Clarity Tax Law

Estate Planning

7 Steps To Basic Estate Planning

Before we discuss the steps to Estate Planning, you must first understand what Estate planning is. This is the process of designating who will receive your assets in the event of your death or incapacitation. Often done with guidance from an attorney, one goal is to ensure heirs and beneficiaries receive assets in a way that manages and minimizes estate taxes, gift taxes and other tax impacts.

Here are the 7 steps you should know of;

1. Inventory your stuff

You may think you don’t have enough to justify estate planning. But once you start looking around, you might be surprised by all the tangible and intangible assets you have.

2. Account for your family’s needs

Once you have a sense of what’s in your estate, think about how to protect the assets and your family after you’re gone.

Ensure you have enough life insurance — If your next question is “How much life insurance do I need?” It depends on factors such as if you’re married and whether your current lifestyle requires dual income. Life insurance may be even more important if you have a child with special needs or college tuition bills.


3. Establish your directives

A complete estate plan includes important legal directives.

A Trust might be appropriate. With a revocable living trust, you can designate portions of your estate to go toward certain things while you’re alive. If you become ill or incapacitated, your selected trustee can take over. Upon your death, the trust assets transfer to your designated beneficiaries, bypassing probate, which is the court process that may otherwise distribute your property. There’s also the option to set up an irrevocable trust, which can’t be changed or revoked by the creator.

4. Review your beneficiaries

Your will and other documents may spell out your wishes, they may not be all-inclusive.

Check your retirement and insurance accounts. Retirement plans and insurance products usually have beneficiary designations that you need to keep track of and update as needed. Those beneficiary designations can outweigh what’s in a will.

Make sure the right people get your stuff. People sometimes forget the beneficiaries they named on policies or accounts established many years ago. If, for example, your ex-spouse is still a beneficiary on your life insurance policy, your current spouse will get the bad news — and none of the policy’s payout — after you’re gone.

5. Note your state’s estate tax laws

Estate planning is often a way to minimize estate and inheritance taxes. But most people won’t pay those taxes.

At the federal level, only very large estates are subject to estate taxes. For 2021, up to $11.07 million of an estate is exempt from federal taxation. In 2022, up to $12.06 million is exempt. What if you have a larger estate that surpasses the federal tax exemption limits? You may want to consider a grantor-retained annuity trust, or GRAT, a type of irrevocable trust that can help reduce the amount of taxes your heirs pay.

Some states have estate taxes. They may levy estate tax on estates valued below the federal government’s exemption amount. (See which states have an estate tax here.)

Some states have inheritance taxes. This means that the people who inherit your money may need to taxes on it. (Learn more about inheritance tax here.)

6. Weigh the value of professional help

Whether you should hire an attorney or estate tax professional to help create your estate plan generally depends on your situation.

If your estate is small and your wishes are simple, an online or packaged will-writing program may be sufficient for your needs. These programs typically account for IRS and state-specific requirements and walk you through writing a will using an interview process about your life, finances and bequests. You can even update your homemade will as necessary.

7. Plan to reassess

Life changes. So should your estate plan.

Revisit your estate plan when your circumstances change, for better or for worse. This may include a marriage or divorce, birth of a child, loss of a loved one, getting a new job or being terminated.

Revisit your estate plan periodically even if your circumstances don’t change. Although your situation may be the same, laws may have changed.

It will take some effort to revise your plan, but take heart. The need to revise means you’ve already avoided the biggest estate planning mistake: never drafting a plan at all.

Originally written by Kay Bell for Nerd Wallet.