Estate planning definitions & checklist
Mention estate planning, and many people assume it’s a financial activity reserved for the wealthy or someone with lots of assets. But an estate plan, even a basic one, is important for everyone regardless of their net worth amount or income level. Why? It can minimize confusion and the costs involved in dealing with your estate after you die, which can ease the stress on your family.
What is an estate?
An estate is the total net worth of an individual at death, which includes all of their personal assets, such as real estate, intellectual property, business equity, stocks, bonds and bank accounts. An estate can continue to grow after a person’s death, such as with artist royalties or investments that continue to accrue interest.
What is estate planning?
Estate planning is an umbrella term that covers many different documents — including wills, trusts, powers of attorney (POA) and beneficiary forms — all intended to determine what happens when you pass away or are unable to make decisions for yourself. While it can be a difficult topic to address, ultimately, it's an important one. Without the road map that an estate plan provides, your assets can wind up in legal limbo for years, putting a burden on your heirs and other family members who are left to deal with sorting out your finances.
What you decide to have people do with your estate is up to you (within legal limits); for example, some people allocate assets to take care of a beloved pet. Besides facilitating the transfer of your assets to those you choose, planning can help minimize income, gift and estate taxes, among other things.
What are wills and trusts?
Several items typically are included in an estate plan, starting with a will or trust. Generally, a will allows you to name heirs to your assets and the amount or percentage to be given to each.
For parents of young children, this is also where you name a guardian to care for them if something happens to both you and the other parent.
Another estate planning document is called a living will. This is different from a last will and testament (though they are commonly confused as the same thing) and is used to define your wishes for end-of-life treatment if you‘re terminally ill. For example, you could define if and when you’d like to be removed from life support.
An estate plan should include both documents: a last will and testament AND a living will.
A trust can be more complex and costly to set up than a will, but it has several pluses. You can avoid probate court with a trust, allowing your beneficiaries to save time and court fees while more quickly accessing the assets you intended them to have. You can create a trust years before you reach an age where you might become incapacitated, too.
What is power of attorney?
A power of attorney is a document that hands over the decision-making responsibilities on your property and finances to a trusted individual. If you ever become incapacitated or are unable to handle your financial affairs, your agent will handle those transactions for you.
You can create a separate power of attorney for healthcare (aka a health care proxy), giving an individual, such as a family member, the authority to make medical decisions on your behalf if you can’t.
What are beneficiary forms?
Another way to avoid probate is by designating an individual on beneficiary forms, which allows accounts to be automatically payable to them upon your death. Accounts can include retirement plans such as a 401(k), life insurance policies and annuities. Many financial institutions allow you to name a successor owner to other financial accounts, such as checking accounts and brokerage accounts, through a payable on death (POD) or transfer on death (TOD) account designation.
Why you may also want life insurance
For anyone who owns a home, has young children or will probably have a large estate tax or debts owed upon their death, owning life insurance can be a wise decision. See how Nationwide can help you find a life insurance policy to lessen your family’s debt burden after you pass.
Getting started
Use our checklist to start or complete your estate plan today:
- Will (last will and testament)
- Life insurance
- Medical POA (power of attorney), aka health care proxy
- Financial POA
- Living will
- Beneficiary designations