Estate Planning: A 5-Step Checklist of the Basics

Estate planning is bewildering, confusing, and intimidating to most people. To complicate matters, many people encounter quite a bit of misinformation and misunderstanding. The result: Few people have estate plans, and among those who do, many are not up-to-date.

However, an estate plan is an essential part of life because it determines what happens to your assets after you die and often how your assets are managed and you are cared for while you’re alive but in need of assistance. An estate plan isn’t simply a will or life insurance policy. And estate planning involves more than avoiding taxes. You need an estate plan even if your estate isn’t valuable enough to be hit with estate taxes.

In this article, we define estate planning and review the basic elements of such a plan. We discuss how to go about developing a plan and how to work with an estate planning professional.

1. Understanding Estate Planning

Many people think estate planning is only for those rich enough to be hit with federal estate taxes and probate. Others believe joint ownership of property or owning life insurance is the only estate planning they need. These notions are wrong. Everyone needs an estate plan, and it should include several important documents regardless of how wealthy you are.

Estate planning is the process of planning for the transfer of ownership of your assets to the recipients of your choice in the most efficient way possible — minimizing the taxes, other expenses, and time involved. The recipients could include your spouse, significant other, children, grandchildren, other loved ones, and charity. 

A good estate plan also ensures that your estate has enough cash to pay immediate (such as burial) and ongoing expenses, that any trusts you create are properly managed, and that your assets are managed and sold competently. Another feature of an estate plan is the designation of who will manage your assets, pay your bills, and make medical decisions if you’re unable.

From a big-picture standpoint, the estate planning process has two important steps: deciding on your goals and deciding which legal tools to use to accomplish those goals.

However, estate planning isn’t quite so simple. Here are the more detailed steps of the process:

1. List all your assets and debts.

Regardless of your financial situation, this step is the starting point for an estate plan. Be sure to include all assets. The estate tax broadly defines assets. Assets include not only property you own (or partly own) but also rights you have such as in trusts, annuities, pensions, and life insurance. 

Your list of debts (your legal obligations to pay money or property to others) also is important. Heirs inherit only net assets (gross assets less debts and other liabilities), and the estate won’t be processed through probate until debts are paid. So an estate plan must include a debt payment plan.

The more work you do to compile a complete list of assets and liabilities and prepare other information, the less your estate plan will cost. Most estate planning attorneys can provide you with a questionnaire or worksheet to help list your assets and debts. Books and websites on estate planning also often have similar questionnaires.

2. Prepare an income statement.

An income statement (also called a cash flow statement) is a list of the income and expenses you expect during the current year. If you prepare a monthly or annual budget, you already have this. It can be as formal or informal as you like. Its purpose is to give your estate planner and executor a clear picture of your cash inflows and outflows. Preparing this type of statement can help you develop a plan for the estate to pay bills and debts.

3. Decide how you want the assets to be distributed.

An estate planner can help develop your goals based on experience with other estates. Usually the estate planner is an attorney who specializes in this area. 

When a valuable or complicated estate is involved, a team of financial professionals may work on the plan, including a financial planner, an accountant, an insurance agent or broker, and a financial planner or other investment professional. Usually one professional is the leader or “quarterback” in charge of the big picture and coordination while the others concentrate on specific areas.

In your plans, make sure you develop initial goals for dividing assets among your spouse, children, grandchildren, charities, and others. Key issues to consider are whether children should receive equal shares, how much your spouse should inherit outright, and how much you want to give to charity.

If you have a blended family (are married to your second or subsequent spouse or have stepchildren), the decisions can be more complicated and you may need to talk them through with your estate planner.

4. Consider secondary goals.

Examples of secondary goals include placing controls or restrictions on inheritances instead of giving property directly. An estate plan often involves trade-offs, because fully reaching all your goals may not be possible. You may have to decide that some goals are more important than others.

5. Resolve how much property to give now and how much to give later.

You can reap both tax and nontax benefits if you make lifetime gifts instead of waiting to make bequests through your estate.

6. Work with one or more estate planning professionals to develop your estate plan.

After you assess your assets and liabilities, cash flow, and goals, it’s time to work with one or more professionals to develop a plan. A typical middle-class family usually needs to work only with an estate planning attorney or an attorney and a financial planner or accountant. 

Wealthier individuals, especially those who own businesses or other complicated assets, may need a team that includes one or more attorneys, an accountant, a life insurance broker, a business appraiser, a trustee, and other professionals.

7. Understand your estate plan.

Be an active participant in developing your plan, and be sure you understand it. Don’t be afraid to ask questions if you don’t understand something. Surveys by Private Wealth magazine revealed that a high percentage of estate plans aren’t implemented because clients didn’t understand them, and the attorneys didn’t adequately explain the plans.

8. Implement the plan.

You had an estate plan created for good reasons, and you spent lots of time and money on it. So be sure to implement it; otherwise, your estate may be in jeopardy later. Your will, trusts, and any other documents need to be legally executed (signed and witnessed or notarized as required by your state’s law). 

Legal ownership of assets needs to be transferred to trusts. If the plan is to make gifts to loved ones or charity, be sure the gifts are made as scheduled. After a plan is developed, your estate planner should provide a checklist of actions you need to take. Be sure to follow through and take those actions.

9. Explain the general idea of the plan to your heirs.

The top reason for estate disputes probably is surprise. When one or more heirs are surprised by the details of the estate plan, hurt feelings can lead to disputes. For example, if you have several children but don’t plan to have your estate divided equally among them, you should discuss this individually with your adult children and explain your reasoning. 

You can reduce the potential for disputes by telling family members, in general, what the plan is, especially any terms that may surprise someone. Doing so gives your loved ones a chance to absorb the news, ask questions, and hear your explanation.

Most estate planners don’t recommend that you give family members (other than the persons picked to be executors or trustees) copies of the will or other estate planning documents. They don’t need to see every detail in advance. 

Besides, you’ll likely need to modify the plan every few years, resulting in the need to circulate copies after every change. Finally, you don’t want multiple copies of your will circulating. When it comes time for the will to be probated, disputes could arise over which is the latest valid version.

10. Review and update the plan.

An estate plan isn’t fixed and permanent — your situation evolves. The tax law, financial environment, and other factors change. Every two to three years or so, meet with your estate planner to review the plan, compare it to changes in your life and the law, and decide whether adjustments should be made. 

You also should meet with the estate planner after major changes in your family, such as births, deaths, marriages, and divorces.

2. Studying Some Strategies Before Starting Your Estate Plan

Estate planning can be overwhelming at first. Attorneys use their own language, and many of them can’t translate their jargon for regular folks. Some attorneys and estate planners also like to use a cookie-cutter approach, offering the same basic estate plan to almost everyone without explanation or consideration for the person’s situation. 

Even when an attorney explains things well, the plan can be confusing because a wide range of strategies is available and each has different advantages and disadvantages.

Despite some of the confusing messages you may receive, you should know some basic rules and guidelines that apply to every estate plan. 

That’s because although strategies and tools differ between plans, some key principles apply whether an estate is worth $50,000 or $50 million. Study the principles in the following sections before meeting with an estate planner and diving into the details of will clauses, trusts, probate, and the like.

1. Finish your plan no matter what

Many people don’t start or don’t finish estate plans, because they can’t resolve certain issues. Their estate plans get stalled for any number of reasons. Don’t let such issues leave you with no estate plan.

Some of these issues may include the following:

  • Spouses may not agree on who should be guardians of their children or whether to restrict the control adult children have over their inheritances.
  • An estate owner may be uncertain whether to give equally to the children or how much to give to charity.
  • In large or complicated estates, the owner may be unable to choose from among different strategies offered by the estate planner.

You don’t need to complete an estate plan in one step; creating it in phases is actually a smarter move. That’s because some things can be changed easily while others are irreversible. For example, you may start with a basic will and powers of attorney. Over time, goals can be developed and refined, disagreements resolved, and the rest of the plan (such as trusts, gifts, and business succession plans) put in place.

2. Keep track of your estate

When putting together your estate plan, keep detailed records and maintain a complete list of your assets and liabilities (and the estate administrator and estate planner need to know where to locate that list). The list should include the following information:

  • Account names and numbers
  • Balances as of a certain date
  • Contact information
  • Internet passwords and usernames

Your estate administrator may be able to locate all your assets in a reasonable time and be able to process your estate without a list of assets and liabilities. However, searching for the information drives up the expense and time involved in processing the estate, delaying the settlement and distribution. Also, the recommended estate plan may have been different if the overlooked assets had been known earlier.

To help your estate administrator and heirs, prepare a notebook that includes statements of your assets and liabilities and cash flow. Include copies of recent account statements, income tax returns, and other ownership information (or at least note where this information can be found). Update the notebook annually, and let your administrator know where it can be located.

Don’t forget to include any “digital assets” or accounts in your list. The list should include details of how the accounts or assets can be accessed, such as passwords, usernames, and security questions. Otherwise, your executor and loved ones will have trouble accessing and taking necessary actions with these assets. Also, include details of any payments that are automatically deducted from a financial account or debited to a credit card.

There’s a story that the late comedian W.C. Fields didn’t trust banks, so he had small amounts of money stashed in banks all over the country. He didn’t keep a master list of the banks, so his heirs never were sure they had found all the money. They spent money trying to track down all the accounts. Fields probably knew how to find everything, but he never gave anyone else all the information.

We see different versions of these events play out in estates all the time. Here are just a few examples:

  • Estate owners may open a number of investment accounts over the years and then do little with them.
  • Balances may be left in the retirement plans of former employers.
  • Life insurance policies and annuities may be purchased and left in drawers or files.

3. Estimate cash flow

Estates need cash for all these reasons and more:

  • If you have dependents, their expenses must be paid while the estate is being processed.
  • The expenses of maintaining your estate, especially the costs of running your home and other properties, need to be paid.
  • The expenses of the estate, such as lawyer’s fees, probate court costs, and taxes, need to be paid.
  • Your debts must be paid.

A number of estates, unfortunately, are asset rich and cash poor. The estate owners reduced taxes and decided how to divide their assets, but they didn’t ensure that their estates had enough cash (or assets that could easily be converted to cash).

Your estate can’t be processed and distributed to heirs until all the debts and expenses are paid. If enough cash isn’t available to make payments, assets must be sold. In this case, you risk having assets sold in a hurry and possibly at distress prices simply to raise cash. To avoid this unpleasant outcome, be sure cash flow planning is part of your estate plan.

4. Don’t wait for the perfect plan

Estate planning involves trade-offs. Among the trade-offs are those relating to your goals, estate taxes, the needs and desires of your family, charitable inclinations, and the economy and financial markets. Don’t expect an estate plan to be perfect, and don’t expect there to be one right plan for you.

Except for simple, basic estates, estate planners present choices and alternatives. Each has advantages and disadvantages. As the estate owner, you decide the plan features that have the best trade-offs among the many factors.

5. Carefully choose executors and trustees

Make sure you take your time to select the right executors and trustees for your estate. Executors and trustees are the people who implement your estate plans. The executor (or administrator) is the person who manages the estate, shepherds it through probate court, and distributes the assets. A trustee controls any property that was put in a trust and manages it according to the trust agreement and state law.

The executor and trustee don’t have to be the same person. In fact, it may be a good idea to name different people. A trustee, for example, is likely to manage property for much longer than an executor, and the responsibilities of the two jobs are different.

Often the selection of executors and trustees is an afterthought. The executor usually is the oldest adult child of the estate owner; it also can be the estate planning lawyer. The trustee is a bank suggested by the lawyer. 

These may or may not be good choices; if better choices are evident for you, go with those. Too often good estate plans are ruined because the wrong people are selected for these jobs. These folks may not be suitable for the positions or may not understand what the estate owner wanted.

When deciding who will be your executor and trustee, consider personal skills, time commitment, cost, and knowledge of your family and your wishes. For some, the best compromise is to name both a family member and a lawyer or other professional to share the positions as coexecutors or cotrustees. You can either divide their duties or require them to agree on each item before taking action.

No matter who you decide on for these positions, make your choices known to family members. Early notice gives them an opportunity to get used to the decisions and gives you an idea of whether it will work.

6. Anticipate conflicts

Most estate problems occur because of conflicts. When planning your estate, consider the potential conflicts and structure the plan to avoid or minimize them.

You may encounter different types of conflicts, such as from the following:

Family members: They sometimes have personality conflicts. For example, maybe two or more members simply don’t get along. You won’t be around to mediate the disputes or keep people in line. With money at stake — and the death of a loved one charging relatives’ emotions — don’t expect these members to suddenly be able to manage property jointly or share the property. A better solution may be to give each of them sole ownership of different assets. If that means directing the executor to sell assets and distribute the cash, you probably should do that as long as you understand the consequences of doing so and are comfortable with those. 

Or suppose your plan for dividing the personal property of the estate is to let the children decide among themselves. In some families this method works. In other families, the children argue over the process and ultimately how the assets are divided.

The actual estate plan: Suppose you put most of your estate in a trust and name your spouse trustee. That trust is intended to support your spouse for life, and the remainder of it goes to your children. The children may decide the trust should be invested more for long-term growth, while your spouse may invest it to maximize income. The situation could lead to hard feelings and perhaps litigation (even though your spouse is named trustee).

You know your family. Do your best to assess how the members may react to different parts of the plan, and change the plan if you foresee conflicts and disputes. Also, benefit from the guidance and input of a competent planning professional who has witnessed firsthand what works and what causes conflicts in similar family situations. You may be uncomfortable or embarrassed at the thought of discussing some family situations with a stranger, but your estate planner likely has seen or heard it all before.

3. Answering Key Questions to Gather Critical Information

A major reason that people don’t have estate plans is they don’t know how to begin. As we state earlier in this article, the best starting point is developing a list of your assets and debts. After you do so, you can put the list aside and ask yourself some important questions before completely developing your plan.

Your estate planner won’t be able to do much without the answers to the questions we discuss in the following sections. Consider these questions before meeting with an estate planner. The planner will discuss them with you, help you refine the answers, and develop a plan consistent with the answers. 

Even when your estate is small, you need to decide who will be in charge of your estate, how your personal property will be distributed, and other key issues. You may not need to spend a lot of time with an attorney to resolve the issues, but they should be resolved.

In this section, we review the key estate planning questions relating to who should receive the wealth, how much each recipient should receive, when the wealth should be transferred, and how the wealth should be transferred.

1. Who’s in charge?

Your estate needs at least one executor or administrator (depending on the term your state uses). Also, every trust you create needs at least one trustee. The right choices depend on your family and its dynamics.

2. How much should I give now?

An important decision you have to consider before developing your plan is whether you’ll bestow gifts now. If you give away property now by making a lifetime gift, the current value isn’t included in your estate. Future appreciation also is excluded. There are some good reasons to make lifetime gifts instead of waiting for loved ones to receive them through your estate. Here they are:

  • You may receive a tax incentive. When your estate is subject to estate or inheritance taxes, the federal estate tax provides an annual gift tax exemption and a lifetime gift tax exemption. In addition, as explained earlier, the gift and any future appreciation are out of your estate.
  • You may have personal reasons for making lifetime gifts. You may want to see loved ones enjoy the benefits of the wealth. Or, you may want to use lifetime gifts to help your loved ones learn how to handle more money or to let you see how they’ll use the wealth. When you don’t like the way they handle the wealth, you may decide not to make further lifetime gifts. You also may decide to reduce the amount they receive in your will or leave it in trust instead of directly to them. Or you may decide they need some kind of instruction on how to manage money to satisfy your concerns.
  • Lifetime charitable giving may be more satisfying. You get to see the benefits of your gifts, the money reaches the charity sooner, and you receive income tax deductions.

3. Should I apply controls and incentives?

Estate owners always have been concerned that gifts to their loved ones would be wasted or make the recipients lazy, spoiled, or worse. Starting in the 1990s, more people began acting on these concerns by creating trusts called incentive trusts that distribute money only under certain conditions, such as when the beneficiary reaches certain goals or behaves certain ways.

Here are the two general types of restrictions that incentive trusts are based on:

Age: This restriction is a classic one that limits distributions of income and principal until the beneficiary reaches a certain age. Until then, the trustee has discretion over how much to distribute each year or distributes only the income but keeps the principal in the trust. Often the principal is distributed in stages as the beneficiary reaches different ages.

Meeting a milestone: With this type of restriction, the beneficiary receives a distribution only after achieving a milestone, such as attaining a certain academic degree, holding a job for a minimum time, reaching a certain income level, attending church, getting married, or whatever other goals the parents establish. The incentives are limited only by the trust creator’s imagination and goals.

The trustee determines whether the milestones are met. In the event that the designated beneficiary fails to ever reach designated milestones, the trust should have named contingent beneficiaries who receive the wealth when the initial beneficiary doesn’t meet the milestones.

Some folks are critical of incentive trusts, and some lawyers won’t even draft them. They view the trusts as an attempt to control loved ones from the grave. Also, they think the incentives can be too detailed and restrictive.

A tightly written trust doesn’t allow for changing times and circumstances (and keep in mind that the trust could be in effect for decades). If an incentive trust is used, it should have some flexibility. An alternative approach is to give the trustee discretion over distributions and leave the trustee a letter of instructions outlining your goals and intentions.

4. Should heirs get equal shares?

Most parents leave each of their children equal shares of their estates, but you may need to ask yourself whether you have reasons to consider unequal shares in your plan. Why would you consider giving unequal shares? Consider the following reasons:

  • An offspring is irresponsible. You may leave an offspring a smaller share if you believe the funds will be wasted or mismanaged. An alternative way to avoid waste or mismanagement of the wealth is to leave it in a trust with restrictions on the distributions or discretion by the trustee.
  • One offspring is more financially successful. You may leave less money to a child who’s more successful financially than the others. In this case, you need to make your intentions known and understood ahead of time.
  • An offspring isn’t involved in a family business. When all the children aren’t involved in the business on a daily basis, it may be best not to leave an interest in the business to those not involved in it. Otherwise, the children could experience conflicts over distributions of profits and other decisions. You can avoid these problems by leaving shares to only those involved in the business. The others can inherit other assets. If you don’t have enough assets to equalize the inheritances, life insurance may be a way to avoid unequal inheritances.

When deciding how much to leave each heir, don’t forget any lifetime gifts and assistance you made to them. One child may have received more lifetime assistance than the others. The children aren’t likely to forget that even though you may have. 

To ensure that inheritances really are equal, subtract significant lifetime gifts from inheritances. In fact, some wills state each heir’s inheritance will be reduced by lifetime gifts. For this method to be effective, however, you must keep an updated list of the gifts you want subtracted.

5. Should I exclude someone?

Most states won’t let you completely disinherit a spouse, unless you have a premarital or post-marital agreement. But anyone else, even children, can be completely excluded from the will. Many families have at least one child who is estranged, is a substance abuser, or has other problems. When the child is well into adulthood and shows no sign of changing, you can consider disinheriting the child.

Disinheriting a family member can potentially backfire. The child may challenge the will or demand money from the other family members in return for not challenging the will. Even if the disinherited person doesn’t have a strong legal case, the challenge may delay settlement of the estate, cost the estate money, and disrupt other family members’ lives.

Rather than completely excluding someone from your will, you have a couple alternative options:

  • Leave the inheritance in a trust with restrictions. 
  • Leave the “black sheep” something in the will, but make it less than a full share. In addition, include a clause stating any beneficiary who unsuccessfully challenges the will forfeits whatever they were left in the will. The trick is determining the amount that’s meaningful enough to deter a will challenge but that’s not more than you want to give.

6. How should my blended family be handled?

How you handle a blended family is up to you and your own circumstances. The key is to decide on a plan and communicate it to those individuals involved.

A blended family is something other than the traditional family of parents who have been married only to each other and had children only with each other. Some people are married to second (or subsequent) spouses. They may have both their own children and stepchildren. They may have biological children from more than one marriage or relationship. A number of possibilities exist, and they can all complicate estate planning.

There’s no right or wrong estate plan for blended families. Some people provide for only their spouse and biological children. Other people decide their adult children from a first marriage are already on their own and provided for, and then decide to leave most of their estate to children from the second marriage. Sometimes the second spouse is secure financially and doesn’t share in the estate.

7. Should I leave only money?

Some of the biggest estate problems and headaches are caused by nonfinancial assets. For example, some assets, such as personal property, collections, and mementos, often trigger disputes among family members. More than one family member will want an asset and be willing to fight over it. 

Some valuable assets also have emotional value, such as your residence or vacation home. You need to develop a way to distribute these items without triggering a major conflict. You can handle it in a couple of ways:

You can set up a lottery or other system that decides who inherits the items. You can choose from many types of lotteries. One simple system is for each child to draw a number from a hat. The child with the lowest number first picks any item from the estate. The rest of the children pick items in order of the numbers they selected. In the second round of selections, the order is reversed. This continues until all the property is selected. Your estate planner may have other ideas, or you can come up with your own.

You can leave the decision to the executor or have family members agree on a distribution. These are the most frequent ways property is distributed. However, you need to decide whether they’ll work for your family. Will your children trust the executor to be fair, or will they complain one child was favored? Will the children be able to work out a distribution or argue over the property?

Each of these approaches has the potential to cause problems. No system is always right. When either of these methods is likely to cause problems in your family, seek another method. Your goal should be to choose a selection system that minimizes the conflicts among family members.

To avoid these problems, you may direct your estate executor to sell all the potential problem assets and distribute only cash to beneficiaries. Even though estate professionals have experienced many problem situations, you know your family better than the estate planner. Get the best advice you can, and then decide whether selling the assets is better than trying to distribute them.

8. Should my wealth stay in the family?

You may want to leave some of your estate to charity or even to people outside the family, which, of course, is your personal preference. The issue is that you’ll be deciding to give part of your wealth to the charity instead of to family. 

You should consider whether loved ones will have to reduce their living standards because of the gift to charity and whether they arranged their affairs in expectation of receiving that part of your estate. If you decide to leave part of your estate to a person or organization outside the family, your estate planner can help decide the best way to do so.

4. Knowing How Estate Taxes Work

The amount exempt from the federal estate tax is increased for inflation annually and was $11.7 million per estate in 2021. The exemption is scheduled to revert back to $5 million (plus inflation) after 2025. The top estate tax rate is 40 percent. The exempt amount is increased for inflation each year. Always be sure to check the current law early in your estate planning process.

The estate and gift tax exemptions and tax rates will determine part of your estate planning. When your estate is below the exempt amount and not likely to rise above it in the next few years, you can ignore federal estate taxes in your planning. 

If that describes your estate, skip this section and focus your plan on the best ways to transfer your wealth to those you want to receive it. But if your estate is valuable enough to be taxed, you need to read this section. Your plan is likely to need ways to transfer wealth to your loved ones at the lowest tax cost.

Reviewing the estate tax

The federal estate and gift tax is what lawyers call a unified tax. You’re taxed on transfers of your property to others whether they’re made during life (gifts) or through your will (bequests). When your executor calculates the estate tax, the estate receives credit for gift taxes paid during your life. The estate and gift tax is imposed on the value of the assets you either gave away or owned at your death.

In a nutshell, here are the steps your executor will take to compute the tax on your estate tax return.

  1. List all the assets you own and value them. The result is your gross estate.
  2. Subtract deductions from the gross estate. The key deductions are the marital deduction (any property inherited by your spouse) and the charitable contribution deduction (any property donated to charity). Expenses of administering the estate also are deductible. The result is the taxable estate.
  3. Compute the tax and apply the lifetime credit. The credit effectively exempts part of the estate from taxes.

The estate tax should be considered with the gift tax, because the two taxes are “unified” in the tax code. You’re supposed to pay a transfer tax whether you give assets away during your lifetime or through your estate. That transfer tax is factored into the estate tax computation.

Gifts to others are supposed to be taxed, but the gift tax has key exceptions that allow you to remove assets from your estate without incurring any gift or estate taxes:

Each person can give a certain amount tax-free per year as gifts. This annual gift tax exclusion is indexed for inflation and was $15,000 in 2021. Suppose you have three children. You can give each of these children up to $15,000 of gifts each year without triggering gift tax issues. You can make exempt gifts to as many people as you want (and can afford to). Spouses can make gifts jointly. In those cases, they double the exclusion. In 2021, a married couple could give each child up to $30,000 of exempt gifts. The exclusion applies to gifts to anyone, not just your family members.

Each person can give amounts in his/her lifetime exempt from the lifetime gift tax. Gift taxes still aren’t due after the annual exclusion is exhausted. Each person has a lifetime exclusion amount that effectively exempts $11.7 million of gifts from the tax (effective tax year 2021).

For example, suppose you want to donate $500,000 now to a relative or friend who is starting up a new private school. In that case, you would use up $485,000 of your lifetime exclusion amount — the other $15,000 is allowed per your annual gift allowance.

Considering state taxes

You should be aware that state estate and inheritance taxes could be an issue for you even if you are exempt from the federal estate tax, and the state tax could be higher than the federal tax. Be sure that your estate planner discusses the issue with you or that you check your state’s taxes with either the department of taxation or a local tax or estate expert.

Each state is allowed to impose its own taxes on the assets of the deceased. Many states don’t impose taxes. Others impose one of the following two, which usually have the same effect but are referred to differently:

  • Estate tax: Like the federal estate tax, these taxes are owed by the estate of the deceased and are based on the value of its assets after considering deductions and credits.
  • Inheritance tax: An inheritance tax also is based on the value of assets, but it’s imposed on the person who inherits an asset.

Twelve states (Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Maine, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington) and the District of Columbia impose a state-level estate tax and six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylavia) impose inheritance taxes. You will note that Maryland is the only state that levies both. For some peculiar reason, these states are clustered in the Northeast, Midwest, and Pacific Northwest.

Usually the estate pays an inheritance tax before distributing assets to the beneficiaries. But both taxes reduce the after-tax wealth that can be distributed to beneficiaries.

The state taxes used to be considered insignificant. However, because of the federal estate tax cuts, state taxes can be much more significant than federal taxes. That’s why you must consider state taxes in your estate plan. The taxes in some states start to be imposed on relatively small estates. In these states, taxes can significantly deplete a person’s estate, especially if it’s small to begin with.

You may owe taxes in a state in which you don’t live, so your executor may have to deal with several states when processing your estate. Real estate is subject to estate or inheritance taxes in the state where it’s located. Personal property (anything other than real estate) is taxed in the state of your residence. So if you own a second property in a state other than your primary state of residence, your executor or heirs have to consider the tax laws in the two states.

You may be able to avoid the two-state tax problem. You can transfer ownership of the real estate to a trust, partnership, limited liability company, or corporation. Then, you technically don’t own the real estate. The trust or other entity owns the real estate. 

You own shares in an entity such as the partnership. Those shares are personal property and are taxed and probated in the state in which you live. The value of the real estate determines the tax, but the tax won’t be imposed by the state in which the real estate is located.

5. Finding Good, Affordable Advice

When putting together your estate plan, you can access a number of tools and sources of advice whether you’re going it alone or getting help from an estate planning professional. 

The size of your estate affects the level of advice and assistance that you need when drafting your estate plan. The following sections give an overview of the types of advice you can use and how to find them.

Doing it yourself

When your estate is well below the taxable level and the terms of your will are straightforward, you may be able to turn to technology and forego an attorney (check out the next section for using an attorney). Several websites and different types of software can help you prepare a basic will.

In general, with these tools you complete a questionnaire and the website or software presents a valid will and other documents that conform to your answers. These sources are an affordable way to prepare a valid, effective estate plan. They can be used in uncomplicated situations, such as when all or most of the estate will be left to your spouse (with the estate going to your children if your spouse already is deceased).

You must investigate any website or software you use. The only source we have reviewed and are comfortable recommending is Nolo Press. Many others are available, and some of them may be fine, but we haven’t reviewed their services or products.

If your situation goes beyond the basic, uncomplicated one, you still have ways to get quality, affordable estate planning advice. Suppose, for example, you have a straightforward estate plan with just a couple of twists, and you think a website or software program helped you produce valid documents that do what you want. 

But you aren’t quite sure. You could ask an estate planning attorney to review your documents and offer a second opinion. Because the attorney will do less work, this method should cost less than having him prepare the plan. The attorney will meet with you to get an understanding of your situation and goals, and then he’ll review the documents. Most likely he’ll tell you that the documents don’t need to be changed. If anything, he may recommend some small changes.

Using an expert: Yes or no?

If your estate is closer to the taxable level, or you’re just not comfortable taking on planning your own estate by yourself, you may want to consult an expert for help. Estate planning experts usually are attorneys.

Although using an attorney is more expensive than creating a plan on your own, you can reduce the cost by doing a fair amount of work in advance. You should collect and put in a clear format all the information the attorney will need. This information includes your assets and liabilities, your cash flow, and details about your family.

Finding prospects

If you want to use an estate planning attorney, you may wonder where you can find one. Consider the following sources:

  • State and local bar associations: These associations usually have lists of attorneys who market themselves as estate planners.
  • Estate planning websites: Several sites are available. As we note in the previous section, we recommend www.nolo.com.
  • Professional organizations of estate planners: One example is the National Association of Estate Planners and Councils (www.naepc.org). You also can type “estate planning professional organizations” into your favorite search engine for other options.
  • Other resources: Any trade, business, or professional associations you belong to may have lists of attorneys who specialize in working with people in your business or profession.
  • Referrals: The best way to find a good, affordable estate planner is through a referral or recommendation from someone you know and respect.
  • Other financial professionals you work with: Tax advisors, insurance agents, investment professionals, and financial planners usually maintain active referral networks of estate planners.

Be cautious with these professional referrals. Some professionals refer others based primarily on the amount of referrals they receive in return. Of course, this referral criterion doesn’t interest you or help you.

Often other professionals can tell whether someone has good technical knowledge and skill in estate planning. But they can’t know how well the estate planner works with clients. An attorney may be able to communicate well with other professionals who know the lingo and concepts of estate planning. But the estate planner may not communicate these ideas well to those outside the field. As a result, he may not be able to explain your estate planning options well.

Selecting an expert

When you’re ready to choose an expert, prepare to have introductory meetings with several estate planners before choosing one. Most estate planners offer a free or low-cost introductory meeting.

As you meet, keep in mind that estate planning isn’t a one-time event; you want to develop a continuing, long-term relationship with the person you choose. You should review the plan with your estate attorney every few years and adjust it for any changes in your family situation, your goals, your finances, and the law. Invest some time early to select an estate planner who’s a good fit for you and can result in a long-term relationship.

Here are the most important factors when choosing an estate planner:

  • The planner must communicate well with you, and you must be comfortable with the planner. Communication and comfort are important because you must be open with the planner about your financial situation, your family, and your goals. You’ll be revealing information and thoughts that are shared with few others (or maybe with no one else).
  • The planner must be technically competent and up-to-date. It will be tough for you as a layman to assess this. That’s one reason it’s good to get referrals from other professionals or satisfied clients.
  • The attorney must be able to explain legal and technical issues in terms you can understand. When an attorney is unable or unwilling to discuss planning options in layman’s terms, look for another planner who meets your needs.

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