Estate planning isn’t just for rich people. Everyone should have these five estate planning documents in place to protect themselves and their loved ones.
Estate Planning is one of the most overlooked but most important parts of financial planning. If you’ve ever had a parent or spouse get ill and/or die without the proper estate planning documents in place, you know what a nightmare it can be. To ensure that things go according to your wishes, you need to make sure you have a will, a power of attorney, a healthcare power of attorney, a healthcare directive, and updated beneficiaries for your accounts.
“Ensuring that things go according to your wishes” may sound like a fairly benign statement. You might be imagining those movie scenes where the lawyer stands in front of the family and reveals that the heirloom china has been left to the oldest daughter and that Uncle Benny gets the grandfather clock. Maybe nobody really cares about these items so it doesn’t seem like such a big deal. Or maybe your loved one didn’t really have anything to pass on to heirs so it doesn’t occur to anyone to think about Estate Planning.
On the other hand, maybe you’ve been watching movies like Knives Out and you start imagining family turmoil and drama complete with threats, blackmail, and murder attempts because the will doesn’t say what the family members want it to say. Although the story is extreme and written for entertainment purposes, it does show how emotions and expectations around money can create many problems in a family.
When someone passes away without a will and beneficiary designations, the state decides what happens to everything. Now maybe you have a family where one parent has a sister who would be an ideal parent to your kids and manager of any money you leave behind. In this case, it might be obvious and natural that the sister would get custody of your children (though it is not guaranteed). But what if you and your spouse have a bunch of siblings, some of whom would be great for your kids and some of whom should never be allowed around children? The court might look at who is nearby and is financially stable, but not who has the best relationship with the kids. Or maybe one spouse’s family starts fighting the other spouse’s family for custody and the kids get in the middle while trying to grieve your death?
It isn’t just the children you have to worry about. An older acquaintance’s spouse died a few years ago and he had not updated his will. Everything was left to the adult children of his first spouse. The adult children waltzed into the condo, took whatever they wanted, and the widow was left with no place to live.
Estate plans are not to be taken lightly.
It’s uncomfortable to face your own death, but if you don’t make an estate plan, all you’ll be leaving your children with is an absolute nightmare. Don’t create a situation where your children are fighting over whether or not to remove the life support or who gets the family home.
Here are the most critical estate planning documents you need to reduce the chance of that happening:
Will (and Trust)
A will is the most basic part of estate planning. Everyone needs one; they’re not just for rich people. In a will, you name an executor who will take care of your affairs after you die. This might include closing accounts, paying off remaining debts, distributing assets to those named in the will, etc. A will also determines what you want to happen to anything that you have and names guardians for underage children.
When you die, your will goes through a process called probate, which is a legal process that makes sure the will is valid and is executed correctly. If you don’t have a will, the courts will appoint an executor and decide what happens to your assets. Having a will can speed up the probate process and is often less expensive as a result as long as it is straightforward and is not contested by the heirs.
A will can help guide the executor of your will in enacting your final wishes, but you may also want to consider writing a letter of intent that will help explain your feelings and thoughts on what you want to happen after you die.
Trusts
Although a trust is not essential, it can be an important estate planning tool. If you have a trust, you still need a will, particularly if you have minor children as that’s where you designate guardians.
Trusts have a number of purposes and it’s important to work with an estate planning attorney to determine the right set-up for you. Assets that are part of a trust do not go through the time-consuming and expensive probate process. As a result, it also affords you greater privacy because the probate process is public record. Trusts also sometimes help with estate taxes and other legal issues related to the transfer of property.
Talk to your estate planning attorney and other financial advisors to find out if a trust is right for you.
Up-To-Date Beneficiaries
Many people don’t know this, but the great thing about having beneficiaries listed on all your accounts (even if you have a will) is that the money in the accounts will pass without going through probate. This means that your beneficiaries can receive the money almost immediately without paying lawyers and court fees. Updating your beneficiaries is so easy, yet so many people forget this step or forget to update it when they have another child or someone dies.
Make a list of your accounts and go make sure your beneficiaries are up to date right now. Make sure you have contingent beneficiaries and that everything gets updated (or at least checked) once per year.
Power of Attorney
A durable power of attorney (POA) can make financial and legal decisions for someone who is incapacitated. This means that if a person becomes incapacitated or mentally incompetent, a person designated as a power of attorney could do things like pay bills, buy and sell assets, run a business, etc. For example, a POA could sell your home on your behalf if you have dementia and need to move into a nursing home.
You can place any limits you want on the POA, but you’ll want to make sure they have a sufficient amount of power to take care of things if you are unable to do so. For example, you could require that a doctor declare you mentally incompetent or limit it to particular assets.
Often a spouse is the designated POA, but it could be a child, friend, relative, or even a lawyer or financial advisor. Make sure you select someone you trust and that your POA has a good understanding of your wishes.
Healthcare Power of Attorney
A healthcare POA, also known as a healthcare proxy, is given permission to make medical decisions on your behalf if you are unable to do so. I’ve heard way too many stories of people who end up in a coma only to have their family members unable to make decisions. These are heartbreaking stories, particularly since they are easily avoidable in most cases just by setting up a healthcare POA.
A healthcare POA should be someone you know and trust, and who shares your views on medical care and the end of life. This person will need to make sure that the hospital and doctors know and follow what you outline in your healthcare directive.
Healthcare Directive
The healthcare directive, also known as an advance medical directive or living will, is a document where you state your wishes for care in the event that you are incapacitated and are unable to communicate your wishes. Healthcare directives are often vague and open to interpretation, which is why it is important to have a healthcare power of attorney that you trust. Think of the healthcare directive as a document that can guide your healthcare POA and medical team and help them understand your wishes. The more you can do to help your healthcare POA to understand what you want, the better.
The Bottom Line
Although you may not feel excited to contemplate these issues, it is critical that you do some basic planning. You don’t want your legacy to be a giant mess and family infighting. Think of estate planning as a way to communicate your wishes regarding the end of your life and your legacy. This is your chance to protect your children and allow them to focus on grief without having to make heart-wrenching and potentially rancorous decisions. Think about it, talk about it, and get started on these estate planning essentials today.
