Once you've outlined the basics of your plan, it's worth discussing them with the key people your decisions will impact before you go through the legal process of formalizing those plans. Obviously, you'll need to use discretion and judgment; talking about your wishes with your wife and adult children is important, but you'd probably not bring it up with young kids. Be prepared for some resistance, particularly from your kids; they really don't want to contemplate a world without their parents, and who can blame them? (Of course, they might also be resistant if your wishes don't coincide with their expectations!) Just stress that you want them to know and understand your desires and the rationales behind them. It can't lessen the pain of your death, but it can help avoid resentment or disappointment.
Most small estates are not likely to breed resentments or disappointments. It's hard for anyone to complain, for example, if you divide your estate equally among your children. But it is possible that you want to treat different heirs in different ways. Some people, for example, have given responsible children lump sums and more profligate children income-generating trusts. Explaining your reasoning to them before your death should mitigate any problems.
-- Then Make It Legal. Once you've decided what you want to do with your assets, and you've discussed your plans with the people who matter, it's time to make things legal.
Everyone needs a basic will; otherwise your assets will be distributed according to your state's "intestate" laws -- which may or may not mirror your wishes.
Another big issue is probate. In some states (notably California and New York) probate is both time-consuming and expensive -- something you want to avoid if at all possible. At the most basic level you can accomplish this by making sure that your beneficiaries are correctly identified for financial accounts and insurance policies. You'll also want to ensure real property is titled properly so that it will pass to your intended beneficiary automatically (outside probate). The key here? A will is essential -- but it will not avoid probate.
In addition, if you have significant assets (potentially triggering estate tax), you should talk to an estate-planning attorney about trusts. It takes a fair amount of money to trigger estate taxes ($2 million this year and $3.5 million next year, but those numbers could change in the future, of course). But a large retirement account and a home in a high-priced real estate market like New York or California could easily put you into the estate tax category. An estate planner can help you figure out ways to reduce the size of your taxable estate, find the right structure for major assets, and establish trusts for your surviving spouse and other heirs.
-- And Don't Forget ... And while you're thinking about the unthinkable, there are a couple of other documents to prepare. You should establish a "power of attorney" to give someone you love and trust the ability to handle your affairs if you're incapacitated to ensure you can pay the bills and make financial decisions when you can't. You should also establish an "advance health care directive" in which you can (1) express your wishes concerning life-sustaining procedures, and (2) designate a trusted relative or friend to make decisions on your behalf should you become unable to speak for yourself.
I've never met anyone who relished the chance to plan for his or her demise. But I'm absolutely convinced that it's right thing to do for everyone with assets or dependents or both -- which means almost everyone. Start now by making your list of goals for your financial legacy. Talk it over with the people your decisions will impact. Then get it formalized and legalized. You should revisit it from time to time, especially if your family situation changes, but you should also be comforted by the fact that your legacy will be just that: your legacy.