What Is Estate Planning? Wills, Trusts, POA, and More

When thinking about your future, estate planning should be top of mind. An estate plan can help protect your finances—and your family—should you die or become unable to manage your affairs. 

Failing to have an estate plan means your money, possessions, and even guardianship of your minor children could get tied up in the legal system while fees and court costs eat away at your finances. Everyone—regardless of age, wealth, and family situation—can benefit from some degree of estate planning, and having a plan in place can help ensure your goals and wishes are carried out.

Estate planning is the process of determining how you want your assets handled when you're no longer capable of making financial decisions—either from death or incapacity. An estate plan also allows you to communicate medical requests, such as a do-not-resuscitate order or end-of-life care, to lessen the burden on your loved ones if you become ill or hospitalized. Estate planning often involves putting together everything from a will and a health care directive to purchasing adequate life insurance, naming guardians for minor children or heirs with disabilities, and figuring out who will inherit your property and money.

Ahead, we'll cover:

• Five foundational estate planning documents
• Naming your beneficiaries
• Consider giving now
• When to review your estate plan
• How to choose an estate planning attorney

These foundational estate planning documents can provide you with a sense of choice, clarity, and control over your future affairs:

1. Durable power of attorney
2. Advance directives
3. Will
4. Revocable trust (if applicable)
5. "I love you letter" to your family

The first four are legal documents. Without them, your wishes lack legal force and may be superseded by state law. The "I love you letter" to your family, although not legally binding, provides a roadmap to help them navigate your finances and fulfill your requests.

A durable power of attorney (DPOA) gives a person of your choice (known as your agent) the ability to manage your financial affairs. They can pay your ongoing expenses, manage your investments, file your taxes, make gifts, and collect any benefits such as Social Security or disability.

Your agent should be someone you trust and who is familiar with your financial situation, your perspectives, and, ideally, your financial advisors. The amount of power you give them can be as expansive or as limited as you want. Generally, a DPOA terminates at your death or at divorce (if your agent is your spouse). After your passing, the executor of your estate manages and settles your finances. If you had a revocable trust in place before your death, your named successor trustee will manage and distribute (if applicable) the assets of the trust following your death.

Consider introducing your agent to your financial advisors in advance, so they can get to work quickly in an emergency. Also, find out whether your financial institutions (banks, brokerage firms, etc.) require their own durable power of attorney document and complete them if necessary.

While a DPOA focuses on your finances, an advance directive covers your health care. There are three types of advance directives:

• Healthcare proxy
• Living will
• Do-not-resuscitate (DNR) order

Depending on your individual circumstances and where you live, you may need one, two, or all three documents. Some states don't recognize advance directives filed elsewhere, so if you spend significant time in more than one state, consider completing advance directives for each. (You can find more information and advance directive forms for each state at CaringInfo.org.)

Also known as a medical power of attorney or durable power of attorney for healthcare, a healthcare proxy lets you appoint an agent to make medical decisions on your behalf. Like with a DPOA, you can limit or expand the powers you give your agent.

Because these decisions can be matters of life and death, your agent should be someone you trust to follow your instructions. Take time going through various what-if scenarios with them so they fully understand your perspective. Then share the details of that conversation with close family members so nobody is surprised later by your instructions.

With a healthcare proxy, your agent speaks for you; with a living will, you speak for yourself through the document. A living will provides a way for you to state the type and level of medical intervention you do—and do not—want to keep you alive, such as the use of ventilators, artificial feeding, and dialysis. Most states only allow a living will to take effect if you're terminally ill or seriously injured, so it's wise to discuss with loved ones the procedures and treatments you're willing to receive should you become incapacitated.

In most states, the agent of a healthcare proxy must follow the directions outlined in a living will. For example, if your living will states that you don't want to be put on a ventilator, your agent is obligated to abide by that.

This document tells medical personnel not to perform CPR if you go into cardiac arrest. Depending on your situation, you may choose to display your DNR order at home to alert emergency medical professionals. Typically, when you're admitted to a hospital, you'll have the opportunity to complete a DNR if you don't have one already.

A will specifies who inherits your assets after you die. If you have a will, your estate will go through a court-supervised process called probate, which validates the will and distributes your assets. Probate can be time-consuming and costly, depending on your resident state—but without a will, the state determines how your assets are distributed, which may not be what you want. (As an alternative, a trust can help you avoid probate and more quickly distribute your assets—more on that below.)

In your will, you can:

• Name an executor to settle your estate and manage probate.
• Name a guardian to care for minor children.
• Provide direction on how debts, taxes, probate fees, and other costs should be paid.
• Provide instructions for covering the living expenses of dependents and family members during the probate period.
• Designate assets to be either distributed or placed in a trust for beneficiaries.

Because each state has its own requirements, it's best to seek legal advice from an estate planning attorney (see "What to look for in an estate planning attorney," below). And if you move to or own property in another state, have an estate planning attorney in that location review your will to ensure it remains valid there.

While there are many types of trusts, the most common is a revocable trust, meaning you can terminate (revoke), change, add, or remove assets inside the trust at any time prior to incapacity or death. To include assets, you must transfer their ownership to the trust either by changing the title or the account ownership, depending on the asset type.

You might consider setting up a revocable trust to:

• Access and control your assets during your life (buy, sell, trade, and move assets in and out of the trust).
• Name a successor trustee to manage your assets if you become incapacitated and distribute them upon your death.
• Help your estate avoid probate on the trust assets after you die.
• Manage assets for the benefit of a minor child at your death or incapacity.

Keep in mind that because you have complete control over the assets in the revocable living trust, those assets are not protected against creditors and are subject to income taxes.

The practical companion to a revocable living trust is a pour-over will. A pour-over will gathers assets from the estate not already owned by the trust at the date of death and pours them into the trust after probate is completed to be held or distributed according to the trust's directions.

An "I love you" letter to your family typically includes details about your assets, liabilities, and wishes. For example, you can leave instructions for funeral or burial arrangements, such as the type of service you want held.

You can also provide names of your trusted advisors and how to contact them, as well as a list of accounts and passwords for important ongoing expenses, such as life insurance premiums, that must be maintained during a period of incapacity.

Creating a letter for your family gives you the opportunity to share things in your life that may not be obvious to anyone but you. Perhaps you want to leave a sentimental message, such as life lessons and family history and values. The letter also allows you to explain the bequests in your will, which can help prevent family acrimony during a time of grief.

Beneficiary designation is another important step of estate planning. You can name a person, trust, estate, or charitable organization (such as a foundation, church, school, or museum) as the beneficiary of your assets or benefits. To help avoid a delay in transferring assets to your heirs, be sure to designate beneficiaries on your life insurance policies, annuities, retirement accounts, health savings accounts, Social Security, and other accounts.

Be aware that beneficiary designations can sometimes override wills and trusts, so it's critical to review your accounts often to ensure your beneficiaries are up to date and align with other estate planning documents.

You don't need to wait until you're gone to provide resources to your family and heirs. Estate planning can involve giving now. One way to give now is to make gifts of your assets while you're still alive. For 2024, you can give up to $18,000 annually to anyone without incurring a gift tax. If you and your spouse team up, that's $36,000.

And rather than leaving $100,000 for a grandchild's college education, you can make contributions to a 529 college savings plan, which can lower your tax bill. Keep in mind that if the child's parents set up the plan, they qualify for the tax treatment. Only the creators of the account (whether the grandparents or any other party) get the tax break. Note that each child can be the beneficiary of more than one account.

You can also front-load up to five years of 529 contributions—$90,000 in 2024 per child, per individual contributor or $180,000 for couples filing jointly—without hitting IRS gift-tax rules. Please check your individual plan rules for more details.

You can also consider giving to charity. When you give to charity now, instead of waiting until you pass, you can claim a tax deduction. You can donate directly, give stock, or set up a donor-advised fund. This allows you to benefit now—along with your beneficiaries.

Finally, don't forget to review your estate planning documents and beneficiaries every three to five years, or anytime you experience a major life event, such as:

• Marriage or divorce
• Birth of a child or grandchild
• Loss of a spouse, beneficiary, parent, or someone you support financially
• Relocation to another state

Your views and feelings can change, so update your estate plan accordingly and share new decisions with loved ones.

Your estate planning moves today can potentially make a big difference later. An estate plan can help reduce the time and hassle of probate court and prevent family disagreements over your assets or health care. And you don't need to wait until you're gone to share your wealth—your estate plan can involve giving now. Not only can you provide financial support to your family or charitable organizations, but in doing so, you can also potentially minimize current and future taxes.