Your estate plan is a critical element of your financial plan. It sets out who inherits your assets when you pass away. It appoints someone to manage your finances if you are incapacitated, and to make health care decisions for you if you cannot. It provides instructions about medical care near your end of life.

A series of documents outlines your estate plan. The documents are not exactly light reading. They include your last will, financial and health care powers of attorney, advanced medical directive and often revocable (also called living) trust.

My challenge to you: can you explain the key elements of your estate plan?

If not, talk to your attorney or financial planner and review your documents. Then, write a summary – or get out your whiteboard and draw some flow charts – to make sure you understand.

Yours truly has some experience with this. Before earning my CFP® designation, I probably met with my parents’ estate planning attorney three times over a decade to ask him to explain, and explain again, and then again, my parents’ revocable trusts. I don’t think I ever understood the subtleties until I earned my CFP® and started reviewing estate planning documents regularly. So, I get it: estate plans are not intuitive.

But they are important.

Below are a few examples of where confusion can arise.

• Who inherits your retirement accounts? If you selected beneficiaries of your retirement accounts, your last will or revocable trust has no impact on who gets your retirement assets when you die. What matters is who you named as beneficiary on the retirement plan’s paperwork.
• Will you avoid probate by creating a revocable trust? If you created a revocable trust but did not fund it, or if your will refers to a so-called testamentary trust (which is created when you pass away), your assets will still go through probate. If you want to avoid probate, fund your trust now.
• How can your heirs reduce their tax burden with a step-up at death? Under current tax law, when you die, assets outside a retirement account will receive a “step-up” at death That means the beneficiary will not owe tax on capital gain from appreciation during your lifetime. This is a huge advantage for people who have owned stocks or real estate for decades. But there is no step up in assets owned in a retirement account or in an irrevocable trust. And there is no step-up if you gave away an asset before you died.
• How does the step-up at death work with jointly owned assets? If you have a joint brokerage account or a jointly owned house, when the first person dies, 50% of the cost basis “steps up” to the value on the date of death. An example: you and your spouse bought stocks in a joint brokerage account over many years, paying $1 mm. They are worth $2.5 mm when the first spouse passes away. Just before the death, there was $1.5 mm of unrealized capital gain. The day after the death, there is only $750,000 of unrealized capital gain. Warning: you must work with your brokerage company to change the cost basis. They won’t do it automatically.
• What are disclaimer provisions? If your assets are in a trust and the trust allows the primary beneficiary to take the assets at your death or to disclaim them into an irrevocable trust, your beneficiary has a valuable option, allowing them to maximize tax benefits when you die.

I could go on … and on … and on.

Spend an hour or two to make sure you understand your estate plan. You and your heirs will be happy that you did.