Having an estate plan might seem like something only extremely wealthy people need, but that’s not entirely true. While high net-worth people need an estate plan, it’s also crucial if you own a house or business, have children or want control over what and how your possessions are distributed after your death.
Even if you’re not married or a parent and pretty sure that no one will fight over your collection of Star Trek figurines, having an estate plan in place is still a good idea.
It is your chance to make your final wishes known in absolute terms. It’s also a way to help your family through a sad and stressful time by not adding to their burden.
Creating an estate plan sounds daunting but it doesn’t have to be. Understanding why you’re creating one and the documents you must include for your situation can make the process easier.
I’m not rich; do I really need an estate plan?
It’s uncomfortable to talk about, but we’ll all die one day. Sometimes illness or injury can happen slowly, and you’ll have time to make your wishes known. Other times, incapacitating injury, illness or death happens in a heartbeat. Your loved ones are left grieving and trying to honor your last wishes.
That’s why considering your estate plan before you become ill or injured can make a huge difference.
An estate plan will protect your beneficiaries.
Having a will and other estate planning documents are the best way to ensure that the people you want to inherit your money, investments and property actually do.
A will’s primary purpose is designating heirs for your assets, which can help prevent fights among family members.
If you don’t decide who receives your assets after you pass away, you won’t have control over how it’s distributed. In many cases, if you die without a will, called dying intestate, your estate is handled by a court. It will decide who gets your assets, even if it’s giving them to a family member you couldn’t stand.
An estate plan will provide for young children.
The other purpose of a will, and in some cases, a trust, is to designate guardianship of your minor children or other people you are legally responsible for.
Picking a guardian for your kids is essential and, surprisingly, can be overlooked by some do-it-yourself estate-planning sites.
Don’t just assume that the person you think is best to raise your children will automatically be named guardian. If you don’t name a guardian in your will or trust, the courts may rule that your children will live with someone you wouldn’t have chosen or possibly even become wards of the state.
When selecting a guardian, ensure the person or couple can financially care for your children and are willing to raise them.
In addition, it’s vital to make a plan for a child or family member with health issues or developmental disabilities so that they are provided for, no matter how old they are or what happens to you.
An estate plan will help reduce taxes.
A well-crafted estate plan can stop family fights before they start. It can also help reduce the tax burden your heirs will face. Working with an estate attorney or tax professional can help you understand the finer details of inheritance taxes and help your heirs decrease the income tax they may have to pay upon inheriting your assets.
What happens if I don’t make an estate plan?
After you die, your estate will transfer to probate, the formal process of distributing any assets you leave behind. With a will or estate documents, probate is much easier. The executor you name will handle your bequests and filing pertinent information with the court.
If you die without a will, the probate process will distribute your assets according to your state’s laws. Probate laws in most states divide property among the surviving spouse and any children, but that’s not always the case.
If you’re not married to your partner or are in the middle of separating or divorcing, your estate could get a lot more complicated. Be sure to explicitly name who you want to get which asset, and update your estate plan every year.
The documents you need in an estate plan
Your estate plan can include multiple documents. Depending on your situation, you may only need a couple of the documents listed below, while other people may need to create highly complicated and specialized estate plans.
Having a living will, medical power of attorney and a last will and testament is a good start for most people. You can add additional directives based on your specific needs.
Last will and testament
A will documents how you want your assets divided after death. You can also name a guardian for minor children and an executor to distribute your possessions according to your wishes.
Note that a will cannot dictate everything. Assets held jointly with the right of survivorship will automatically pass to the named survivor, not necessarily your heirs. Some retirement accounts also dictate how assets can be distributed upon inheritance.
A living will
A living will is vital to an estate plan. If you cannot consent to medical procedures or advocate for yourself after illness or injury, a living will (sometimes called a health care directive or advance directive) can express your wishes for you.
You can detail any treatments you want to receive or reject and dictate the use of life-saving interventions, like CPR, tube feeding or being put on a ventilator. You can also provide direction about organ donation in your living will.
A health care power of attorney (HCPA) or health care proxy
Having a health care proxy or power of attorney appoints someone to make health care decisions if you cannot make them for yourself. Without this document, these decisions will default to the state law, usually your closest blood relative.
The person appointed by the court to make decisions may be someone you haven’t seen or spoken to in years. Meanwhile your long-term partner could have no legal rights about decisions regarding your care.
Power of attorney (POA)
Similar to the health care power of attorney, this document appoints someone to act on your behalf in specific instances, like paying bills or making financial decisions. With a POA, your named executor can act as you in business transactions. They can also make you legally and financially liable, so be very careful of who you select.
A POA is only enforceable while you are alive and becomes null at the time of your death. That’s when the executor of your will or trust documents will take over. Your POA and executor can be the same person, but you can also appoint two different people (or multiple people) in your estate plan to handle your affairs.
Trusts
A trust can be enacted while you’re alive or created within your will and become valid at your death. Trusts are usually used to control how funds are distributed to your heirs. Rather than a lump sum inheritance, you can dictate the timeline of distributions, which can be helpful if you’re leaving money to minors.
You can also set up a trust to handle long-term care needs and your funds if you become incapacitated and need specialized care.
Life insurance
Do you have a life insurance policy? Keep the policy details, login and password information with the rest of your estate planning documents. That way, your executor or other family members won’t have to search for pertinent information after your death.
What do I do with these documents once they’re created?
Once your estate planning documents are created, you need a safe place to put them.
Put originals somewhere secure, preferably in a fireproof box at home or a safe deposit box at a bank. Keep physical copies of each document in a clearly marked folder or envelope with copies of other vital records like birth and marriage certificates and passports.
Then make sure that family members, like your spouse or partner, parents, siblings, children or trusted friends, know where you keep everything. That way, if you die unexpectedly, they know where to look.
If you mention people by name in your estate plan documents, send each person a digital copy. Ensure they know their responsibilities and are willing to perform them.
It’s also a great idea to send your doctor a copy of any medical directives or living wills you create and ask them to keep a copy with your medical records. Many larger health care systems use online portals for doctors and patients to access and may have a place to upload medical directives for secure storage.
Bottom line of estate plans
Your situation may vary, based on the laws of your state and the assets you have to distribute. But nearly everyone can benefit from having an estate plan.
Discuss your plans with your loved ones, so no one is surprised about being named in your estate planning documents. If possible, and if necessary, consult a lawyer or tax professional to help you correctly designate how everything should be distributed. It will ensure your loved ones are protected, even when you can’t be there to do it.
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