Basic Estate Planning: Tools Everyone Needs to Know

Estate planning is essentially a set of tools that use the exceptions in the inheritance, probate, and tax process to give you more control over the outcome of your estate. In this series, we’ll cover these key tools, from the basics that everyone should have in place, into more sophisticated options for tax planning and complex situations.

Let’s start with the basic tools that cover your needs, regardless of your family or wealth situation:

• A will. A will is a document that outlines specific distribution of your assets according to your wishes. In this document, you also typically name an estate executor or representative, the person you wish to oversee your estate’s resolution.
• Power of attorney (POA). A POA appoints someone to act on your behalf in legal or financial matters. It’s primarily a tool to protect you while living, in case you need a trusted person to make decisions in your interest, if you are incapacitated.
• Medical POA. This document, also referred to as a living will, healthcare directive, or health proxy, appoints someone you trust to make medical decisions on your behalf if needed.
• Designated beneficiaries. Some assets are not subject to probate court, including those that have designated beneficiaries—specifically retirement plan assets like 401(k)s and life insurance policies. Your designated beneficiary entries even supersede your will, legally.

If you have dependents, two other basic tools will provide security for their needs:

• Appointing a guardian. You should appoint a legal guardian to care for your children. You’ll include it as an additional clause in your will.
• Life insurance to provide for dependents. The primary role of life insurance is to receive a payout upon your death to provide financially for your children or other dependents. However, as we’ll detail in the next section, Life Insurance as an Estate Planning Tool, life insurance policies can be very flexible planning tools for other purposes as well.
• How much life insurance do I need? The amount of life insurance you need to provide for dependents is particular to your situation; you’ll want to strike a balance between the expense of policy premiums today versus the size of the benefit upon death.