Estate planning checklist and basics: What you need to know

This step-by-step guide was created to walk you through estate planning basics, ensuring you cover all the essential elements. From drafting a will to setting up trusts and designating beneficiaries, our estate planning checklist will help you navigate each step with confidence, making the process as smooth and straightforward as possible.

What is estate planning?

When we talk about estate planning, it's important to clarify what we mean by the term "estate." It refers to a person's net worth, or the sum of financial assets they have accumulated over the course of their life. Keep in mind that "net" refers to the total amount you own outright, minus any outstanding loan obligations. For example, a $5 million home with a $4 million mortgage would only count as $1 million towards the estate.

Your estate may include bank accounts, investments, real estate, and any other assets you own or hold a financial stake in. Our Valuing Your Estate worksheet (PDF) can be a helpful planning tool.

Estate planning is a comprehensive process designed to ensure that your financial and personal wishes are carried out according to your preferences, both during your lifetime and after your passing. It involves creating a set of legal documents and strategies that outline how your assets will be managed, distributed, and protected. This can include everything from designating guardians for minor children and ensuring that your loved ones are taken care of to setting up mechanisms for managing your wealth.

Estate planning isn't just about creating a will; it encompasses a wide range of tools and strategies to safeguard your financial legacy and provide peace of mind.

Where to start with estate planning

Estate planning doesn't have to be intimidating, and it's certainly not just for the ultra-wealthy. In fact, estate planning basics are straightforward and can provide real peace of mind for you and your loved ones. Whether you're just starting out or have been investing for years, it's never too early to think about your estate.

A good place to begin is with an estate planning checklist, which can guide you through the essential steps, such as creating a will, setting up trusts, and designating power of attorney. By following a clear and structured process, you can ensure that your assets are protected and your wishes are honored.

Our Critical Financial Checklist (PDF) can be a helpful tool to track your progress.

#1: Create an inventory of your assets

Assets include not just your financial holdings like stocks, bonds, insurance policies, and real estate, but also personal items such as jewelry, art, and other valuables. Simply taking the time to catalog these items can be a great incentive for organizing your home—getting rid of items you no longer need and making sure your most prized possessions are safe and secure. By taking stock of everything you own, you might realize that your estate is more substantial than you initially thought.

Having an inventory provides a clear picture of what you have, making it easier to decide how to allocate your assets. Additionally, gathering usernames and passwords for your digital accounts is essential to ensure that your beneficiaries have access to all your assets, both physical and digital. This step not only helps you stay organized but also gives you a sense of control and preparedness for the future.

Share your inventory with your family and others helping you, such as your attorney or financial advisor. It's important to put aside any short-term hesitancy to ensure you have a clear plan in place. And remember: Taking inventory of your estate isn't a one-and-done job. You should review your assets every few years and update your plan for any changes that may have occurred.

#2: Consider the goals for your estate plan

Beyond the assets themselves, you'll want to give some thought to your goals in making an estate plan. This involves your emotions, values, and intentions as much as your finances. These goals can shape significant decisions, such as who receives your assets—whether it's family, friends, or charitable organizations—and how those assets are distributed.

You might set a goal to protect minors or special needs family members by ensuring that assets are managed responsibly and that the right individuals are appointed to make decisions on their behalf. Another goal could be to support your philanthropic interests, allowing you to contribute to causes you care about and create a lasting impact.

If you have a family business, you can set goals to ensure its continuation by creating a structured transition plan and designating the right individuals to take over.

Discussing these plans with your family can provide comfort and clarity, ensuring everyone understands your intentions and is prepared for the future.

#3: Review beneficiaries and asset titling

Beneficiaries are the individuals or entities you designate to receive your assets upon your death. Including beneficiary information on life insurance policies, retirement accounts, and other assets is crucial to avoiding conflicts and ensuring your wishes are carried out. By specifying beneficiaries, you ensure that your assets are distributed directly to the intended recipients, bypassing the probate process and saving your loved ones time and legal expenses. This can also prevent disputes among family members or other potential heirs.

Regularly reviewing and updating your beneficiary designations is essential to ensuring they reflect your current wishes and circumstances, especially after significant life events like marriage, divorce, or the birth of a child.

When deciding beneficiaries, consider not just the immediate financial needs of your family members but also your personal values and the legacy you wish to leave. Think about whether you want to support specific goals for your beneficiaries, such as education or starting a business.

Asset titling, which refers to how ownership of your assets is legally recorded, is also important, because some assets don't allow you to name a beneficiary. Ensure that the titling of your assets matches your estate plan to avoid unintended legal and tax consequences.

Involving your family in philanthropic efforts can help foster a sense of purpose and continuity. By taking these steps, you can create a comprehensive and thoughtful estate plan that reflects your values and ensures that your legacy endures.

#4: Consider ways to minimize estate taxes

State taxes, inheritance taxes, and gift taxes are distinct and can significantly impact the amount of money that ultimately reaches your loved ones. Estate taxes are levied on the value of your estate—meaning they come out of the estate itself—while inheritance taxes are paid by your beneficiaries.

Gift taxes apply to large gifts given during your lifetime. There are some important exceptions, including a $19,000 annual exclusion per recipient, as well as gifts to charity, tuition payments made directly to a school, and payments for someone's medical care.

Let's say you gave one of your children a $20,000 gift. You would need to fill out a gift tax form (known as Form 709) to report the $1,000 above the annual limit. That's because, on top of the annual gift tax exclusion, you also have a lifetime estate and gift tax exemption. It's currently set at $13.99 million but expected to drop to around $6 million on December 31, 2025. Any amount you give over the annual limit is deducted from your larger lifetime limit by the IRS.

Filing a gift tax return enables the IRS to track the total value of your gifts over your lifetime, helping you stay clear of gift and estate taxes. Once you've used up your lifetime limit, you might owe taxes on any additional gifts or transfers, or your estate might owe additional taxes at the time of your death.

Assuming there will be changes to the lifetime limit, it's important to bear in mind that any gifts you've already made will count toward the new limit. In other words, a rule change doesn't offer a clean slate.

The IRS website is a helpful resource for details on gift taxes and the rules that apply. These taxes can vary widely by state, so it's important to understand the specific rules where you live.

Arming yourself with an effective tax strategy can help you avoid costly mistakes that could eat into your estate. Your strategy could include:

• Understanding what taxes may apply in your situation. In addition to the federal estate tax and inheritance tax, you may need to factor in state taxes depending on where you live.
• Transferring assets to take advantage of the lifetime estate and gift tax exemption. If you know you're going to leave some money to loved ones or important causes, you can maximize what they receive by making gifts during your lifetime.
• Converting traditional retirement plan assets to a Roth IRA. When it comes to estate planning, the primary benefit of a Roth conversion is that you pay taxes now, so your beneficiaries won't have to pay them when they inherit your IRA. You'll want to consider how your tax rate compares with the tax rate of your beneficiaries; if yours is higher, converting to a Roth may not make sense, but it could still help to pay taxes and reduce the estate that will ultimately be subject to 40% tax.
• Establishing an irrevocable trust. This type of trust isn't suitable for all situations, but it can help lower the amount of your estate subject to taxes.

Learn how to plan for inheritance taxes

#5: Plan for potential incapacitation

Incapacitation refers to the loss of the mental or physical ability to handle one's own personal, medical, or financial affairs. It's best to have a plan in place in the event you're unable to make decisions, whether temporarily or permanently.

In cases of temporary incapacitation, you'll want to arrange a durable power of attorney, a document that appoints someone you trust to manage your financial affairs when you're unable to. Not having one could lead to delays in paying bills or managing investments.

Similarly, a health care proxy or advance directive helps you establish a clear plan for medical decisions in the event you're unable to advocate for yourself. A health care proxy lets a trusted person make medical decisions on your behalf. An advance directive outlines what kinds of care you wish to receive or decline in certain situations.

Without these instructions, making medical decisions can become complicated, since a judge might have to appoint someone (generally a family member) to handle them on your behalf. By setting up these documents, you ensure that your wishes are respected and that your loved ones aren't burdened with unnecessary stress. 

Already have an estate plan?

Keep in mind that estate planning isn't a one-and-done task; it's a living document that should grow and change with you. It's a good practice to review your estate plan every 3 to 5 years to ensure it still aligns with your current circumstances and goals. Major life events, such as marriage, divorce, the birth of children or grandchildren, or the passing of a loved one, can significantly affect your estate plan and should prompt a review.

Even changes in your financial situation, like inheriting a large sum or selling a business, can necessitate updates to your estate plan. By treating your estate plan as a dynamic document, you can ensure that it continues to reflect your wishes and provides the best possible protection for your loved ones.

Beneficiary designations and letters of intent

Beneficiary designations are forms you fill out for accounts like retirement plans, life insurance policies, and bank accounts. They specify who will receive the funds when you pass away. While these forms are typically straightforward, it's a good idea to review them periodically and ensure they align with your overall estate plan.

A letter of intent is a non-legal document that can provide personal guidance to your executor and beneficiaries. It can include things like your wishes for funeral arrangements, explanations of your estate decisions, and personal messages. While you can write this on your own, it's helpful to discuss it with an estate planning attorney to ensure it complements your other documents.

Simple and complex wills

Your will is a set of instructions explaining how property owned in your name should be distributed after your passing. It also names an executor and a guardian if needed.

A simple will is straightforward and is typically used for individuals with a smaller, less complicated estate. It outlines the basic distribution of assets and names an executor to carry out your wishes.

A complex will, on the other hand, is used for larger estates or those with more intricate financial situations, such as multiple properties or business interests. It might also include provisions for trusts or detailed instructions for asset management.

Your will is a physical document that you create and sign, often in the presence of witnesses. It's important to keep it in a safe, accessible place, like a fireproof safe or a safety deposit box, and to let your executor know where it is. While some states allow electronic wills, it's generally best to have a physical copy to avoid any legal issues.

Whether simple or complex, a well-crafted will is a crucial part of your estate plan, ensuring your wishes are respected and your loved ones are taken care of.

Revocable living trust

A trust is like a legal container where you can place your assets to manage and distribute them according to your wishes. Different types of trusts are available to suit various situations, including:

• Blended families.
• Assets being passed to grandchildren.
• Children with special needs.
• Money meant for specific uses.
• Assets being passed to several inheritors (like homes or businesses).

There are 2 main types: revocable and irrevocable trusts. A revocable trust, also known as a living trust, allows you to retain control over the assets and make changes as needed during your lifetime. An irrevocable trust, on the other hand, is more permanent; once you transfer assets into it, you generally can't change it or take the assets back.

A revocable living trust offers flexibility and control while you're alive, and it can help avoid the probate process, making it easier for your loved ones to manage your assets after you're gone.

Financial and health care powers of attorney

If there comes a time when you can't make decisions for yourself, it's important to have powers of attorney (POAs) in place. A POA is a legal document granting a person you trust the authority to act on your behalf. A financial POA manages decisions surrounding your finances, while a health care POA handles decisions regarding your medical care.

A POA typically ends if you become incapacitated. A durable power of attorney, however, remains in effect even if you become incapacitated, ensuring continuous management of your financial affairs.

Living will and advance medical directive

A living will specifies your wishes for medical treatment if you become unable to communicate, while an advanced medical directive can include a living will and also appoint a health care proxy to make decisions on your behalf. Unlike a health care POA—which applies to other areas of medical care—a living will only details instructions concerning end-of-life care.

To set up a living will, you should consult a legal professional to draft the document, ensuring it meets your state's requirements, and then sign it in the presence of witnesses or a notary.

Estate planning is easier with a professional by your side

It's important to reflect on how straightforward or complex your situation might be. If you have a simple estate with a few assets and clear wishes, you might feel confident handling it on your own. However, if you live in a state with inheritance taxes, plan to create a trust, or have philanthropic goals, your estate plan could be more specialized and benefit from professional guidance.

Vanguard has a downloadable checklist (PDF) you can use to track your own planning needs and progress.

Estate planning services range from basic wills and power of attorney documents to more advanced strategies like trusts and charitable giving. Working with a professional can ensure that your plan is tailored to your unique needs, providing peace of mind and clarity for you and your loved ones.