Jovan Johnson, MBA, CFP®, CPA/PFS
Why Is Estate Planning Important?
Estate Planning is not only for the wealthy. If you have assets in your name, you have an estate. And, if you have an estate, you have an estate plan – even if you haven’t drafted documents on your own. If you don’t have an estate plan, your state will create one for you. If you were to pass intestate, meaning without a published will, the state courts will determine how your asset are distributed.
Taking the time to create an estate plan avoids leaving the decision up to the court. A well thought out estate plan can ensure that assets are distributed according to your wishes and in line with your intended legacy. Also, a thoughtful estate plan can also help you save on taxes and organize your assets and documents for effective execution.
In this article, we will discuss 7 key estate planning documents.
1.) Last Will and Testament (Will)
Don’t let your State decide for you on how your assets will be distributed when you are gone. In the absence of a will, a probate court will appoint an executor for your estate. These are your assets, so your wishes deserve to be fulfilled. This is where a Last Will and Testament (Will) comes into play. A will provides you with the power to decide what is in the best interests of your heirs when you are gone. This document will provide guidance and details on your wishes regarding what will happen to your possessions after you are gone.
There are typically four main parties listed in a will: testator (individual publishing the will – you), executor (person managing the estate), trustees (person who manage trusts created by will), and guardians (for children). If you have minor children or pets, it is essential that your will contain provisions with your desired guardian(s). Also, your will may include any funeral provisions. A will may be amended during your lifetime and should be reviewed periodically, especially after major life events. One thing to remember, a Will alone doesn’t avoid probate court.
Bonus: Provision for digital assets
This is an area most individuals don’t think about when creating their will. You should decide on what to do with your digital assets such as: your computer hard drive, digital photos, information stored in the cloud, and online accounts such as Facebook, Instagram, Google, and Twitter. Also, be sure to include a list of your passwords. This MoneyTalksNews article explains how to make these decisions.
2.) Living Will
A living will is a comprehensive document with instructions on what type of care you do and do not want to receive while you are still alive. It is a place where you can list out all of your health care preferences. For example, you may express if you want to receive life-sustaining procedures if you have been diagnosed with a terminal condition. It also provides guidance to your family members to follow if you become terminally ill.
3.) Healthcare Power of Attorney
A Healthcare Power of Attorney allows you to designate someone to make medical decisions for you if you are unable to make them for yourself. Please try not to delay this task. You must be legally competent to assign this role to someone. This document can also be used to designate someone to serve as your guardian or conservator in the event a court determines that you have become mentally incapacitated.
The person you designate is responsible for carrying out any care decisions specifically listed in your Living Will. This is why it is important to discuss your Living Will and other Estate Plan documents with your chosen Power of Attorney.
Healthcare Power of Attorney comes in three forms:
- Durable Power of Attorney – Goes into effect as soon as you sign it and remains in effect until you are gone.
- Springing Power of Attorney – Goes into effect after you have been declared mentally incapacitated and remains in effect until you are gone.
- Non-Durable Power of Attorney – Goes into effect as soon as you sign it, but is no longer effective once you are deemed incompetent.
4.) Financial Power of Attorney
A Financial Power of Attorney allows you to designate someone to manage your financial, business, and legal affairs, if you were to become mentally incapacitated. Examples can include paying bills, managing bank accounts, conducting real estate transactions, or signing legal contracts. Please try not to delay this task. You must be legally competent to assign this role to someone.
Financial Power of Attorney comes in three forms:
- Durable Power of Attorney – Goes into effect as soon as you sign it and remains in effect until you are gone.
- Springing Power of Attorney – Goes into effect after you have been declared mentally incapacitated and remains in effect until you are gone.
- Non-Durable Power of Attorney – Goes into effect as soon as you sign it, but is no longer effective once you are deemed incompetent.
5.) Beneficiary Designations for Retirement Accounts, Life Insurance, Bank Accounts, etc.
One of the easiest ways to avoid probate is through designating beneficiaries on all of your accounts with the option. This is typically an option with life insurance, retirement plans, and bank accounts. When applying, it normally asks you to name a beneficiary, which is the person you want to inherit the proceeds when you pass. Beneficiary designations takes precedence over your will, so it is very important to make sure you complete this. Also, make sure you review and update your designations as your life changes.
6.) Revocable Living Trust
A revocable living trust provides you with more control, discretion, and flexibility. It is a revocable trust because you are able to amend the trust until your passing, at which time the trust becomes irrevocable.
There are three main benefits to having a revocable living trust:
- Avoiding probate court (saving time and money)
- Providing for beneficiaries with special needs
- Ensuring assets are passed down according to your true wishes
The trust will list out instructions covering three areas:
- What happens while you are alive?
- What happens if you become mentally incapacitated?
- What happens after your death?
If you decide to go this route and establish a trust, it is very important to seek an attorney’s help.
7.) Letter of Intent
A letter of intent may be included with your will or trust document. This letter can be used for providing greater detail on your philosophy and desires for your estate assets. That way your heirs will have a true understanding on why you made certain decisions in your estate planning documents. This is one way your legacy can be understood and carried forward.
KEY TAKEWAYS
- Estate planning is not only for the rich. Everyone can benefit from a comprehensive estate plan. This will ensure that your true wishes are fulfilled, and your assets are distributed the way you desire.
- Probate court can be very expensive and time-consuming and may lead to unintended distribution of assets.
- A successful estate plan will provide permission to a designated individual to carry out your wishes if you become incapacitated, while still alive.
Disclosures
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
