Estate Planning: Five essential steps

Once you’ve created your net worth statement, prepared for the possibility of incapacity, and reviewed your life insurance needs, you need to write or update your will and review the designated beneficiaries on all your investments and insurance policies.

You also need to consider ways to avoid probate, as well as determine if you need any of the different types of trusts. Here are five steps to follow.

Write or update your will. If you die without a valid will your assets will be distributed according to state law, not necessarily according to your wishes.

Some of your property may directly pass to your beneficiaries in other ways, such as through a trust, insurance policy, joint ownership, or a retirement plan. However, any property you don’t leave through these methods is governed by the state intestacy laws.

In fact, if you’re married and have children it’s not safe to assume everything will go to your spouse. That’s because in many states your assets are divided among your spouse and your children, even if your children are minors, with restrictions on how the children’s share can be spent.

Even worse: A court could end up choosing a guardian for your children. And if you die with an outdated will -- say your family situation has changed or you have new family members -- your intended heirs may be left out in the cold.

Furthermore, the intestacy laws in most states make no provisions for those who aren’t related to you by blood, marriage, or adoption. Consequently, you’ll lose out on the chance to leave anything to anyone unrelated to you under the state definition, including stepchildren, unmarried partners, and friends. Likewise, you’ll miss out on the opportunity to leave a bequest to charitable organizations.

Check your designated beneficiaries and how your assets are held. Review your designated beneficiaries on your investments, retirement plans, annuities, and life insurance policies. The designations on these documents supercede your will instructions. So checking that your beneficiaries reflect your current wishes is essential.

Also review the title registrations on all your assets to ensure they meet your current needs and to ensure that your property will be passed to your beneficiaries in the most tax-efficient manner. Some of the ways you can own assets are as sole owners, joint tenants with rights of survivorship, and tenants in common.

Take steps around probate with a few forms. One way to transfer some of your assets directly to your beneficiaries and avoid probate costs and delays is to simply fill out a few forms.

For savings and money market deposit accounts, checking accounts, CDs/share certificates, and Treasury securities, you can complete a pay-on-death form. For brokerage accounts, if allowed in your state, you can complete a transfer-on-death form.

With these designations your beneficiary has no right to the assets in your accounts until your death, so you retain complete control during your lifetime. That means you can make transactions and withdrawals or change the beneficiary anytime before death.

Consider whether trusts should be part of your estate plan. Consult an estate planning attorney about whether any of the different types of trusts may be appropriate for you.

Technically, a trust is a legal relationship in which a person or trust company holds property for the benefit of him or herself or another beneficiary.

Trusts can help you take care of your surviving loved ones, including those with special needs, as well as allow you to exercise some control over how your assets are used after death. Trusts can also help you avoid probate, make charitable gifts, or help manage your affairs if you become disabled. If you have substantial assets setting up certain types of trusts can also help reduce estate taxes.

Keep your plans up-to-date. Tax laws are extremely complex and it’s impossible to predict what the rules will be in the future. So it’s essential to stay informed of new developments. When there are changes, review your plans to make sure they still meet your needs and that they comply with the new federal and state estate tax laws.

If you get married, divorced, have children, move to another state, or experience other significant changes in your life, update your will and other estate planning documents. Likewise, if the executor named in your will or any of your beneficiaries are seriously ill or have passed away, make any necessary changes in your estate plans.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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