to manage your legal, personal, financial, and healthcare affairs if you were unable to for any reason.

  • Protect you and your finances. Without a durable power of attorney, you don’t know who will be appointed to watch over you and your finances.
  • Avoid costly guardianship proceedings. We spoke a minute ago about the cost of guardianship.
  • Save money and protect your estate because you’ve planned in advance. If you don’t have durable powers of attorney, then your family is forced to court.
  • Ensure your wishes are carried out quickly, without the need for a Judge to intervene and interfere.
  • Protect you, your family, and your future.

Choosing the agent or attorney-in-fact for your durable power of attorney is perhaps one of the most important decisions you can make.  Here are some things you should consider:

  • They need to meet the legal requirements in your state
  • They must be ready, willing, and able to act on your behalf and in your best interest
  • Your agent must be able to act in your best interest, not in their best interest
  • This person should be someone you trust to manage your financial, legal, and personal decisions
  • For healthcare, they should know your choices and wishes
  • Knows what is important to you

This is a very important decision. It doesn’t have to be your oldest child because they are oldest. Everybody has strengths, and you should use those strengths.  If your youngest is a financial advisor and your oldest a nurse, then perhaps the youngest should be in charge of finances and the nurse in charge of healthcare.

Healthcare Power of Attorney

A healthcare power of attorney tells the world who you want to make healthcare decisions for you if you are no longer able to.

HIPAA Waiver

Federal law protects your healthcare information.  The law limits the people that it can be shared with, including your spouse. A release tells the healthcare professionals who they can talk to and share information with.

Advance Directive (Living Will)

An advance directive, also known as a living will, tells the doctors if there is no chance of recovery, then you don’t want to be hooked up to machines to keep you artificially alive.

Will or Trust for Asset Distribution and Protection?

Now it is time to consider whether you should have a Last Will and Testament or a Revocable Living Trust at the center of your asset planning.

There are a lot of factors that go into deciding which should be at the center of your plan.

However, for many families, a Last Will and Testament plus some additional asset planning is sufficient to keep assets out of probate.

But, for some families, a Revocable Living Trust is the best.

How do you know which is the best for you?  Consider these factors:

  • Do you have children under 18?
  • Do you have children with special needs?
  • Do you have children receiving means tested government benefits?
  • Do you have children with credit issues?
  • Are you worried about the status of your children’s marriage?
  • Do you have children with addiction issues?

If you answered yes to any of the above, then you should strongly consider a Revocable Living Trust at the center of your asset planning.

Those aren’t the only factors to consider but are some big ones that point to a Revocable Living Trust.

4. Review Your Beneficiaries

The fourth step to a comprehensive estate plan is to review your beneficiary designations.

Every year, financial and insurance representatives have to break the news to spouses that the ex is getting the life insurance.

Your Will and/or Trust may spell out your wishes, but some things pass outside the Will or Trust.

If you don’t set beneficiaries on your accounts, retirement, life insurance, and more then the State’s laws or your Will take over for who gets the asset.  And they will be subject to probate with all the problem probate brings.

  • Life Insurance
  • Retirement Accounts
  • Bank Accounts

5. Take Estate Tax into Account

The firth step in an estate plan is to look at your estate tax liability. Most people don’t have to worry about paying estate tax.

Many states still have estate tax to worry about. (Arkansas does not.)

  • Federal estate tax starts for estates worth more than $11.7 Million (as of 2021).  If your estate is worth less, then no need to work. (NOTE: The Biden administration has already announced they want to change this.)
  • Arkansas does not have estate tax, but some states still do.

6. Don’t Forget About Capital Gains Taxes

The sixth step in an estate plan is to worry about capital gains tax and what it does to your family later.

The often “hidden” tax people don’t consider when doing estate planning.

Too many people put their children on the deeds while still living. What they don’t realize is that this is an immediate gift. Because it is a completed gift, it is subject to gift tax and capital gains tax.

If the house is worth more than $30,000 (in 2021), then a gift tax return will need to be filed.

When you pass, then half the house will go through probate and the other half will be subject to capital gains tax.

An example here is helpful:

Mary has a house worth $250,000.  She puts her son’s name (Mark) on the deed as a co owner. Because there are now two people on the deed, each owns half. Mark’s gift in this case is half of $250,000 or $125,000. Mary needs to file a gift tax return for the $125,000 gift she gave Mark.

Then, later when Mary passes, the house is sold for $300,000. That means Mark gets $150,000 which is more than the $125,000 he received as a gift. He now owes capital gains tax on $25,000.

If Mary had left that as an inheritance, Mark wouldn’t owe capital gains taxes.

7. Look to a Professional

The seventh step to a great estate plan is to get professional help. While estate planning may seem simple, there are too many “gotchas” to be doing this on your own.

Professional help can be invaluable in drawing up your plan.  You can always find forms on the internet, or use a do-it-yourself service, but beware of doing it yourself.

Doing your own planning can lead to hidden mistakes. The forms may not meet state requirements. The forms may not be comprehensive enough to meet your needs.

If you’re a do-it-yourself-er (DIY-er), you might be tempted to “have a go” at creating your own estate plan using tools available online. But simple, the planning process (usually) is not! You’ll have to understand many technical rules and address them skillfully.

Many people are tempted to do this on their own, but DIY planning is full of danger. One mistake can lead to everything being invalidated and you’ll end up in court. Any DIY mistakes are paid for by you and your family. One mistake can lead to the entire plan falling apart, then there is no plan.

And don’t think that an online service protects you. If you read their fine print, they are a document preparation service and waive any liability.

Also, recognize that when you are incapacitated or gone, you don’t get a “do-over.” You can’t monitor the process after the fact. One mistake and everything could be invalidated!

An improperly written plan can be as bad as no plan at all.

8. Plan to Plan – Step by Step Keep Your Estate Plan Up to Date

Finally, the last step in an estate plan is to plan to keep planning.

Estate planning is not a once and done event. Life changes and you need to update your plans to match your life.

You should review your estate plan every 3 to 5 years or when a major life change occurs. Major life events include:

  • Marriage
  • Divorce
  • Birth of a child
  • Death of a child
  • Children’s divorce
  • Death of a spouse
  • Retirement
  • New job
  • And much more…