Estate Plans: The Basics of What They Do and Why You Should Have Them
“I intend to live forever or die trying.” -Groucho Marx
The thought of planning for the end of one’s life can be daunting and thinking about ones own demise is not high on most people’s list of weekend activities. But planning properly for what happens if you are incapacitated or your death is a critical step to ensure that your loved ones are taken care of and your wishes are honored. Basic estate plans provide a roadmap for managing your assets, healthcare decisions, and more. In this article, we’ll delve into the significance of having a basic estate plan and why it’s an essential aspect of responsible financial and personal planning.
Why Plan in Advance?
Doing nothing to proactively plan for your estate is in fact making a decision. By doing nothing and not having the foundational documents in place, you are handing over the management and distribution of your estate to the state you live in. Each state has laws in place that govern custody of assets, guardianship, conservatorship, and more. If you do nothing, something will happen, but it may not be what you want, what is best for those you love, and the cost may be far greater than putting a basic plan in place. What are the benefits of planning for your estate in advance?
- Control Over Your Legacy: Creating a basic estate plan ensures that your assets and personal matters are handled according to your wishes. Without a plan, the state’s laws will dictate how your estate is distributed, which might not align with your intentions.
- Protection for Loved Ones: An estate plan offers protection and security for your loved ones. For instance, a will allows you to name a guardian for your minor children, ensuring their care is entrusted to someone you’ve chosen.
- Avoiding Family Conflicts: A well-drafted estate plan can help minimize potential conflicts among family members by providing clear instructions and reducing ambiguity.
- Financial Benefits: Estate planning can help reduce estate taxes and ensure that your assets are distributed efficiently, potentially saving your beneficiaries from unnecessary financial burdens. Check out this article for information about probate fees: Probate Fees: Costs by State Breakdown [Updated 2021] | Trust & Will (trustandwill.com)
- Incapacity Planning: Estate plans encompass documents that address your wishes in the event of incapacitation, sparing your loved ones from having to make difficult decisions on your behalf.
The Foundational Estate Documents
The Last Will and Testament
The Last Will and Testament, or just Will, is a legal document that outlines how you want your assets to be distributed after your death. The Will handles any asset that flows through probate and directs the state as to who should receive them. This document is especially crucial if you have minor children, as it allows you to designate guardianship for your children who may or many not be whom the state would choose for you. The Will also has the ability to create a Trust (see below) for more complex situations.
Financial Power of Attorney
The Financial Power of Attorney (POA) grants someone you trust the authority to manage your financial affairs. The Power of Attorney allows the trusted individual to access accounts to pay bills, manage important financial tasks, and more. Typically, this document is designed to allow the trusted individual to manage your affairs if you’re unable to do so due to illness or incapacity, but it can be set up to be used outside of those circumstances.
Generally, when you establish a Financial Power of Attorney, you will need to notify your associated financial institutions (banks, investment accounts, retirement accounts, etc.) of the existence of the document. They may have their own forms to complete as well to identify the trusted individual.
Healthcare Power of Attorney
A Healthcare Power of Attorney, also known as a medical power of attorney or healthcare proxy, is a legal document that designates someone to make medical decisions on your behalf if you become incapacitated and unable to communicate your preferences. This person, known as your healthcare agent or proxy, steps in to ensure that the medical treatments and care you receive align with your values, beliefs, and previously expressed wishes.
The Healthcare Power of Attorney is broader in scope than a Living Will (see below).
Living Will or Advance Healthcare Directive
A living will, also known as an advance healthcare directive, is a legal document that outlines your medical wishes and treatment preferences in the event you’re unable to communicate or make decisions for yourself. This could arise from a severe medical condition, a coma, or any other scenario where you lack the capacity to voice your choices.
The Living Will contains instructions for life-sustaining treaments, pain management, organ donation, religious or personal beliefs, and end-of-life care.
Beneficiary Designations
A beneficiary designation is a legally binding instruction that determines who will receive a specific asset upon your death. This asset can be a retirement account (like a 401(k) or IRA), a life insurance policy, a payable-on-death (POD) bank account, or even a transfer-on-death (TOD) investment account. In essence, you’re naming a beneficiary who will automatically inherit the asset without the need for it to go through the probate process or be governed by your will.
Summary
Basic estate plans are not just for the wealthy or the elderly—they’re essential for everyone who wants to secure their legacy and ensure their loved ones are protected. By taking the time to create a comprehensive estate plan, you can have peace of mind knowing that your wishes will be respected, and your loved ones will be provided for, even when you’re no longer there to guide them.
Important Notes
The above list outlines important estate documents everyone should consider but does not represent the only estate documents you should consider. Particularly, trusts are not covered in this article and could be an important piece of your estate plan.
Finally, I am not an attorney and am not providing legal advice. Please consult your attorney for specifics on your own situation.