Managing and planning one's estate may sound like a task reserved for the very wealthy, but that is a common, and potentially costly, misconception. Estate planning is a necessary component of long-term financial planning no matter the size of a person's investment portfolio.

Estate planning is an umbrella term that encompasses anything from asset allocation after death to end-of-life health care decisions to designating a power of attorney in case an individual becomes incapacitated. Key components of an estate plan typically include wills, trusts, power of attorney, and health care directives.

A few basic steps can help people to establish an estate plan.

People should create a will - a legal document that specifies how a person's assets will be distributed after his or her death. Although a will can be set up without an attorney, relying on an attorney to create or update a will can ensure that it is legally sound and reflects the person's intentions. The will can specify the estate's executor, who will carry out the plans of the will. Without a will, local intestacy laws will dictate the distribution of the assets.

Establishing trusts is an option. Morgan Legal Group says trusts are tools that can protect assets, minimize estate taxes, and provide for beneficiaries. Trusts can be revocable or irrevocable. Special needs trusts also can be set up. Trusts can help avoid probate and reduce estate taxes. Trusts also can shield some of the assets so they cannot be counted as part of the person's responsibility for paying for skilled nursing home admittance.

People are also advised to determine powers of attorney and health care proxies. If someone becomes incapacitated, that person will need someone responsible to act on his or her behalf. A financial or legal power of attorney can help with paying bills, accessing accounts and managing finances and other needs. A health care proxy can be listed on an advance health care directive, known as a living will. The proxy will communicate the person's wishes indicated on the directive and see that these wishes are honored.

Knowing what is included in an estate plan can ensure that people make informed choices about their assets, beneficiaries, and financial futures. It is advisable to work with legal, medical, and tax professionals when drawing up estate plans to avoid any issues that can arise when matters are not decided ahead of time.