Don't Leave Your Estate to Uncle Sam

Where there's a will, there's a way. The problem is: Not enough Americans have one and that's one life lesson you can't learn the hard way.

AP

Financial advisors say the No. 1 mistake people make with estate planning is that they don't quite get around to it.

"It's right up there with cleaning the toilet for a lot of people," says Stacy Francis, president of Francis Financial and founder of Savvy Ladies, an organization aimed at educating women about finance.

Just 64 percent of Americans making $75,000 or more have a will, according to a 2005 Gallup poll; that number drops to half for those earning less.

Everyone has their reasons -- too young, not wealthy enough, high hopes for immortality!

Will Yourself To Do It

The truth is, everyone needs a will, because, well, you never know. So get over the icky factor, stop making excuses and just do it.

"If you're not doing your own estate planning, the government will do it for you," quips Francis. "And you may not like how the government divvies up your assets."

For something, fast, easy and cheap, go online. Nolo, which makes the popular WillMaker Plus software, will help you create a will online for $39.99. Legal Zoom 's online-will service starts at $69.

The alternative is a hiring an estate lawyer, which is more expensive but recommended for those with complicated circumstances, such as divorcees who hold assets with their former spouse.

If you're prone to procrastination and need a push, or have a question deciding which route to go, New York lawyer Sharon Siegel hosts a weekly chat about estate planning on lawyers.com.

Make Updates as Life Changes

Another common mistake is thinking that once a will is done, it's good for life.

You have to update a will -- and other important and related legal documents -- after every major life change, from marriage to divorce, the birth of a child or death of a loved one.

You should keep a checklist of all your major policies and holdings -- 401(k)s, life insurance, annuities, etc. -- and update them, especially the beneficiary category. Don't wait. You don't want to have to explain to your new spouse why your mom is still your beneficiary.

"If your will states that your mutual fund goes to your wife but the beneficiary listed with Schwab is your ex-wife, guess what? It's going to your ex-wife," Francis cautions.

You Also Need a Living Will

If you have any questions about why you would need one, remember Terry Schiavo, the woman who suffered brain damage at age 26 and wound up in a persistent vegetative state for 15 years.

A living will is a type of advanced health-care directive, which allows you to specify what type of medical treatment you want -- or don't want -- should you become unable to make the decision yourself. For instance, you need to determine if you want a "Do Not Resuscitate" order, which would tell your health-care provider to "pull the plug" if you are being kept alive by life support.

"It's amazing to me, with all that's happened -- the Terry Schiavo case -- how many people today don't have living wills," said Tom Geraghty, a partner at Stonegate Wealth Management.

Along with a living will you need to have a health-care proxy, granting a loved one power of attorney for your health-care decisions, and a Hipaa release, which will allow that person access to your medical records. Both forms are pretty standard and can be found online or by contacting your state government.

Don't Forget About the Kids!

It's not a pleasant topic, but it is crucial to appoint a guardian for your kids in the event you die before they turn 18.

"People get so wrapped up mulling over all of their assets that they forget to choose a guardian for their children and set up a trust for them," says Francis.

You should also appoint a trustee to manage your kids' inheritance, so they don't blow it on expensive cars or a chauffeur.

Experts recommend that the guardian and trustee be different people. After all, these roles involve very different interests and skill sets.

Geraghty puts it this way: "Don't you want a separation of church and state? It's the fox guarding the hen house!"

Once you have candidates in mind, talk to them to make sure they are comfortable with the responsibilities.

Make sure all of the documentation for your will and other important items (investments, life-insurance policies, instructions for your memorial and burial) are filed neatly and that your family knows where they are.

There are a couple of companies, Docubank and Legal Directives, that deal with putting your health-care directives online, so no matter where you are, in what emergency, hospital officials can access your documentation.

Draw up a one-page cheat sheet as a guide, but don't make it a treasure hunt – walk your family through it while you're still around.

While you're at it, make sure you file a list of people who should be notified in the event of your death (stock broker, attorney, etc.) and key financial information – everything from your Social Security number to your bank account(s).

This is particularly crucial for women. Surprisingly enough, a lot of women still defer to men about handling the finances. But guess what? The reality is, widows outnumber widowers four to one, so ladies, there's a very good chance you are going to have to learn eventually.

Quit the Bickering

If you discuss your estate plan with your family, it will probably help alleviate some of the conflict after you're gone.

"Money and death bring out the worst in family relations," says Eric Tyson, author of "Let's Get Real About Money! Profit From the Habits of the Best Personal-Finance Managers."

Geraghty says having a very liquid estate -– a lot of cash, a lot of life insurance -- helps tremendously. "Don't leave a house split between three kids," he advises.

Barry Armstrong, a financial planner and host of "Money Matters" on WBIX 1060 in Boston, has a simple solution to prevent bickering: "Add a clause that says if you dispute any provision in the trust, you're automatically disinherited!"

Siegel says that's actually one of the most common questions she gets asked, "Can I disinherit one or all of my kids?"

The answer? Yes; it's legal in every state but Louisiana.

© 2009 CNBC.com