Estate Planning Basics: Wills, Trusts, Beneficiaries

"Estate planning" sounds like something for wealthy 70-year-olds. It's actually for everyone. If you're an adult with any assets, dependents, or strong opinions about who should inherit your stuff, you need a basic estate plan. Without one, the government decides for you. Here are the four documents every adult should have.

1. A will

The most important and most-skipped document. A will specifies:

• Who gets your assets when you die
• Who becomes the guardian of your minor children
• Who is in charge of executing your wishes (the "executor")

Without a will, state law decides everything. The default rules vary by state but rarely match what you would have chosen. If you have minor children and no will, the court decides who raises them, possibly someone you specifically wouldn't have picked.

Cost to create: $50-300 with online services like Trust & Will, FreeWill, or LegalZoom. $500-1,500 with a lawyer for more complex situations. Either is far better than nothing.

2. Beneficiary designations

Here's the trick: many of your most valuable assets don't pass through your will at all. Retirement accounts, life insurance policies, and "transfer on death" bank accounts pass directly to whoever you named as the beneficiary, regardless of what your will says.

This is good news (it's faster than probate) and bad news (you have to keep the beneficiaries current). Common mistakes:

• Listing your ex-spouse as the 401(k) beneficiary and never updating it after divorce.
• Naming "my estate" as beneficiary, which forces the asset through probate unnecessarily.
• Not naming a backup beneficiary (so if your primary beneficiary dies before you, the asset goes through probate).
• Forgetting that you opened a new 401(k) at a new job and never set a beneficiary at all.

Action: log into every retirement account and life insurance policy you own. Check the listed beneficiaries. Update if needed. Add backups. Takes 30 minutes once a year.

3. Power of attorney (financial)

This document names someone who can manage your money if you're incapacitated. Without it, even your spouse can't legally handle your accounts on your behalf, they'd have to go to court and get appointed as a conservator, which is expensive and slow.

The power of attorney you want is usually a "durable" power of attorney, which remains valid even after you become incapacitated. (A non-durable power of attorney expires when you become incapacitated, which is exactly when you need it.)

You can grant broad authority or narrow authority. For most people, broad authority to a trusted spouse or family member is appropriate.

4. Healthcare directive (living will + healthcare power of attorney)

Two related documents:

Living will: Your written instructions for end-of-life medical care. Do you want to be kept on life support? Do you want resuscitation? Do you want a feeding tube? You answer these questions in advance so doctors and family don't have to guess.

Healthcare power of attorney: Names someone to make medical decisions for you if you can't make them yourself. This person doesn't override your written wishes, they fill in the gaps the document doesn't cover.

The combination is sometimes called an "advance directive." Forms are usually free from your state's bar association or hospital system. Print, sign, give copies to your designated person and your primary care doctor.

When you need a trust

Most people don't need a trust. Trusts are useful when you have:

• Significant assets ($1M+) and want to avoid probate
• Minor children you want to leave money to (a trust controls how and when they receive it)
• Beneficiaries with special needs (a special needs trust preserves their access to government benefits)
• A blended family with potentially conflicting heirs
• Real estate in multiple states (avoids probate in each state)

If none of these apply, a will is enough. Don't pay a lawyer thousands for a trust you don't need just because they recommend one.

Common myths

"Estate planning is for wealthy people."

Actually, the wealthy have estate planning lawyers and trusts. The middle class is where the most damage happens, small estates frozen in probate for years, families fighting over who gets what, kids placed with the wrong relatives because nobody wrote it down.

"I'm young, I don't need this."

Young adults die in accidents. Young parents leave behind minor children. Young people get incapacitated by injuries. The probability is low but the cost of not having anything is enormous. The cost of having basic documents is small.

"I'll do it after I have more money."

The whole point is to plan for the unexpected. Planning after the fact is impossible.

The minimum viable estate plan

If you do nothing else this year, do this:

1. Use Trust & Will or FreeWill to create a basic will (1 hour, $0-150).
2. Update beneficiaries on every retirement account and life insurance policy (30 minutes, free).
3. Sign a durable financial power of attorney (free template, 30 minutes).
4. Sign an advance directive for healthcare (free template, 30 minutes).

Total cost: under $200. Total time: under 3 hours. Future-you and the people you love will thank you.