To start with, what is the purpose of estate planning? Basically, you want to make sure that your estate (your estate consists of everything you own - cash, real estate holdings, life insurance policies, retirement plans, even your doll collection) is distributed to your heirs in as intact a manner as possible. If you don't write a will, for example, your property could be distributed to distant relations, rather than to your friends or favorite charities; and even if you do write a will, if you don't plan your estate distribution carefully, more than half of what you leave to your beneficiaries could be paid in estate taxes! The minimum in estate planning is writing a will; depending on your tax circumstances, you may want to establish a living trust of some nature as well.
Determine the Value
In order to plan your estate, you first need to estimate the value of your estate, and then determine whether estate tax will apply. If the value of your estate is under a certain value, you can leave it to anyone without estate taxation; you need to know the value of your estate to be sure, though! See the Estate Tax FAQ on whether you are required to file an estate tax return for filing thresholds from 2011 on.
Last Will and Testament
Regardless of the value of your estate, you should write a will; click here for more information. If you die without a will, your estate will be escheated, which is a fancy term for being left to your state to dispose of. If you are married and die intestate, your property will be left to your spouse and dependent children. If you do write a will, the will has to go through the probate process, a legal process wherein your will is subjected to public scrutiny in the court system in order to determine its legal validity. Therefore, you might next want to look into trusts to sidestep the probate process.
Rather than leaving assets to your beneficiaries outright in a will, you can create a trust. Establishing a trust allows you to appoint a trustee to manage your assets, and oversee payments to your beneficiary. Further, you can avoid the probate process in leaving assets to your beneficiaries by establishing a trust; the probate process takes a long time, and can be costly. However, these trusts are only worthwhile if you have a fairly sizeable estate, as they can be expensive to establish. Click here for more information on living trusts (living trusts are the most commonly used for estate planning).
Your 401(k) plan, insurance policies, and so forth, probably allow you to designate a beneficiary in the event of your death. Make sure that your beneficiary designations are up to date. Further, jointly owned property automatically goes to the joint owner upon your death. You can't leave jointly owned property to anyone other than the joint owner.