What is estate planning?

Estate planning is the process of deciding what will happen to your assets after you die or become incapacitated. Through legal documents like wills, trusts and powers of attorney, an estate plan outlines your wishes to help ensure they are carried out. Without estate planning, the government determines what happens to your assets through a process called probate. 

What you’ll learn:

• An estate plan includes instructions for distributing your assets, paying off your debts and caring for your dependents. 

• If you die without an estate plan or a will, then state laws will dictate what happens to your property and who gets custody of your children.

• The basic parts of an estate plan involve listing your assets, choosing beneficiaries and writing a will. You’ll also need to appoint an executor to carry out your plan.

Estate planning can cover physical assets like property and vehicles, decisions related to your health, retirement accounts, life insurance and even instructions for your social media accounts. Here are some of the documents that may be included:

• Last will and testament: This legal document explains what should happen to your possessions and assets when you die. If you have dependents, it can also include instructions regarding their interests.

• Trust documents: A trust is a legal entity that can hold assets for a third party. They can be used to minimize taxes and avoid probate.

• Powers of attorney: A power of attorney document gives someone else legal authorization to make decisions on your behalf. You can have different types—for example, a medical and a financial power of attorney.

• Living will: This legal document makes clear your medical preferences should you become unable to communicate. It can include scenarios like resuscitation, ventilation, dialysis, etc.

Estate planning is important because it helps ensure your assets, finances, healthcare decisions and personal affairs are handled according to your wishes. A well-crafted estate plan can protect your loved ones, reduce legal complications, minimize tax burdens and provide peace of mind.

Without an estate plan, your estate may be subject to probate, a process supervised by the court, which can be expensive as well as financially and emotionally draining. State laws will determine how your assets are distributed, which may not align with your wishes. The absence of clear instructions can also create confusion and increase the likelihood of disputes among family members over issues like inheritance and guardianship.

To properly create an estate plan, you’ll need to take inventory of your assets and debts, choose your beneficiaries and an executor of your estate, draft the legal documents and share the plan. Here’s a checklist for the estate planning process.

The first step in estate planning is creating an inventory of your assets and any debts you owe.

Assets are things you own that have value, such as property, vehicles and collectibles. They also include bank accounts, investment and retirement accounts, and life insurance policies. Debts include any liabilities you have outstanding, such as a home loan or a credit card with a balance.

An inventory of your assets and debts allows you to decide what you want to do with each item.

A beneficiary is any person or entity that will inherit your assets. For example, your beneficiaries may include your family members, friends and charitable institutions. You should name a beneficiary for any financial assets you own, such as bank accounts, 401(k) accounts and life insurance policies.

Your executor is the person who’s in charge of your estate, so they carry out the instructions in your will. For example, the executor may distribute assets to beneficiaries, pay off creditors, issue notices of death and file your final tax returns.

Choose a responsible person you trust—such as a spouse, a child, a sibling or a close friend—to act as your executor. It’s also a good idea to name at least one backup executor in case your executor can’t carry out their duties.

By preparing a will and other legal documents, you give the executor of your estate the authority they need to distribute your assets according to your wishes. Documents to consider preparing include:

• Will
• Trust
• Power of attorney
• Advance directives

You may choose to have a legal professional assist you at this stage.

Once you’ve written your will and filed any legal directives, you should store these documents in a safe place. For instance, you might keep the original copies in a fireproof box in your home or inside a desk. Label the file to make it clear what the documents are, and tell someone where they are stored.

Here’s a list of what you might choose to file away:

• Your will and legal directives

• Statements for insurance policies, such as life insurance, homeowners insurance and disability insurance

• Statements for financial accounts, such as savings accounts, checking accounts, investments and retirement accounts

• Documents that prove ownership, such as car titles, property records and deeds

• Statements for any debts, such as credit cards, loans and mortgages 

• A document that includes information about how to access all your accounts, such as where the account is held, the account number and any login details

As your life changes, so should your estate plan. It’s a good idea to regularly review your estate plan to ensure your accounts have the right beneficiaries and your will reflects your wishes. Look through your plan annually and during big life events, such as marriage, the birth of a child, the purchase or sale of a home, divorce or the loss of a loved one.

Creating your estate plan now can ensure your belongings go to the right place after you pass away. Anyone with children, pets or assets can benefit from creating one of these plans. Depending on the complexity of your estate, you may decide to hire an attorney or use online services that walk you through the process.

Losing a loved one can be emotionally challenging, but the logistics of sorting out their finances don’t always have to be. Check out Capital One’s guide to handling financial matters after a death in the family.