The goal of a good estate plan is threefold: to distribute your assets where you want them after you die, to make sure your heirs don't have to pay exorbitant taxes on their inheritance and to ensure that a person you trust will be able to manage your affairs if you're alive but unable to make decisions.
Wills are a very important part of any estate plan, and it's important to make one no matter how many assets you have. Everyone owns something of value or something of sentimental importance to their heirs, and making a will ensures that these are distributed fairly and without delay. Also, wills are not only a way to distribute possessions. If you have children, your will is the best place to name guardians for them.
If you die intestate -- without a will -- the state court decides which of your surviving relatives gets what, regardless of what you wanted. Even if you made your wishes clear while you were alive, unless you put them down in a legally binding will, it's likely that they will not be observed. This can have very messy consequences with regard to child custody issues, as well as the distribution of assets. You may want your best friend to be the legal guardian of your child and to inherit most of your money, for example. But even if you have discussed this with your family and best friend, if you die intestate, it's more likely that one of your nearest blood relatives will be chosen as guardian, and your money distributed among your family.
Making a decision about power of attorney is at least as important as making a will, because it affects you while you're still alive. The person you choose is called your agent and needs to be someone who you can trust completely, and who understands what your wishes are and agrees to carry them out. You don't have to be incapacitated to give someone power of attorney. For example, many people make a spouse their agent so that this person can manage their finances while they're out of town. If you want someone to be able to make decisions for you when you're incapacitated, you need to give them durable power of attorney. Otherwise, it actually goes out of effect as soon as you are incapacitated.
Medical power of attorney functions just like financial, but involves medical issues. Whoever you choose as your agent for this kind of power of attorney needs to understand your wishes and philosophy about the means taken to prolong your life. For example, if you're in a coma and it's unlikely that you'll come out of it, your agent can decide whether or not to keep you on life support. It's also very important to discuss your views on these kinds of issues with your doctor before you become ill.
Read on to find out about trusts and how to reduce taxes on your estate.