What is estate planning? Understanding how it can protect your loved ones and your most important assets

There’s no way to anticipate when we’ll go, but that difficult time can be made easier on our friends and family by having a plan in place that tells them exactly how to manage any money or assets we’ve left behind. 

What is estate planning?  

Think of an estate plan as your final instructions for how to manage important decisions about your finances, health, and more. 

“Estate planning is a collection of legal documents that details your final wishes about your assets, healthcare decisions, and finances—where you create an estate plan and keep it up-to-date,” says Jenny Xia Spradling, Co-CEO of FreeWill, an online platform that offers free estate planning tools. “It governs the assets you own, your future care, and the legacy you leave for people and for causes you care about. It’s important because it simplifies the probate process, which can be lengthy and costly for your loved ones, it can help you set aside funds and guardians for minors and for pets, it helps avoid conflict between your loved ones over your assets, and it helps you leave an impact via charity.” 

Your estate plan should leave clear instructions for the following: 

• Personal identification documents: Proof of identity documents, such as your license, passport, and Social Security card.
• Last will and testament: This tells your family and loved ones how you wish for your wealth and assets to be distributed.
• Revocable living trust: A legal document that gives someone of your choosing the authority to make decisions about money or property being held in a trust. 
• Beneficiary designations: This is the person or persons who will inherit your assets in the event of your passing. This could include any funds held in your life insurance policy, retirement accounts, brokerage accounts, etc.
• Advance healthcare directive: Legal documents that provide clear instructions for your medical care if you cannot communicate your own wishes.
• Financial power of attorney: This document appoints someone to manage your finances for you.
• Deeds or titles: Your estate plan should include any deeds or titles for your properties and assets.
• Funeral instructions and wishes: If you have any specific wishes for your funeral that you would like your loved ones to carry out, be sure to include detailed instructions in your estate plan.

Most Americans don’t have a plan in place  

A common misconception is that estate plans are for the ultra-wealthy, but this is simply not true. Your loved ones will need to know what to do with any assets or money you leave behind, no matter the size or value. 

It’s projected that more than $80 trillion will be passed down from today’s older generations to their children and other heirs over the next two decades, but most Americans don’t have a clear plan in place for their assets. 

A 2022 survey by Caring.com found that only 33% of Americans have a living will or trust, and one in three Americans who have no will or living trust claim they don’t have enough assets to leave behind. And the outlook is even worse for people of color. 

According to a 2022 Consumer Reports survey, 61% of white Americans and 67% of English-speaking Asians don’t have a will. When looking at other groups, the survey found that 77% of Black people and 82% of Hispanic people don’t have a will. 

“If you don’t plan ahead, you run the risk of either dying without a will or estate plan in place—or you might be scrambling to do so after you’re in physical and/or mental decline and might prefer spending quality time with the people you love. This all runs the risk of it being unclear while you’re alive who makes healthcare and financial decisions on your behalf if you become incapacitated, what your wishes are for your body after you pass away, and who receives your assets,” says Spradling. “When there’s familial disagreement over who receives certain assets, that can lead to discord over your estate that can turn ugly and costly, and is probably not what you ever intended.” 

4 pointers to keep in mind as you make your estate plan 

As you’re working on creating your estate plan, you’ll want to keep the following in mind to ensure that the process is smooth and seamless. 

1. Don’t be afraid to seek help from a professional if it makes sense for your situation. Depending on the size of your estate, the number of assets, or your family dynamic, you might find it helpful to work with a licensed estate planning attorney. “Anyone who has a complex estate that consists of complex trusts, or children with special needs, should turn to a lawyer,” says Spradling. Hiring an attorney will come with added costs, but it will also give you the peace of mind that there will be no stones left unturned and all of your assets will be properly distributed. 
2. Take advantage of free resources online. If you anticipate that your plan will be less complex and perhaps you have a smaller estate, you could take advantage of free planning websites online that offer easy-to-follow templates for your estate planning documents. 
3. Be sure that you distribute copies of your estate plan. Your attorney should have a copy of your estate plan, as well as any family members you wish to share it with that may be included in your estate plan like your beneficiaries or the executor of your estate—although it isn’t necessary to share it with all of your loved ones in advance. 
4. Update your plan as your circumstances or wishes change. Depending on when you create your estate plan, you can likely anticipate that some of your circumstances will change. That’s why it’s important to update your estate plan periodically. “One of the biggest mistakes of not updating an estate plan is that families themselves change. Many relationships don’t work out, and a common issue is that an out-of-date estate plan leads to a windfall for an estranged spouse,” says Spradling. “There can also be additional children born into a family that you wouldn’t want to overlook. Lastly, pets live shorter lives than humans, so there can often be changes that occur over time regarding who your pet is, how old they are and how much you should set aside in your pet trust for their care.” 

The takeaway 

For some, making an estate plan can feel complex and emotionally heavy, but taking the time to set clear instructions now can make it easier on your loved ones later. It also protects your legacy and ensures a smooth transfer of wealth from one generation to the next.