Many people mistakenly believe that estate planning is only necessary for the wealthy. In reality, a basic estate plan is essential for everyone, regardless of income or net worth, because we all want to minimize confusion, unnecessary costs, and stress for loved ones after a death.
Estate planning can be a difficult topic for many families to address, but it’s a necessary one. Without proper preparation and documentation, assets—like houses, retirement plans and savings accounts—can end up in limbo for years, sometimes requiring expensive legal assistance to straighten matters out.
At a minimum, everyone should have the following four items in place:
1. An up-to-date will or trust.
Wills are easy to create, but they require the distribution of assets to go through the legal process of probate. The probate process involves validating a deceased person’s will; identifying, inventorying, and appraising the deceased person’s property; paying debts and taxes; and ultimately distributing the remaining property as the will directs.
A trust can be more expensive to set up and requires professional assistance, but it provides benefits that a will does not. First, when they’re structured properly, trusts will help avoid guardianship or conservatorship if you become incapacitated. A will only works after you’ve died; a trust, by contrast, works all the time, including periods of incapacity before death. Additionally, for those with minor children, a will controls who will take custody of their minor children if no natural parent or legal guardian survives. For most parents, deciding who will raise their children if they are unable to, is the most important component of the entire document.
Trusts usually avoid probate, which helps beneficiaries gain access to assets more quickly as well as save time and court fees. Depending on how it’s structured, a trust may also reduce estate taxes owed and can protect an estate from heirs’ creditors. The probate process often requires a lot of technical paperwork and court appearances, and the resulting legal and court fees are paid from estate property—reducing the amount that’s passed on to heirs.
2. Updated beneficiary designation forms.
Beneficiary designation forms on life insurance policies, 401(k) accounts and other assets will generally override any conflicting provisions within a will or trust. It’s essential to make sure all forms are checked and updated regularly, ideally on an annual basis.
For most estates, the life insurance and retirement accounts provide the majority of the assets, so this step is crucial in effectuating one’s wishes. An estate planning professional can help anyone create or update these basic items as well as provide suggestions for additional steps, if needed. Consulting a professional may be well worth the money in the tax savings that may be achieved.
For example, leave tax-deferred retirement accounts to a charity who will receive the money tax-free based on their tax-exempt status instead of an individual who will owe income tax on the distribution. Leave life insurance, which is generally income tax-free to an individual instead of a charity who does not need the income tax-free benefit because they are already exempt from paying income tax.
3. A durable power of attorney.
A power of attorney is a written authorization that allows someone else to make financial and legal decisions for a person if that person should become hospitalized, disabled or otherwise incapacitated.
Not all powers of attorney are created equal. Some are put in place for short periods of time only—while a person is vacationing overseas but dealing with legal matters at home, for example. That’s why it’s important to have a durable power of attorney in place, which simply means that the agreement is not for a temporary period of time. It may be valid immediately when it’s signed, or it may go into effect at a later point. But what makes it “durable” is the fact that it will survive your later incapacity. (If a power of attorney is not durable, it is revoked when you become incapacitated – the very moment when you need it most.)
Powers of attorney for property should only be given to trusted individuals, ideally those who are good with financial and legal matters. Medical powers of attorney are a separate matter and can be given to someone else, if desired.
4. An advance directive for health care
An advance directive for health care is a document that comes into play when a person cannot make healthcare decisions for themselves. The document has several components.
First, the document names a healthcare power of attorney, which is the person who will make medical decisions on your behalf if you are unable to do so because of your medical condition or mental state. The document also provides instructions of the type of treatment that you want under certain circumstances, which relieves the healthcare power of attorney from having to make some of the most difficult decisions.
The biggest threat to your estate plan is procrastination, so if you haven’t taken care of these items, call today to make an appointment.