A will is a legal document that tells how you want your estate to be distributed after your death. In your will, you name an executor, a person to carry out the transfer of your estate when you pass away.

Why is it important to prepare a will?

If you pass away without a will, you are said to be intestate. In this case, your property is distributed according to the laws of your state. By having a valid will, you can control who get what, rather than allowing the state to make those choices for you. Property reverts to the state when a person dies without heirs.

You need a will if you:

• Are married

• Have children (you will specify who will be their guardian)

• Have been divorced

• Are married to a non-U.S. citizen

• Have a partner, but not in a state-recognized marriage

How to make a will?

Anyone who is age 18 or older and of sound mind can make a legally valid will. A simple will is a short document that lists the people you want to inherit and what you want each to receive. There are some states where a handwritten will is legally valid, but it should be witnessed like other wills. Because a handwritten will often is easier to contest or question, we don’t recommend going this route.

Formal wills take a short amount of time to prepare. We recommend working with a legal professional, but if your estate is fairy uncomplicated, then you usually can prepare a will yourself with these resources:

• Nolo's Quicken Willmaker Plus: www.nolo.com/products

• LegalZoom: www.legalzoom.com

Whether you use an estate lawyer or not, you will need witnesses, usually two people who are not mentioned in the will. They must be 18 years old, unrelated to you and able to stand behind your mental competency at the time you signed the will.

• See also: Financial professionals

How to make changes to a will?

You can make a will and later make changes with a document called a codicil. The codicil lists the changes and then reaffirms the rest of the original will. A will cannot legally be changed by crossing out, adding or erasing word or by removing or adding pages. A codicil is usually drawn up by an estate lawyer and is executed and witnessed the same way as a will.

What is estate planning?

You may not be thinking ahead to estate planning right now, but there are some quick and easy tasks you should take care of to make sure your future is in order, even if you don't have a lot of assets and aren't all that worried about the future.

Estate planning is preparing a plan for transferring property acquired during one’s lifetime at the time of one’s death. Your goals in estate planning should be to make known how you want your possessions to go to your loved ones upon your death. Some tools of estate planning include wills, powers of attorney, trusts and joint ownership of assets.

• See also: Other taxes

How to create an estate plan

Tell someone you trust about everything above and figure out how you'd give him or her access to it all if something happened to you. An estate plan is of little use if nobody knows you’ve got a will or safe deposit box.

Here are financial steps you should take to plan your will and estate:

Consult an estate-planning attorney.

If you haven’t done so already meet with a trained estate-planning attorney are skilled with helping you with the complexities of legal documentation to make sure your affairs are in order. We recommend working with an estate-planning attorney to make sure affairs are in order. Be sure to read up on the specifics of your state to make sure any documents you fill out are legally valid.

There are legal self-help guides and online resources:

• Nolo: www.nolo.com/legal-encyclopedia/wills-trusts-estates

• American Bar Association: www.americanbar.org/aba.html

Draft a financial power of attorney.

At some point in your life, you may be incapacitated and unable to make your own decisions. A power of attorney is a legal document authorizing someone to act on your behalf. For example, if you become incapable of caring for yourself, the power of attorney give your appointed person the power to use money from your savings to pay bills or hire people to take care of you.

The general power of attorney gives people the right to act completely for you. Of course, you must fully trust the person to whom you give this legal right so choose carefully. You can hire a lawyer to write your power of attorney, or you can do it own your own.

Name beneficiaries.

A beneficiary is someone you choose to get your assets and take over your accounts after you are gone. Name the right beneficiaries on all of your IRAs and retirement plans. Most people rarely change beneficiaries after opening their accounts or even know exactly who their beneficiaries are at any given time. But you don't want your assets going to the wrong person.

• See also: Retirement, Investment

Look for joint ownership accounts and update them.

If you have any joint ownership accounts, called Joint Tenancy with the Right of Survivorship (JTWROS), make sure that is still current. A JTWROS account is one where two or more people own property together, and the property transfers automatically to the joint owner if something happens to the other. Check your bank or credit union accounts, brokerage accounts, mutual fund accounts and real estate. If you no longer want to be sharing assets with a joint owner, make sure to remove them from the account. If you have questions, talk with a financial professional.

Prepare for sudden accidents or incapacity, just in case.

Accidents occur. You don't want to be dealing with the results of an accident and the financial headaches. And in the event you are so incapacitated that you can't care for yourself, you want to make sure you laid out your plans for your care.

So take care of these things while you're well:

• Fill out an advance health-care directive.

Also known as a living will, this document describes your preferences for health care — how far to go in trying to revive you and when to stop. Make it accessible. One way is to email a copy to yourself, plus a copy to whomever you typically list as your emergency contact when asked.

• Fill out a health-care power of attorney or durable health-care power. 

This allows someone you trust to make medical decisions on your behalf if something happens to you and you can’t communicate. It’s also helpful with more routine hospital visits. An example is if your significant other isn’t your spouse. Because of privacy laws (called HIPAA) it can be difficult for someone who isn’t related or married to the patient to get medical information without a health care power.

• Add emergency contacts to your cell phone.

Load up your cell phone with numbers you might need in an accident scenario. Include relatives, friends, doctors, your bank, your building manager or landlord. Label the person you want in charge of your personal and financial care, “Emergency Contact.”

• Document your medications.

If you take any medications, consider putting a list of them on your cell phone or other accessible place, like on a slip of paper in your wallet.

Get life insurance.

If you’re married, or have kids or other people who depend on you for income, buy at least enough term life insurance to pay for the bare essentials—whatever you decide that means. Maybe that's enough for funeral expenses, or a year of earnings, or who knows what. Figure it out and if you haven’t already insured yourself for more than that, at least get enough to cover the minimum. A simple term life policy can be super-cheap for most young people.

• See also: Life insurance

Safeguard your documents.

Put all of your key documents and important stuff in a fireproof, stormproof, theft-proof, waterproof, kid-proof place. A safe deposit box at your bank is a good start. If you have any key documents or valuable stuff, don't put them where they could get ruined or lost. Examples: life insurance policies, originals of wills and trusts, health powers of attorney, health directives, savings bonds, deeds to a home or other property, car or boat title certificates, paper U.S. Savings Bonds, etc. Scan them and store those copies on a secure server.

• See also: Protect yourself

How do taxes affect estate planning?

Federal and state government levy various types of taxes that must be considered in planning your estate. Three major taxes are estate, inheritance and gift taxes.

Estate tax

Estate tax is a tax on property passed from deceased individuals to their heirs. It is assessed only on large estates. In 2011, “large” means more than $5 million, excluding anything left to a spouse or to charity. The estate tax is paid from the assets of the estate, before anything can be distributed to heirs. An estate may have to sell property or investments in order to pay this tax.

Inheritance tax

The inheritance tax is a tax on an heir who receives property from a deceased person’ estate. The different between the estate tax and an inheritance tax lies in who pays the tax. The estate tax is deducted from the value of the estate, but the heirs pay inheritance taxes on property received. The amount of tax is based on the value of the property in the estate. In states where inheritances taxes are imposed, laws vary widely as to the rate of taxation and treatment of property to be taxed.

Gift tax

Gifts are a popular way of distributing property to loves ones before death to avoid estate and inheritance taxes. A gift tax is a tax on a gift of money or property, that is paid by the giver of the gift. You can give up to $11,000 per person per year without having to pay a gift tax. Gifts from a husband or wife to someone else means that together they can give as much as $22,000 per year to anyone, tax free. And after that, you can give up to $1 million in lifetime gifts, still without paying gift tax. Gift tax only kicks in after that point, making it a very unusual tax to pay.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a few online resources you might find useful:

• AARP Estate Planning 101: www.aarp.org/relationships/caregiving-resource-center/info-11-2010/lfm_estate_planning_101.html

• Nolo: www.nolo.com/legal-encyclopedia/wills-trusts-estates

• AARP Financial power of attorney: www.aarp.org/relationships/caregiving-resource-center/info-11-2010/lfm_financial_power_of_attorney.html