Financial Fundamentals – Estate Planning Essentials
What’s Included:
- What happens if you don’t have an estate plan?
- Core documents of an estate plan
- Often-overlooked estate planning elements
- Maintaining your estate plan
- When to consider working with an estate planning professional
- The bottom line
During an initial conversation with a prospective client, a financial planner will almost always inquire about their estate planning needs. The reason is that you can learn a lot about what matters to someone from their end-of-life desires. However, more often than not, the people we speak with do not have an estate plan, or any of the basic documents that comprise one. Even Financial Planners are guilty of this. It is not always easy to consider what life would be like, even from a strictly financial standpoint, after you are gone.
An estate plan is a set of documents meant to clearly define how your assets will flow from one generation to the next. The purpose of this is to ease the process for your loved ones after you pass. This edition of the Financial Fundamentals series will discuss the various documents that comprise an estate plan, including wills, trusts, financial powers of attorney, and healthcare directives, as well as their importance.
What Happens if I Don’t Have an Estate Plan?
According to Gallup, less than half of adults in the U.S., only 46%, have a will. This percentage has remained similar since 1990. For over three decades, despite advancements in technology and increased access to financial services and information, people continue to overlook the value of having an estate plan. Not having an estate plan can result in several consequences, including your after-death wishes not being fulfilled.
If you pass away without an estate plan, the distribution of your assets will be decided in court, which can be a lengthy and expensive process for your loved ones. This leaves your legacy in the hands of a detached legal system. This is called dying “intestate.”
Simply put, intestate means you die without a will, and your loved ones will have to go through the probate process for intestate succession. The probate process occurs even if you have a will, but without a will to guide it, the process is much more arduous.
A probate court is a court with jurisdiction to handle the enforcement and administration of estates and property. They handle the “probate” of wills, trusts, guardianship, and all of your estate planning documents. They also hold the estates of intestate deaths.
Each state has varying processes and laws for intestate deaths. For all states, though, if you die without a will, the state makes one for you. Then, once your estate goes through probate, the inheritor must file a petition to justify why they have a claim to all or a portion of the estate. Multiple people can file a petition, and based on the case and information provided, the court decides on how the remaining assets will be distributed.
This entire process can be long and financially taxing on your loved ones. Not only are there legal fees for the probate process, but the estate’s value can change because of how long the process can take. This often leaves inheritors with less than they may have expected, which can cause frustration and anger.
Dying intestate can have a significant emotional toll on your loved ones. The probate process is highly stressful, made worse by the fact that someone they loved has passed away. The probate process can also pit family members against one another, leading to increased emotional strain. The way to avoid this is by having a thoughtful and thorough estate plan.
Core Documents of an Estate Plan
What is a Will?
A will is a legal document that provides direction on where you want your assets and property to be distributed upon your death. Wills are typically put together by an attorney, although there are some boilerplate wills that you can find online, which do not require an attorney to draft.
For families with young or special-needs children, a will is crucial for designating a guardian. Without a will, the courts will decide who should care for any minor or special needs children. In some cases, this may conflict with the parents’ wishes.
One critical item about wills, which many people don’t understand, is that account beneficiaries trump wills. Therefore, if you have beneficiaries listed on your accounts, your assets will be distributed directly to those beneficiaries, bypassing your will entirely.
In other words, you could spend a significant amount of effort and money creating an elaborate will that will play out all of your wishes, but if it is not executed correctly on your account beneficiary forms, it won’t matter. This is why it is essential to revisit and, if necessary, update your beneficiary elections once you have completed your will.
What is a Trust?
A common estate planning question is, “Do I need a trust?” Sure, having a trust sounds fancy, but in many cases, if you have a simple estate plan, a trust may not be necessary.
One reason a trust is almost always recommended is if you have minor children. A trust can be a powerful tool for providing direction and protecting assets to ensure a minor heir is taken care of.
Another reason a trust might make sense for you is if you own property in another state. In that case, a trust may help your heirs avoid probate in the state in which the property is owned.
According to Bravura Group, a revocable trust can help avoid probate in each state where property is owned. A revocable trust allows you to transfer ownership of these properties to the trust during your lifetime, streamlining the process after death. Trusts remain private, unlike wills, protecting the privacy of your estate and beneficiaries. In the event of your incapacity, a revocable trust allows your beneficiaries to manage your properties without court interference. And, a revocable trust can be changed at any point while you’re alive.
What is a Financial Power of Attorney?
A financial power of attorney is a legal document that grants someone other than yourself the authority to make financial decisions on your behalf. There are state-specific financial power of attorney forms that can be completed without an attorney; however, these documents are typically prepared with the assistance of an attorney as part of the estate planning process.
While the idea of giving someone the power to conduct business on your behalf may be alarming, that is what makes it so crucial for you to select someone you trust. If you were to become incapacitated, having this document allows someone to conduct financial business on your behalf.
One thing to understand about a financial power of attorney is that it is a document that only takes effect while you are living. Once you have passed on, this document is voided, and the executor of your estate now has the legal power to conduct business.
What is a Healthcare Directive?
A healthcare directive, also known as a living will, is a legal document that provides medical direction if you are no longer able to make decisions for yourself. This can be referred to by many names, such as healthcare power of attorney or durable power of attorney, but they serve the same purpose.
There are state-specific health directive forms, or an attorney can draft one on your behalf. Healthcare directives can be challenging to consider, especially in the circumstances that would necessitate their implementation. Some of the decisions that may be included in a healthcare directive are:
- do-not-resuscitate (DNR)
- discontinuing life support
- how you would like your body handled after death.
It is helpful to provide your healthcare provider with a copy of this document.
Each of these documents plays a unique role within an estate plan.
At Affiance Financial, our recommendation is to ensure that at minimum, you have a:
- Will
- Financial power of attorney
- Healthcare directive
Once these documents are created, it’s essential to save them in a secure and accessible location (if you worked with an attorney, your attorney’s office will retain a copy) and share their existence and location with your loved ones and relevant professionals.
Often-Overlooked Estate Planning Elements
In addition to the core legal documents described above, there are several estate planning elements that should be considered. Unfortunately, these tend to be overlooked, which can lead to complications for your beneficiaries.
What are Beneficiary Designations?
Beneficiary designations specify who you want to receive your assets upon your death. Beneficiary designations take precedent over directives written in your will, and they can help assets bypass the probate process.
Reviewing your beneficiary designations regularly is crucial, especially after significant life changes, such as:
- divorce
- marriage
- the birth of children
If your designations are outdated or incorrect, it can result in assets not being allocated to the intended recipients. It can also delay the probate process.
By keeping your beneficiary designations up to date, you ensure that your assets are distributed according to your wishes and ease the process for your beneficiaries who are already grieving your loss.
What are Digital Assets?
When creating wills or other estate planning documents, the focus is often on tangible assets, such as a car, property, or heirlooms. However, in this generation, some of our most valuable assets are digital. Your estate plan must include instructions and relevant information to access your online accounts. This includes:
- naming your accounts
- providing passwords
- specifying who you would like to have access to them
This can include anything from bank accounts to your social media accounts. Designating an individual to take control of your online presence after your death can also help prevent identity theft.
Is Cryptocurrency a Digital Asset?
Cryptocurrency is often one of the first things that comes to mind when people hear the term “digital assets.” Henson Efron recommends taking two crucial steps in estate planning if you own any cryptocurrency. First, track the information pertaining to your purchase of or access to cryptocurrency. This is important because unlike other financial assets, you do not have to provide your name or other personal information to purchase cryptocurrency. It is your responsibility to document your ownership of it.
Inform your financial advisor and estate attorney of your cryptocurrency assets. This will help ensure this information is included in your estate plan.
Second, ensure your heirs understand the tax implications of inheriting cryptocurrency.
Including verbiage in your estate planning documents about this will prevent your heirs from inadvertently violating any laws.
What are the Most Important Digital Assets to Include in my Will?
Valuable digital assets include:
- cryptocurrencies
- domains
- sentimental digital files like photos
These may be the most important digital assets to include in your will. Many states, including Minnesota, have adopted legislation that allows internet users to plan for the distribution of their digital assets. Many platforms have introduced features to do this, including Facebook and Apple.
For example, Henningson & Snoxell LTD. recommend Apple’s “Legacy Contact” feature. This feature enables an account holder to designate individuals authorized to access their iCloud account after their passing. These selected individuals can use the account holder’s death certificate and an access key to bypass any court proceedings and gain access to the account holder’s iCloud files, contacts, notes, and other data.
What is Business Succession Planning?
According to Fafinski, Mark, & Johnson, many business owners view their business as their greatest asset. Thus, planning for the succession of their business is a critical part of a thorough estate plan. If a business is going to be left to the children of the owner, gifting ownership shares over an extended period can be a tax-efficient method of transferring ownership. Strategies that make effective use of federal gift and estate tax exclusions and exemptions can result in substantial tax savings. This means that despite the change in management, the business can retain its value.
Is Life Insurance Part of Estate Planning?
Many people have life insurance, but don’t view it as part of their estate plan. With the right life insurance policy, you can leave your loved ones significant wealth and avoid the consequences of inheriting a large sum at one time.
There are two different types of life insurance:
- term life insurance (provides coverage for a set amount of time)
- permanent life insurance (lasts your entire life but typically costs significantly more)
There are pros and cons to each type.
Life insurance can be used to pay estate taxes after your death. The payout can also be used in the case that you have assets that are not easily divisible. One heir could receive a life insurance payout in exchange for a property wholly going to another heir.
It is important to work with a financial planner when considering life insurance, because it can also add to your estate and the tax implications may not be worth it in the long run.
Apart from life insurance, Medicaid and long-term care insurance are also something you need to consider while estate planning. According to Friendship Village of Bloomington, the median monthly cost for senior living in the state of Minnesota ranges from $2,100 to $13,200, and these costs are expected to continue rising. This is why it is crucial to begin planning for nursing homes, assisted living, or Medicaid eligibility as part of your estate planning process.
What Funeral & Burial Preferences Should I Plan for?
If you have specific preferences for your funeral and burial arrangements, you can include them as part of your Estate Plan in a directive or letter of instruction. According to the National Funeral Directors Association, the average cost of a funeral in the United States is $8,300. This can vary based on your preferences, which is why it is crucial to inform your beneficiaries so they can prepare for the sometimes-hefty price tag.
Taking care of funeral and burial costs ahead of time can help ease the grief of those you leave behind. Some funeral homes offer the option of a funeral trust, where individuals can pay for their funeral costs in advance, and any remaining funds are distributed to their beneficiaries.
How do I Maintain my Estate Plan?
It is essential to regularly review and update your estate planning documents and accounts as your situation evolves or as current laws change. Below are some major life events that warrant reviewing and updating your estate plan.
Marriage or Divorce
When you get married or divorced, you may want to add or remove your spouse as a beneficiary. You can revise your healthcare directives and appoint or remove your spouse as your power of attorney.
Birth or Adoption of Children
Having children is one of the most important reasons to update your estate plan, because they will most likely outlive both you and your spouse. You’ll need to appoint guardians for them and possibly establish trusts to manage their inheritance. It may also be a good idea to designate powers of attorney for healthcare and financial decisions on their behalf.
Death of a Family Member
If a loved one passes away, you will need to update your estate plan by removing them as a beneficiary or a power of attorney. You’ll want to ensure that the estate plan remains effective without them.
Financial Changes
If you’ve acquired new assets, such as property, investments, or businesses, you will need to update your estate plan to ensure they are distributed according to your wishes after your death.
Legal Changes
There are federal and state laws governing estate planning, and if they change, you may need to update your estate plan to comply with these laws. If you move to a new state, you will likely need to update your estate plan to reflect the latest state laws.
Tax laws also change frequently and may impact estate taxes. Simply put, estate tax is a tax on the assets you leave behind when you die. The IRS looks at the total value of everything you own, and based on how large it is, you may owe taxes.
Specific strategies, like charitable giving, can reduce the amount of taxes you owe. There are both federal and state estate taxes. The federal estate tax typically only applies to very large estates because of the higher exemption.
Reviewing and updating your estate plan every few years is beneficial, even if there are no significant life changes. It is simply good practice to check in and keep your documents accessible and shared with the key people involved in your estate plan.
When Should I Consider Working With an Estate Planning Professional?
Financial planners often play a key role in the estate planning process. They understand the many variables that affect the distribution of assets after a death. They can help you create clear and actionable plans that will put all your loved ones on the same page by eliminating uncertainties, untangling discrepancies, and aligning your estate plan with your goals.
Financial planners can work with you to facilitate your estate planning needs by:
- Narrowing down your intentions
- Communicating your objectives to your beneficiaries
- Laying the foundation for document preparation by a legal professional
A financial planner’s role doesn’t end once your estate plan is created; they can remain by your beneficiaries’ sides during the administration of your estate until all loose ends have been resolved.
Having your financial planner collaborate directly with your estate attorney is also very helpful. Moss & Barnett describes services provided by estate attorneys as including:
- the preparation and administration of wills, trusts, powers of attorney, health care directives
- charitable giving legalities
- guardianships and conservatorships
- resolution of family and business disputes
- and more
A financial planner and estate attorney can collaborate and bring you the most comprehensive estate planning.
At Affiance Financial, we offer both estate planning and legacy planning services to help you safeguard your wealth, as well as help you crystallize your vision for the future.
The Bottom Line
Many people lack an estate plan, which can result in a costly and emotional probate process. Key estate planning documents include:
- wills
- trusts
- financial powers of attorney
- healthcare directives
Having these documents in good order can help ensure your wishes are met and ease the process for your grieving loved ones.
Are you ready to start estate planning? Do you need to update your estate plan? Consider partnering with a financial planner today. They can help you evaluate your current position, prioritize next steps, and create a customized plan for the rest of your life and beyond.
SCHEDULE A 30-MINUTE WELCOME CALL
FAQ
1. Why do I need an estate plan?
Without one, your assets may be distributed by the state, which can be costly, slow, and stressful for your loved ones.
2. What documents should I have?
At minimum: a will, financial power of attorney, and healthcare directive. Trusts may also be useful in some cases.
3. How often should I update my estate plan?
Review your plan every few years or after major life events like marriage, divorce, or having children.
4. Should I work with a professional?
Yes—financial planners and estate attorneys can help ensure your plan works toward your goals, follows the law, and eases the process for your beneficiaries.
Please remember there can be no assurance that the content made reference to directly or indirectly in this article will be suitable for your individual situation, or prove successful. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized advice from Affiance Financial. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Affiance Financial is not an attorney and no portion of this content should be interpreted as legal advice.
All investment and insurance strategies have the potential for profit or loss. Insurance product guarantees are subject to the claims-paying ability of the issuing insurance company. Affiance Financial only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
Always consult an attorney or tax professional regarding your specific legal or tax situation.
Please Note: Affiance Financial and Private Client Services do not serve as an attorney and do not prepare legal documents.
Sources:
https://news.gallup.com/poll/351500/how-many-americans-have-will.aspx
https://trustandwill.com/learn/intestate
https://ferglawgroup.com/dying-without-a-will/#emotional-impact
https://www.bravlaw.com/post/own-property-in-more-than-one-state
https://www.hennsnoxlaw.com/blog/2025/06/10/simplifying-your-digital-estate/
https://hornjohnsen.com/often-update-estate-planning/
https://www.lawmoss.com/practices-estate-planning-and-wealth-preservation
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
https://www.fmjlaw.com/succession-planning-business-edition/
https://www.schwab.com/learn/story/should-you-add-life-insurance-to-your-estate-plan
