Estate Planning: How To Get Started

Unfortunately, most Americans don't have even a simple will. Maybe that's because it's hard to think about what happens to our possessions and money after we die, but it might also be because the number of decisions and amount of paperwork can seem overwhelming. But once you've done the work of making an estate plan, you might find it calming and reassuring to know you've reduced your family's decision-making burden and ensured that your wishes will be honored.

Here are some basic dos and definite don'ts that will save you hassles and money — and help you avoid common mistakes.

The goal is to communicate your end-of-life healthcare wishes and document what possessions you own, who gets them after you die, and set up a trouble-free way to transfer all of it to your heirs or preferred charities, while minimizing payouts to probate courts, attorneys, accountants and Uncle Sam.

Note: This article doesn't provide legal or tax advice. For that, you'll want to contact an estate planning attorney or tax professional.

While some of us can do all our own estate planning, many prefer turning to experts for help. Consumers' Checkbook also offers tips on hiring estate-planning experts.

Start Planning Right Away

Too many people wait until the unexpected happens or they're gravely ill to complete estate planning. It's difficult to prepare documents when you're incapacitated or close to death. Make big decisions when you're of sound body and mind; disabilities or tragedies can cloud judgment and create legal challenges or delays for you and your beneficiaries.

Unless you've made a will or living trust, or assigned beneficiaries to your accounts, your assets will automatically transfer to what the law considers your default heir. If there's any ambiguity about who that is or what you wanted, a judge will have to decide, which can take months — and his or her orders may not reflect your wishes.

If your estate is modest, you don't have complex family dynamics, and your wishes for who gets what are straightforward, you can probably write your own will. Make a list of what you have, state who gets what, provide contingencies in case heirs die before you do — then find two witnesses and sign it all in front of a notary. Templates and services are available from websites like Trust & Will, RocketLawyer.com (free) and LegalZoom.com ($89 for a simple will; $179 for a bundle including a will, living will, and financial power of attorney). Keep in mind that states may have different requirements to make your will a legal document.

Unless your situation is very straightforward, have an experienced lawyer prepare your documents. As Jeffrey D. Katz, an estate-planning attorney practicing in the Washington, D.C., area, observed, "Some lawyers love DIY wills for all the extra fees they generate... The problem with lousy estate planning is no one will know you screwed up until you're dead. Then there's no going back to fix it."

Married? Prepare a Separate Will From Your Spouse

Joint wills can create problems because when the first person in a joint will dies the estate goes through probate, which locks in the terms of the will until the second person dies. Life circumstances can change during those in-between years. The surviving spouse might remarry or have additional children, additional grandkids might be born, and assets come and go. Spouses may separate and have different plans for what happens to their assets when they die. Changing a joint will (say, to add a grandchild) after a death is complicated; changing an individual one for the surviving spouse is very easy.

Not Married but in a Long-Term Partnership? Definitely Prepare Wills

Without a will, there's a big risk of property held in your name being transferred to your relatives, effectively cutting out your partner. You may also consider establishing shared assets as having joint tenancy with rights of survivorship.

Assign Guardianship for Kids

If you don't record a choice for who will raise your kids, then a family court will have to make it. Before locking in your decision, ask the designated guardian for permission, and give him or her time to think it over. Consider naming a backup guardian in case circumstances change. If the guardian doesn't live nearby, specify who will take care of children until they can arrive.

Write a Living Will and Designate a Healthcare Surrogate

Also called an "advance directive," this states the actions you do and don't want medical providers to take if you're incapacitated. Consider asking your family doctor to help write it.

Main points to cover in a living will:

• Conditions of providing artificial life support.
• How long to allow artificial life support.
• Whether and how long to attempt to resuscitate if you stop breathing or your heart stops.
• Whether to use a feeding tube.

Assign someone as your decision-maker through a durable health care power of attorney (also known as a health care agent) in case you can't speak for yourself and complete a medical information release so your treatment and history can be discussed with your health care agent and anyone else you identify.

Check out the free advance directive forms available from the National Hospice and Palliative Care Organization.

Send copies of your living will to your immediate family, doctors and health care agent. Include explanations and the philosophy behind your choices. If you don't want long-term life support, explain why. It will be easier for your family to work with healthcare providers to honor your wishes if they understand them.

Assign a Financial Power of Attorney

Establish who will manage your finances and pay your bills if you can't. Unless you have significant assets or own a business, setting this up should be relatively simple. The website PowerofAttorney.com offers sample forms you can use. Indicate when and how your power of attorney takes effect and dictate whether your designee gets access to your finances right away or only after a specific event, such as a hospitalization or mental incapacity. Upon your death, financial power of attorney ends and your estate's executor takes over.

Designate an Executor

Once you die, someone needs to pay your final expenses, collect money owed to you, file your last income tax return and distribute remaining assets. Your executor can be anyone — an heir, corporate fiduciary, attorney, accountant or friend. Because it's often a big job, pick someone who is task-oriented and good with paperwork. If your executor is not an heir, it's customary to pay him or her. If it's an attorney, your estate will get billed an hourly rate; if not, establish the payment arrangement in your will or leave it up to your heirs.

Make Lists of Assets and Accounts and How To Access Them

Provide copies of your end-of-life documents to loved ones: power of attorney, healthcare surrogate, living will, medical info release and your will or living trust.

Create a roadmap to your major assets and accounts. Also maintain a paper trail to your digital assets and accounts.

Save your lists to a password-protected document and share it with your will's executor, estate attorney, primary heir or close friend.

Keep Beneficiary Information Up to Date

Another common estate planning mistake: If you, years ago, named your spouse as beneficiary of a retirement account or life insurance policy, were later divorced and forgot to update it, your former spouse likely will inherit it. Because retirement accounts and life insurance policies are considered legal contracts, their directives override even your will.

To avoid misdirecting your retirement and insurance policy benefits, be sure to keep your beneficiary information updated.

Be Clear About How Assets Transfer to Your Children

During Consumers' Checkbook's research, estate-planning attorneys repeatedly warned of this all-too-common occurrence: A parent leaves their entire estate to a current spouse or partner, effectively disinheriting children from a previous marriage or relationship. In your will, explicitly state how assets will transfer to family and others.

Set Up Accounts to Immediately Transfer to Heirs Upon Your Death

To avoid delays by probate processes, direct financial institutions and investment firms to make your accounts immediately transfer on death (TOD) to designated heirs or reorganize your accounts so they are titled jointly. (Careful: This may mean your children have access before you die.)

Consider Setting Up a Living Trust

Setting up a living trust can help streamline the process of transferring management of your affairs if you are unable to manage them yourself.

In some states, where the probate process is complex, heirs can wait months to receive assets — and they'll receive less after the estate pays court and legal fees. Setting up a living trust can also help reduce the time that process takes. You control the trust until you die and your heirs — named in the trust — take over, eliminating the need for a probate court to award your stuff to them. As you accumulate property, add it to the trust. Like a will, a trust specifies who gets what or what share each heir inherits. You can revoke a living trust or change your heirs any time.

Because Washington has one of the most simplified probate processes and lowest fees in the country, a living trust isn't as necessary for moving things along. But if you own real estate in other states, or you own a business, a living trust is crucial for avoiding a lengthy probate. It's also wise to create a trust if your heirs won't receive equal shares of your assets. But if all of your assets are in retirement accounts, life insurance, or investment accounts, which don't have to pass through probate, a trust is less necessary; you can just designate beneficiaries for each and they'll get the money quickly.

There are many types of trusts — marital, charitable, testamentary, terminal interest property, generation-skipping, bypass, and more — each with its own benefits and too many to discuss here. Hire an experienced attorney to set one up.

Don't Wait Too Long to Place Your Home in a Trust or Transfer it to Family

It's a good idea to put your home in a trust, especially if more than one person will inherit it. In some states, you'll help them avoid probate delays and costs, and possibly protect the equity from some creditors. But don't wait too long to do this. If you run out of money to pay medical bills or for long-term care, Medicaid will take over and, after you die, initiate an "estate recovery" process to capture your remaining assets for reimbursement. When you put your home in this type of trust, it is typically "irrevocable," meaning the home is no longer your asset but it is an asset of the trust. Some people transfer their homes to trusts or heirs to avoid sacrificing their home equity to Medicaid, but when you transfer your home to a trust, it can trigger a Medicaid ineligibility period of up to five years.

Be Careful About Adding Heirs to Your Home's Deed

To avoid including their homes in the probate process, many families add their adult children to their homes' deeds or transfer them completely. This can also shelter your home equity from Medicaid if you need help paying for medical or long-term care (see above), but you risk losing control of your property. If you convey full or partial ownership of your home, even if you and your kids agree you get to live there, if one of them dies, their part of the ownership could pass to an estranged or in-debt relative or even a stranger. And if someone you add to the deed goes bankrupt or divorces, your home might become ensnared in the resulting legal proceedings.

Another consideration: When someone inherits a home, its value is part of the entire estate, which isn't subject to federal income taxes unless it's worth more than $11.7 million. Inherited assets get a step-up in basis, which readjusts the value of appreciated assets for tax purposes. This means that unless you have a very high-value home, your heirs won't pay capital gains taxes when they sell it; but if you list them on the deed before you die, they will pay capital gains taxes if the home appreciates in value.

Selling Large Assets Late in Life May Trigger High Capital Gains Taxes

If you buy an investment for $20,000 and later sell it for $50,000, you'll pay capital gains taxes on the $30,000 profit. But if you don't sell and your heirs inherit that investment, for tax purposes they get to start from scratch. Their cost basis for the investment will be its value on the date of your death, not the day you bought it, and they can sell the investment for $50,000 and pay nothing in capital gains taxes.

If you need funds to pay for other expenses, be sure to talk to your investment and tax advisors.

Watch Out for Gift Taxes

Few families will ever have to worry about paying gift taxes — the federal tax doesn't kick in until someone gives away more than their lifetime limit, which in 2023 is $12.92 million for individuals and double that for married couples. Give away too much and you pay gift taxes, not the recipients.

The IRS requires that you disclose large gifts (for 2023, it's those larger than $17,000 made by individuals and $34,000 for those made by couples), so it can keep track of large gifts that, over the years, might add up to exceed the lifetime limit and trigger the gift tax.

Some gifts are always excluded from the tax and do not require paperwork. Married couples can transfer wealth to one another. And you can pay anyone's medical or educational costs without worrying about dealing with the IRS or the tax, as long as you directly pay the healthcare provider or school.

Gifts and inheritances might also be taxed by Washington state, which has a tax that kicks in when estates are worth more than about $2.2 million.

Consider Naming Charities as IRA Beneficiaries

While you don't pay income taxes on money you contribute to an IRA (or pay taxes on Roth IRA disbursements), your heirs will pay income tax when they inherit your retirement accounts. But you can avoid giving Uncle Sam a cut by naming a tax-exempt charity as beneficiary.

Don't Make Young Children Direct Beneficiaries

The Uniform Transfers to Minors Act governs inheritances for kids, requiring assets to be deposited into accounts managed by third parties until the beneficiaries reach age 18 or 21. Include in your will or trust instructions to disburse assets to your child's guardian to help pay living and educational costs. But because even at age 21 your child may be too young or inexperienced to manage a lot of money, think about including guidelines for how remaining assets are distributed. A common approach is to have the trust dole out an allowance until each heir reaches his or her middle 20s or 30 but lets them tap more funds sooner for tuition, home purchases, business startup costs, etc., subject to approval by the trust's custodian.

Avoid Leaving Large Lump Sums to Financially Irresponsible Heirs

Since your desire is to help them — not to enable gambling or shoe-shopping binges — consider placing their inheritance into a trust overseen by an independent third party and distributed over many years. As one estate planner told Consumers' Checkbook, "You want them to see Paris, France, not try to be Paris Hilton."

Preplan Your Funeral

Write down your preferences for your funeral arrangements and give them to a likely survivor or file a preference form with a funeral home. You can also plan, in advance, how to cover the costs.

Want to Donate Your Organs? Register With State Licensing Agency

You can arrange to donate part or all of your body to improve the quality of life of others — or offer the gift of life itself. But don't assume this will happen automatically. Hospitals are blocked from harvesting life-saving organs if you haven't officially stated your intent to donate.

To become an organ donor, have your state vehicle licensing agency state your intent on your driver's license. You can also register online with Donate Life America. And inform your family of your wishes.

Get Rid of Extra Stuff

Not to be too cliché, but you really can't take it with you. Do your family a favor and pare down your possessions. You can offload unwanted clothes by reselling them, dump romance novels by donation, or shuttle an entire household's worth of stuff via an estate sale.

State Reasons Behind Your Decisions

It can be a touchy subject to discuss who gets what when you die, especially if you decide to leave more assets to one heir than another, or if you give most or all your assets to charity. Decide whether it makes more sense to inform your family now or have your will speak for you later. Estate attorneys generally recommend setting expectations and eliminating uncertainty early on, which reduces the chances of legal squabbling later.

When discussing these matters, remain calm, positive and sincere. Stress that you've given these matters much thought and that your wishes are what's important.

At the very least, include explanations in your will. For example, spell out that you are leaving one survivor less money than another due to an earlier loan or gift. If you hope kids or grandkids will use part of their inheritance to travel, say so. Your will can be more than just a statement of who gets what, but also an expression of your values and philosophy about how your estate is spent.

Update as Necessary

Births, deaths and divorces happen. People move around. Assets come and go. Don't accidentally disinherit a new grandchild or create the need for a lengthy probate process or legal fight by waiting to update your estate plans.

About Consumers' Checkbook

Puget Sound Consumers' Checkbook and Checkbook.org are a nonprofit organization with a mission to educate and help consumers. Checkbook also evaluates local service providers — home improvement contractors, doctors, dentists, veterinarians, stores and more. It is supported by consumers and takes no money from the companies it evaluates. BECU members can try Consumers' Checkbook for 30 days for free and can get 50% off their annual subscription.

Resources

• Trust & Will estate planning for BECU members
• Consumers' Checkbook estate planning information

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