No one loves to think about what happens after they’re gone. But if you’ve ever had to clean up the financial mess of a loved one who passed without a plan, you know how overwhelming and painful it can be. With a well-thought-out estate plan, you can spare your family that stress.
Here’s everything you need to know about creating an estate plan, as well as common mistakes to avoid.
If Money’s Heavy on Your Mind…
We all know the state of our finances can significantly impact our well-being. Are you struggling to cope with financial stress? First, take a deep breath.
Then, take a look at our roundup of resources to help you manage your stress and your money. You got this.
What Is an Estate Plan?
Estate planning is the process of determining how you want your assets to be handled when you’re no longer alive to make financial decisions. An estate plan typically starts with a will or living trust.
A will describes how you would like your assets to be distributed after your death. However, your assets may still go through your state’s probate court before they’re distributed to your intended beneficiaries. In other words, a will provides your instructions, but it doesn’t avoid probate. A probate is the process of proving that a will is valid and confirming who has the authority to administer the estate of the person who passed away.
For these reasons, a revocable living trust is preferred by many estate planning professionals, including Evan H. Farr, Certified Elder Law Attorney and Principal Attorney at Farr Law Firm, who suggests using a living trust as a primary estate planning tool. It allows you to bypass probate.
“People think they need wills, whereas in reality, a last will and testament is a ticket to probate. Once you understand the nightmare of probate, you always want to avoid it,” he said. “Trusts are what is important to avoid probate and make everything simpler after death.”
How to Create an Estate Plan
Many financial advisors recommend creating an estate plan once you become a legal adult. So if you don’t already have one, this is your sign to set one up.
Here’s a quick breakdown of how to create an estate plan and simplify it for your heirs.
- Take inventory of your assets: List everything you own, such as bank accounts, investments, real estate, vehicles, personal valuables, and digital assets like crypto or online accounts.
- Choose your beneficiaries: A beneficiary is anyone you name in your estate plan who will have the right to receive your inheritance. Make sure to update the beneficiaries on your retirement accounts, life insurance policies and payable-on-death (POD) accounts, because these typically override your will.
- Write a will: This document names your beneficiaries, designates a guardian for minor children and appoints an executor to carry out your wishes.
- Consider setting up a trust: A revocable living trust allows your assets to skip probate, remain private and be distributed more efficiently.
- Assign power of attorney: Choose someone you trust to handle financial decisions if you can’t.
- Organize your documents: Store everything in a secure place and let your loved ones know where to find them.
If your estate planning and family situation are complicated, consider hiring an estate planning attorney to help you formulate or review your estate plan.
Drowning in Expenses?
Maybe you’re scrambling after your car broke down. Or you got a medical bill you weren’t expecting. Or inflation has finally pushed your budget over the edge. Take a breath. You don’t need to go it alone.
When money is tight, these resources can help you manage unexpected expenses without stress.
Common Estate Planning Mistakes to Avoid
These are some common mistakes people make when estate planning.
1. Not Updating Their Estate Plan
Estate plans are living, breathing documents that require routine maintenance. “Without regular updates to account for births, deaths, marriages, divorces, business changes, or other major life events, they might contain incorrect or incomplete details once they’re actually needed,” said Jennifer L. Zegel, Estate Planning Attorney and Chief Product Officer at Eternal Me.
She said outdated estate plans could create barriers for heirs to access or manage the assets effectively. For example, if you acquire new assets that aren’t reflected in the estate plan, these unaccounted-for assets will create disputes and needlessly drag out the estate distribution process.
2. Over Relying on DIY Documents and Self-Service Technology
A lot of people these days are using estate planning software or even AI assistants to help them create their estate plans. Though this can sometimes work, it can be risky if used incorrectly.
“The notion that a client can simply feed their information to an AI assistant and come away with a flawless estate plan is as misleading as it is dangerous,” Zegel said. “I’ve seen real-world cases where a client’s digital asset wishes conflicted with instructions in a living will because an attorney wasn’t aware the client had set wishes separate from the living will.”
She said if an attorney isn’t prompted to review a client’s work, they’re leaving the door open for a slew of costly errors that could needlessly complicate administration or render parts of their estate plan invalid. “Every self-service platform, whether it’s AI-powered or not, should require attorney review prior to completion of a client’s estate plan. If you’re not using such a platform, you should seek out a professional advisor,” she urged.
Ben Michael, attorney at Michael & Associates, agrees. “The thing about estate planning is that it is inherently individualistic. No two estates look the same, and no two people have the same familial circumstances,” he said. “So, estate planning software often just does not provide the kind of individual customization needed. That’s why working directly with an estate planning attorney is so helpful.”
3. Not Planning for Digital Assets
We live a huge part of our lives online, but most people forget to include digital assets in their estate plan.
“Neglecting digital assets, such as crypto, online banking, intellectual property, social media, email, cloud storage, and so on, is one of the absolute costliest estate planning mistakes,” Zegel said. “This can create nightmare scenarios for executors and beneficiaries.”
Despite what a lot of people think, simply adding a generic clause about ‘digital assets’ to an estate plan won’t cut it. “Digital assets need careful, specialized planning and the right technology to ensure they’re securely transferred and preserved, and when necessary, deleted,” Zegel explained.
So, make sure you have a detailed inventory of your digital assets and store your login credentials in a secure password manager that can be shared with your executor or trustee. To avoid any issues down the line, you may want to consult an estate planning attorney to make sure your digital assets are handled exactly as you intended.
Give Your Loved Ones Peace of Mind
Having a detailed estate plan gives your loved ones clarity, peace of mind and the freedom to focus on healing without dealing with unnecessary stress. If you haven’t already, set up an estate plan so your loved ones won’t have to guess what you would’ve wanted or fight over how things should be handled.
Need a Hand With Bills?
Listen, we know it’s tough out there. But there’s no shame in asking for help.
These companies make it easy to help yourself and your bank account.
Jamela Adam is a personal finance writer covering topics such as savings, investing, mortgages, student loans and more. Her work has appeared in Forbes Advisor, Chime, U.S. News & World Report, RateGenius and GOBankingRates, among other publications.