While it's true that "you can't take it with you," with proper planning you can make sure that the assets you leave behind when you die will be properly distributed the way you want. That's the main purpose of "estate planning," the term used for the strategy you develop to transfer your assets after your death.
Part of developing an estate plan is to review your net worth and determine if you need to purchase life insurance to supplement your assets. The purpose of this insurance is to replace your future income and provide your survivors with the necessary funds they need to feel secure.
In Yes, You Can... Achieve Financial Independence, American Century Investments founder James E. Stowers recommends determining the amount of money you would need to provide for your survivors' living expenses, education and other needs. Ask yourself:
- What lifestyle do you want your family to have?
- How much income will they need each month?
- Where can this money come from?
- How much cash is needed today to provide this future income?
"Once you know what's needed, build a team of trusted advisers, beginning with a financial planner who understands the importance of creating a plan for managing and distributing your assets, both during your lifetime and after," recommends Melissa Dailey, American Century Investments' Investor Center manager. Other members of your team will likely include an accountant, insurance agent and an estate-planning attorney who will draw up the appropriate documents.
Your team of advisors will help you decide exactly what should be in your estate plan. Some of the documents that could be part of your estate plan include:
Will
A will is a document that designates how your property should be distributed at the time of your death. Without a will, your assets could go to "probate", a legal process where your assets are held prior to distribution in order to authenticate ownership. When an estate goes to probate it becomes public record and may take years before the courts can validate the assets. Once validated, the state determines how the assets are distributed to your survivors. That means there's no guarantee that they will be distributed per your wishes or your heirs' needs.
Trust
There are many types of trusts and each type serves a specific purpose in how your assets are protected and distributed upon your death. A trust can expedite the distribution of your assets, let you put conditions on how your assets are distributed and may help reduce your estate taxes. In addition, assets in a trust are not subject to the delay or publicity of probate.
Living will
This is also known as an advanced medical directive. Through this document you designate who can make medical decisions on your behalf should you no longer be able to make those decisions for yourself. A living will is your opportunity to spell out what type of life-sustaining medical intervention should happen if you become terminally ill.
Powers of attorney
Just as a living will designates someone you trust to make medical decisions on your behalf, assigning someone the power of attorney allows that person to act on your behalf to manage your financial affairs and other aspects of your life should you be unable to do it for yourself.
Guardianship designation
If you're a parent with minor children you should consider who you want to serve as their guardian upon your death. Typically, the surviving spouse will become their guardian. If there isn't a surviving spouse, then you need to determine which relative or trusted adult you want to care for your children. Prior to naming guardianship, you should discuss with the future guardian their desire to take on this responsibility and consider how you might provide them the funds to support your children's future needs such as food, clothing and education.