Step 1: Begin with a Healthy Perspective: Estate planning is as much for you as it is for the people you leave behind.
No matter your net worth, it's important to have a basic estate plan in place. Such a plan ensures that your family and financial goals are met after you die.
An estate plan has several elements including a will; a power of attorney; and a living will or health-care proxy (medical power of attorney). For many people, a trust may also make sense.
If you're retired or nearing retirement, the first and most important consideration of your estate plan should be to make sure you have enough assets to last your retirement and to live the life you've planned on living.
If you're younger with minor children, one of the most important decisions you'll ever make is who would take care of your children if the unthinkable happened to you. And how would the money you left for them be managed?
Step 2: Calculate your Gross Estate
Your gross estate is the total value of all your assets. This includes real estate such as your homes and recreational properties; your business interests; your life insurance death benefits; your retirement savings; your brokerage and bank accounts; and other valuables like household furnishings, collections, art, jewelry, etc.
Calculating your gross estate is easy, and it's the first concrete step to take. It doesn't have to be calculated to the penny, but take just a moment and get a close approximation. Just round to the nearest $10,000 – these values fluctuate with time anyway.
Be sure to include your residence, other real estate, business values, Retirement plan values, brokerage and investment values, life insurance death benefits and a rough estimate of the value of all your household items and collectibles.
Step 3: Evaluate Your Tax Situation: Is your estate taxable, or likely to become taxable?
Estate taxes are no longer the great unknown. Right now (2014), there's an exemption in place for the first $5+ Million or so in assets you own. That means you can give away – to anyone in the world – $5+ Million in assets without paying federal estate tax. (Be careful - your state laws may alter this number). As we've seen in the past though, it doesn't take much to raise your taxes.
Look at what you calculated in Step 2. What is your estate value? Remember, your estate consists of everything you own, even life insurance. If you are approaching $5 Million in total assets, you have an estate tax issue that needs to be addressed. If you aren't approaching $5 Million in assets, your estate planning just got simpler. No less important, but simpler.
Step 4: Evaluate Your Family Situation: Harmonize your estate plan with the realities of your family dynamic.
What you're trying to do here is determine the level of planning you need when you consider your family situation. Let me ask you a few sensitive questions:
� Is yours a "blended" family with step-children?
� Are there addictions or gambling problems among your children?
� If they're married, are your children's marriages solid and are their spouses trustworthy?
� If you have minor children at home, who would take care of them if you aren't around?
� Do your children get along, and can they rationally discuss money issues among themselves?
� Are there any special needs situations in your family with children receiving or likely to receive government benefits?
If any of these situations apply to you, there are specific techniques that can prevent inheritances from falling prey to divorce, family infighting, government confiscation, or spendthrift tendencies.
If none of these situations apply, then of course things are simpler. But regardless, I would still caution you to plan for clear and concise instructions in place, keeping in mind the truism, "Good fences make good neighbors." In other words, help prevent problems and misunderstandings by being clear to your children. Don't leave anything to argue about. This is a decade of estate planning experience talking. I have seen firsthand the result of good people making poor choices when it comes to money and relationships.
Step 5: Will or Trust? Decide on a planning vehicle and resolve to get it in place.
Revocable trusts are particularly well suited for solving tax and family estate planning problems. However, they are not the only solution. A will can be just as effective. However, in order to solve most of the problems we've identified with taxes and family concerns, a will needs to use a trust structure. In short, if you want to prevent a child from blowing their inheritance, or the government from taking more tax than necessary, you have to use a trust, either inside a will or outside of one.
I'll be blunt: Revocable trusts are by far the preferred choice of estate planning vehicle, and they aren't just for the wealthy. Even if your estate will never be taxable, and even if you have the perfect family, a revocable trust is easier to manage and easier to settle than a will. It provides complete privacy and autonomy within the family. It is managed outside of any court oversight. Done right, it will never be a part of the public record like a will.
A will is most appropriate for small estates with no real property and total values of under $100,000. For anything else, it's hard to envision a situation where a will is more suitable than a revocable family trust.
You may need guidance here – talk to an estate planning professional about your situation and get his or her opinion.
Step 6: Consider Your Retirement Savings Plan : Look at your IRA or 401(k) beneficiary and make sure it is correctly worded
One of your largest assets could very well be your IRA or 401(k). These require special tax and inheritance considerations.
Generally speaking, you want to make sure your retirement savings are not left to your family trust. The best course of action, assuming there are no major problems with your children and their ability to handle money, is to name your spouse as primary beneficiary and your children as co-equal secondary beneficiaries. The beneficiary language you use is critical here. Using the wrong language can result in unfortunate and unnecessary taxation of your retirement asset.
If you are what I call a "Traditional Married Couple" – that is, legally married to only ever one spouse with children only from this marriage, you have powerful estate planning options that other couples don't have. The realities of tax policy favor people who can trust their spouse to only favor their children, not others. You should definitely call me for more details about this.
Step 7: Seek Professional Guidance "Do-it-Yourself" solutions are fine for those with few assets. But if you're concerned about making the right choices for your family, there's no substituting for experience.
Technology is wonderful, but it can create a false sense of security. Just because you can sink your retirement savings in an online brokerage account filled with penny stocks doesn't mean you should. Likewise, just because you can find a form online that says it's a living trust doesn't mean that form will help your family.
I don't believe much in the adage, "Learn from your mistakes." Of course, if you're going to make a mistake, by all means learn from it, but I much prefer the idea of learning from other people's mistakes.
Think about it: how many trusts will you draft in your lifetime? How many different situations will you face while drafting those documents? Can you afford to learn from your own mistakes with something as important as estate planning? I've drafted hundreds of estate plans and seen the decisions of hundreds of families. There really is no substitute for experience.
And be careful that you talk with someone who really knows estate planning. There are lots of lawyers who will draft a will or trust (or two) each year in between their divorce trials, personal injury settlements and business deals, but do these lawyers really know everything they need to know to protect you and your family? Do yourself a favor and get help from someone whose professional focus is on estate planning.