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What Is an Estate Plan and Do You Need One?

A good estate plan can save you major asset problems down the road. Here's why.
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Everyone has an estate, whether they believe it or not.

A $100,000 home, a beat-up pickup truck, and a bank account with $300 is as much an estate as one with a $5 million home, a fleet of classic cars, and an investment portfolio groaning with millions of dollars.

That's exactly why every American, no matter what his or her financial standing, needs an estate plan that will set the financial rules needed for loved ones to process after your death, exactly as you see fit.

Make no mistake, your estate plan is your legacy - the wishes, gifts, assets, and life instructions you leave behind to the people you care about.

In fact, according to a recent survey from Merrill Lynch, 69% of Americans say, "they most want to be remembered for memories shared with loved ones."

Unfortunately, according to the same study, of Americans age 55 and older, only 55% have wills, and only 18% have the recommended essentials of a will, a healthcare directive or proxy, and a durable power of attorney.

Why You Need an Estate Plan

That's where a good estate plan can help.

An estate plan can help you properly prepare for late-in-life financial arrangements, for you and your loved ones.

That includes directions for any medical issues you may face, as well as establishing financial directives while you're still alive - and after you're dead. That includes plans for your funeral arrangements and for determining who gets your most valued possessions afterward.

That preparation provides the sustained peace of mind you need to live the rest of your life on your terms and ensure that your loved ones are taken care of later. That alone will help assure your legacy, and allow you to move on knowing that you've done everything in your power to care for those you're leaving behind.

The goal is to accomplish this task with the lowest amount of money going to Uncle Sam in the form of taxes and court fees and the highest amount to your family, friends and charitable organization who are included in your will.

What Is Estate Planning? 

An estate plan enables you to establish who receives your assets - all of your money, possessions and other assets - after you die.

That's the broad definition, but there are plenty of moving parts to an estate plan.

Your estate, in total, includes the following assets:

Property. Any real estate you own, including your own primary home, any vacation homes you own, or any properties you own and rent out.

Bank accounts. Any cash in the bank accounts you own.

Stocks, bonds, funds and other investments. Your primary investment portfolio, your retirement fund, and any other financial investments you own.

Insurance policies. Any insurance policies you own, including life insurance, long-term care insurance and annuities.

Your personal possessions. Any personal possessions, such as vehicles, collectibles, gold and other valuable metals - even season tickets to major league baseball or other sports.

How does an estate plan help you share your wealth on your terms?

In a word or so, plenty of ways. In fact, a good estate plan can provide you the following benefits:

  •  It can point out the loved ones (i.e., family, friends and others) you wish to care for after you die.
  •  It can make sure your family home - or any possession or assets - will go to the ones that you designate as your beneficiaries, as fast as possible and with no legal entanglements.
  •  It can curb the tax burden that often comes with the handling of the transfer of possessions after someone dies.
  •  It can avoid probate, which can delay the transfer of your assets and possessions after you're gone.
  •  It can provide specific direction on the quality and quantity of medical care you may need to prolong your life if you're unable to do so when that time comes.
  •  It can establish the funeral arrangements you desire and how any of those funeral expenses should be paid out.
  •  It can help fund your favorite charity, which can benefit from your largesse long after you're gone.

These Are Your Most Important Estate Planning Tools

There is a wide variety of estate planning tools and documents available to you and your professional partners (think accountants, estate planning attorneys, and financial advisers) to master your estate planning strategy.

These are the tools you'll need the most:

A Will

In its most basic form, a will is a legal document that allows you to establish who gets your assets after you're gone.

By and large, if you don't own a lot of assets aside from your home and savings, a will is an effective legal tool to control where your assets go and when. A will doesn't cost much (under $100 in many cases) making it a great estate planning document at a low cost.

A Living Trust 

The main difference between a will and a living trust is that a will takes effect after one dies while a living trust takes immediate effect once the trust owner signs on the dotted line.

A living trust can be very useful as an estate planning tool while still alive. It allows you to control how your assets are managed and distributed in the event you're incapacitated or disabled and are unable to express how you want your estate handled.

The main advantage of a living trust is that it avoids probate court, allowing your assets to be distributed per your wishes without any government involvement. That saves money, too. In many states, probate costs can amount to 5% or more of one's entire estate value.

Cost-wise, a living trust can be drawn up for as little as $1,000 for individuals and for as little as $1,200 for married couples.

A Durable Power of Attorney

This estate planning tool allows an individual to designate someone to act on his or her behalf when needed. A durable power of attorney can be triggered the minute the document is signed or can be delayed until it kicks in when the document owner is incapacitated or unable to make key financial decisions.

In that event, the durable power of attorney designates the person assigned the task in the agreement to take over any critical life and finance decisions.

A "Prenup"

For high net-worth Americans with plenty of assets, or who have been married before and suffered financially, a prenuptial agreement is a useful way to hold on to your assets so you have sole control over them in an estate plan.

A Health Care Proxy 

This handy estate planning tool is similar to a durable power of attorney, but for medical issues.

A health care proxy designates a close relative or friend, or anyone you trust, to make critical decisions for you regarding any medical care you receive in the event you can't make those health care decisions on your own.

That's an insurance policy that your medical care directives are followed, even if it's not you calling the shots.

Key Questions to Ask Before You Decide on an Estate-Planning Professional

Chances are you'll need the services of a qualified estate planning professional. That could mean, for example, an estate-planning attorney, accountant or registered investment adviser.

Before you sign on the dotted line, ask these key questions first.

What Is Your Experience in the Estate Planning Market?

No offense to younger financial and legal professionals, but ideally you want someone with 10 or more years of experience handling complex estate planning and estate trust issues.

An estate planning professional who fits that bill has likely seen it all and has learned from earlier estate planning mistakes. That is to your benefit.

Do You Specialize in Estate Planning or Is It Another Service You Offer?

This is especially helpful if you're looking to hire an estate planning attorney, who likely will help you with the bulk of your estate and trust needs.

The reason you ask this question is that you really want a financial professional who is an expert in the estate planning field. After all, you wouldn't want a bone specialist to operate on your eye or have a mortgage lender do your taxes.

The same goes for estate planning needs - only hire a specialist.

Do You Offer Referrals?

You'll want to hear from other clients when vetting your estate planning professional - they can offer (hopefully) an objective analysis of their experience with the estate planner, and how responsive, efficient and knowledgeable their estate planner was on their behalf.

(Both Yelp and Avvo offer nationwide reviews of estate planners - even ones near you.)

How Do You Price Your Estate Planning Services?

Obviously, the cost is an issue with any estate planning professional and you'll not only want to know how much you'll be charged, but you'll also want to know how you'll be charged.

That could mean a fixed rate, an hourly rate, or a discount if you refer other clients to the estate planner's practice. Don't sign off on an estate planning deal until you know what it will cost and what pricing model your planner uses.

How Long Will It Take to Get the Job Done?

Time is a commodity, too, and you'll need to know how long it will take for your estate planning specialist to set up and execute your estate plan.

There's likely no rush, but any foot-dragging on your plan is a red flag, so it helps to know upfront a reasonable time frame to deliver a good estate plan to you, and within budget.