In a strictly legal sense, estate planning is making legal arrangements for what will happen to your assets when you die. And most of the time, people automatically think of wills and trusts as the primary tools of estate planning.
In reality, though, estate planning can and should be so much more than distributing assets or drafting legal documents. It is an opportunity to look ahead to the end of your life and arrange for several things:
- How to distribute your assets when you die
- How to address the practical details that will come with your death, funeral, and burial
- How to care for your loved ones when you pass
- How to end your life well
We call this broader others-focused view of estate planning Relational Estate Planning®. The hallmark of Relational Estate Planning ® is that it prioritizes your loved ones’ well-being and your legacy over your money.
(Related: What Is Relational Estate Planning?®)
Relational Estate Planning® is a profound, meaningful, and holistic approach to the end of your life. But it is also a lot to think about. There are many ways you can approach estate planning, and there is no one right way. The route each person takes depends on their individual life, relationships, and assets. So how do you know where to begin creating this kind of plan for yourself?
Start by understanding the tools of estate planning, and then choose which of them you will use to set up your plan.
The Tools Of Estate Planning
There are eight primary estate planning tools you can use to distribute your assets, address practical details at your death, care for your loved ones, and end well. Some of them are legal documents, and some of them are non-legal documents. Some are essential to any estate plan, while others are optional. Your life is unique, and you should create your plan using a combination of the tools that are most relevant to you.
Let’s explore each one, starting with a last will and testament.
1. Last Will and Testament
A last will and testament is a legally-binding document. It states how you want your assets distributed and who is the guardian for your minor children if you pass. At the time of your death, your will is filed with the local court and is enforced through a system called probate.
Without a will, there are no directions for how to transfer your assets. This means that your state government will take charge of distributing your assets according to their rules. They will also assign care of your minor children to whomever they see fit.
Regardless of the other tools you choose, a will is essential to your estate plan.
A trust is another vehicle for transferring your assets at your death. But a trust operates differently from a will.
Think of a trust as a fake person that you create. It has a separate legal identity, the ability to buy and sell, the freedom to own property, and its own tax identification number. A trust functions according to rules that you set up when you create it. It is overseen by a trustee of your choosing (usually you while you are alive).
Different types of trusts have different purposes. Usually, though, people use a trust to avoid the probate process or to keep control over their funds after they pass.
With a will, you can distribute your assets however you want when you die. But this is a one-time event. You cannot set conditions on how your money is used after you are gone. With a trust, however, you can set up rules so that your funds are used in a certain manner long after you pass.
This enables you to do all sorts of things, such as leave money for yearly payments to a charity or set up ongoing income for a disabled family member.
3. Beneficiary Designation
A beneficiary designation is a third way to transfer your assets at death. While wills and trusts are legal documents enforced by the court system, a beneficiary designation works differently. It is an agreement between you and your bank or financial institution. It directs the institution to pay your funds to a certain person(s) or organization when you die.
Beneficiary designations are simpler and more straightforward than wills and trusts. But they also have limitations that make them less flexible:
- They can only apply to financial accounts. They cannot pass on real property or valuables.
- They generally only have one level of backup beneficiaries.
- They are not subject to court oversight. This means the financial institutions have the final say on where your funds go.
4. Estate Guide and Inventory
An estate guide and inventory is a non-legal document you can use to list your assets, important instructions, and key contacts. It should include details like funeral arrangements, bank account information, online usernames and passwords, and contact information for professionals who can help your family.
This practical estate planning tool will help your family wade through the tasks that come with your death.
5. Ethical Will
An ethical will is the least common tool of estate planning we discuss in this article. It is also the most profound. An ethical will is a non-legal document designed to pass on your values, beliefs, and knowledge. This personal record can take many forms: a letter, a video recording, a statement of faith, and more. It is meant to leave the most important parts of you behind for your circle of influence.
We believe everyone should have an ethical will as part of their estate plan.
6. Gifts and Memories List
A gifts and memories list is sometimes called a personal property memorandum. You can use it to pass on the physical property you have not addressed in your will or trust. For example, most wills don’t list who gets your recipe box or old dresser. You can use a gifts and memories list to make sure certain items like these go to specific people. We also encourage you to include the story or memory that goes along with that physical item for your loved ones to remember.
In some states, this document is legally-binding if you sign and date it. It is also easy to change. When you need to add or edit something, simply tear up the old one, fill out a new one, and sign and date it.
7. Planned Giving to Charities
Planned giving is gifting money to a cause you care about in a thoughtful, organized manner, or creating a plan to give money to a cause in the future.
Planned giving is an incredible way to leave your legacy and promote a cause you value.
(Related: Leave Your Legacy with Planned Giving)
8. Funeral Arrangements and Directive
Funeral arrangements are a general set of your plans and wishes for your funeral and burial. We recommend you include these in your estate guide and inventory. You could use funeral arrangements to tell your family what music you want to be played at your ceremony, as one example. Funeral arrangements are not a legal document and are not binding.
A funeral directive is a legally-binding document stating your wishes for your funeral and burial. It also names an agent to carry out those wishes when the time comes. If there is any argument about your funeral or burial, your agent can use the funeral directive to enforce your wishes.
Selecting the Right Tools Of Estate Planning
Each of these tools, if used correctly, can be useful in your estate plan. As you think about your life, relationships, and assets, some of the tools probably stick out as more relevant than others. We encourage you to combine these tools to create a relational estate plan, so you can care for the people you love, distribute your assets the way you want, and end your life well.
If you have specific questions about how these tools work, or if you want to use them in your estate plan, schedule a free consultation with us. We would love to chat with you and answer any questions you may have.