Estate planning and creating a will both involve an uncomfortable topic – thinking about what will happen to your money when you die – but they are separate concepts. The two terms are often used together, which can be confusing; it can be hard to know which documents are needed for which purpose and which steps are involved.
Let us help you understand these two ideas. Broadly speaking, a will is a specific legal document stipulating exactly how your assets will be distributed on your death and who will care for any dependents. Creating that document is what you may hear referred to as will planning.
So, what exactly does estate planning involve, and how does it differ? Allow us to explain: Estate planning is an umbrella term that covers all aspects of end of life documentation and decision making, which can include a will.
But it goes well beyond just a will. Estate planning allows you to say how you want your assets divided after your death and can help you transfer those assets in the most tax-advantageous way possible for your loved ones. For example, by setting up your assets in a trust, you may be able to help your heirs minimize tax burdens. The trust can also be used while you’re still alive to provide lifetime gifts as well.
End of life documents, including power of attorney and living will forms, are often created as part of the estate planning process. These help ensure that your wishes are followed, even if you are medically incapacitated. (You can also access these as part of will planning; we’ll cover that in a minute.)
Estate planning may sound complicated. Or perhaps you think it’s only for people with seven-figure or higher bank accounts, or properties sprinkled around the globe. Not necessarily! In some cases, it can be done relatively quickly, often using online templates. In other cases, it may be advisable to have an attorney manage the process.
What Is Will Planning?
Writing a will usually refers to a very specific task: A will details where you want your assets to go at your death, and who you would like to serve as guardian of your minor children. If you have pets, it may also spell out who will care for them and how. Additionally, a will names an executor. This is the person you are putting in charge of distributing your assets to the right individuals or charities.
In most cases, you’ll be creating what is called a testamentary will, which is signed in the presence of witnesses. This is often considered a good way to protect your decision against challenges from family members and/or business colleagues after you’re gone. While you can write this kind of will yourself, you may want to have it prepared by an attorney who specializes in trusts and estates, to ensure that it complies with your state’s laws. Or look for an online business that customizes its work to your location.
When you are creating a will, you may look into preparing other related documents that are usually part of estate planning. For example, you may be able to add a power of attorney form and a medical directive or living will.
Together, these documents spell out who can handle matters on your behalf if you were to come mentally or physically incapacitated. If you aren’t planning on pursuing estate planning, these are important documents to complete when creating your will. (Even young people have sudden illnesses and accidents, so these forms are an important part of adulthood.)
Many online will templates provide for these additional documents, so that your bases are covered if the worst were to happen. Creating a legal will can cost anywhere from $0 to hundreds or thousands of dollars, depending on whether you do it yourself or if you work with an attorney.
Even if you die with a will in place, it’s likely that the document will go through probate — the legal process in which an executor to the will is formally named and assets are distributed to the beneficiaries you have named in your will. Yes, there are nightmare stories about the probate process and the word alone is enough to make some people cringe. Don’t get too stressed about it, though. In general, if an executor (an individual appointed to administer the last will and testament of a deceased person) is named in your will and your will is legally valid, the probate process can be relatively streamlined.
What Is Estate Planning?
Estate planning can be the umbrella term for all end-of-life decision making, but it’s more often used to describe your plan for how you want your property divided when you die and the financial implications of those decisions. It can involve creating the following:
• Will/trusts to smooth the transfer of assets/property
• Durable and healthcare power of attorney
• Beneficiary designations
• Guardianship designations
Estate planning aims to make sure that your loved ones receive the maximum proceeds possible from your estate.
Often, estate planning is done with the oversight of an attorney, who can provide strategies for how to minimize tax burdens for your beneficiaries when you die.
As you can see, an estate plan encompasses not only a will, but significantly more end-of-life preparation, with much thought given to protecting your loved one’s financial interests.
Who Needs an Estate Plan?
Because estate planning can be more complex than creating a will, involving vehicles such as trusts, it can be more expensive and time-consuming. But let’s clarify one thing about the word “estate.” It may sound like something that only high net-worth individuals need to worry about, but for the purpose of end-of-life planning, “estate” is simply a term that describes everything you own, from your lucky penny collection all the way up to your investment portfolio.
When people talk about estate planning, they may be referring to the decision to create a trust. Trusts can be especially beneficial for high-net worth individuals who may be worried about tax implications of their heirs inheriting their belongings. But they also have a role in less wealthy families. If your clan has a beloved lake house that you want to stay in the family, for future generations, a trust might be a possibility to investigate.
These arrangements allow a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries and can help avoid the time-consuming process of probate. Trusts may also be beneficial for people who have dependents in their care, as well as those who may worry about how their beneficiaries will spend the money bequeathed to them.
There are two other scenarios in which a trust can be very helpful:
• People with a pet who have a specific plan of how they wish the pet to be cared for after their death. (Pets can’t own property, so leaving money to pets in a will can cause a legal headache. This can be sidestepped by creating a trust for Fluffy’s care.)
• Those who want to minimize ambiguity in who gets what, which could be helpful in the case of people who have had multiple marriages.
The most common type of trust within an estate plan is called a revocable living trust. This may also be called a living trust because, while you are alive, you can name yourself a trustee and have flexibility to make changes. These can often be created online, although an attorney can certainly be involved, guiding the process and answering any questions.
In setting up a trust, you will name a trustee. This is a person in charge of overseeing the trust according to the parameters you state. Unlike a will, where an executor will ensure beneficiaries get the property stated, a trust allows the creator to put guardrails around gifts, and for the trustee to ensure the guardrails are followed.
For example, you can specify in a trust that certain assets do not go to a beneficiary until they reach a certain age or milestone.
Recommended: Does Net Worth Include Home Equity
Taking the Next Step in Will Writing and Estate Planning
There’s a lot of overlap between “creating a will” and “creating an estate plan,” and that ambiguity can lead to difficulty beginning the process. But creating a legal will, including guardianship documents for minor children, can be a good first step. Also, making sure you have power of attorney forms in place and any advanced directives; these can guide decision-making on your behalf if you were ever mentally or physically incapacitated.
Then, you can have peace of mind and can “ladder up” to creating a more complex plan that encompasses more “what ifs.” Estate planning, with the possibility of trusts and transfers, can complete your end of life planning.
Creating a will and an estate plan are two different ways to address your end of life wishes. A will is a document that says who inherits what and how you want minors, dependents, and even pets cared for. It may have additional documents that spell out your wishes if you become incapacitated. An estate plan, however, is a more comprehensive way to spell out the allocation of your assets after you die. It typically includes finding ways to make the process run more smoothly, quickly, and with lower tax payments for your beneficiaries. Starting the process now, whether with online templates or by consulting with an attorney, is important. While no one likes to think about it worst-case scenarios, the sooner you get the paperwork done, the better protected your loved ones will be.
Protecting Your Loved Ones: SoFi and Ladder
Beyond wills and estate planning, another way to care for those dearest to you after you’re gone is with life insurance. Term life insurance can make sure financial needs, from daily expenses to college tuition, are covered. SoFi has partnered with Ladder to bring you affordable and reliable coverage, from $100,000 to $8 million, that’s easily applied for and purchased online. And for qualified applicants seeking under $3 million in coverage, you don’t even need a medical exam!
Photo credit: iStock/AnnaStills
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.