The most successful estate plans factor in several considerations. For example, they might name who inherits your retirement accounts or provide directives for your medical treatment if you become incapacitated. Learn more about essential strategies to keep in mind when you develop an estate plan. That way, you can shape your documents to meet your goals and provide for your loved ones in the way you want.
Why Is Estate Planning Important?
An estate plan is vital to helping you use your assets to provide for your loved ones in the event of your death or incapacity. When you don’t have an estate plan, financial decisions about your money, medical care, and other issues may not be made in the way you would like. Not having a plan can cause a burden on your friends and family, especially if they have to manage your finances without knowing your wishes. Consulting with an estate planning attorney can help you get the most out of your estate plan by ensuring you complete the correct documents.
Death
You may not want to think about your death, but it’s practical to set a plan in place to prepare for it. A will is one common tool used to specify where your wealth goes after you die. If you don’t create a will, your state’s laws dictate what happens to your assets along with other decisions, and the results might not match your wishes. For example, you may want to pass your assets on to people outside your family, or you might want to name specific guardians to care for minor children.
Incapacity
An estate plan can also ensure someone can make the financial decisions for you if you’re unable to manage your finances because you’re injured or sick. For example, you might become unconscious, be medicated, or simply lack the energy to communicate or take action. Without help, your bills may go unpaid or insurance policies can lapse.
Who Is Estate Planning For?
It’s a common misconception that estate planning is for rich people and those with children. “Estate planning is for everyone,” Pam Horack, CFP and founder of Pathfinder Planning, told The Balance in an email. Horack said people of any income and single people also need to establish plans for what happens to their estate when they die or become incapacitated. “If you are single, you need to designate beneficiaries for your accounts and [perhaps] name someone to care for your dog,” Horack said. “If you are married with a family, this is the only place you can designate your best friend rather than your brother to take care of your children.” An empty nester may want to leave specific items to their nieces or nephews instead of their children. Or an aging senior may want to leave money to their church.
Estate Plan Essentials
An estate plan prepares you to deal with some of life’s most challenging situations. “The plan is the detail of what happens to your money and property when you are gone,” Horack said. The essentials listed below are some of the most common factors that shape estate plans. Depending on your financial situation, you might not need to include them all; other strategies not listed here might make better sense for you. Again, discuss your goals with an estate planning attorney.
Last Will and Testament
A will, a common foundation of an estate plan, is a legal document that provides instructions for handling assets in your estate after death. Your will can name who will receive cash, investments, homes, vehicles, valuables, and other items. Wills can accomplish more than distributing property. For example, a will might:
Name an executor or personal representative to handle your estateDesignate guardians for minor childrenEstablish and fund trusts
Once the will is drafted, tell someone you trust where to find your estate planning documents.
Trusts
A trust is a legal arrangement in which a trustee holds assets for a grantor for the benefit of a beneficiary. So instead of holding assets in your name, you can hold them in a trust. Trusts are helpful for estate planning because they can help keep your assets out of probate, which can be a time-consuming and expensive process. A trust can also set detailed rules on when and how beneficiaries receive their inheritance. Not everyone needs a trust, but they can be especially useful in complicated situations, Jeff McDermott, CFP and founder of Create Wealth Financial Planning, told The Balance in an email. “Trusts can also handle special situations, like a beneficiary with special needs or a beneficiary with poor money habits that needs conditions around their access to inheritance,” McDermott said. Finally, trusts can provide privacy. A will is a public document after it’s filed with the court. Likewise, if you’re incapacitated, anyone who wants to manage your affairs must go through the courts to get control of your assets. In contrast, a trust can eliminate the need to create public records.
Insurance Protection
Life insurance can play a key role in estate planning. A life insurance policy often pays a tax-free death benefit to beneficiaries, and the death benefit might be substantial. Those funds can replace the deceased’s income, pay off debt, ensure that children can afford education, and more. “Determining how much life insurance you need to replace your income if you pass away is an important part of the estate planning process,” McDermott said. An insurance agent or a financial planner can help you determine how much insurance you need and what types of policies may be appropriate.
Financial Power of Attorney
A power of attorney (POA) is a legal document that gives someone the right to manage legal and financial affairs for you. They can pay bills and invest money on your behalf in a variety of situations. You might want a POA in your estate plan to empower someone to make major life decisions, including about your health care or finances, when you can’t.
Health Care Directives
A thorough estate plan includes a specific plan for getting you the treatment that you would want when you’re unable to make or communicate decisions, no matter how old you are. Without proper health care directives, you might not get the treatment you’d like. You can either articulate your heath care wishes in a written document or assign someone to make decisions for you.
Living will: This is a legal document that states your medical treatment preferences. For example, you might specify that you do not want to be kept alive via a feeding tube. Depending on your state, these documents may be called “advance health care directives” or “medical directives.” Health care proxy: This is a person you authorize to make medical decisions for you. So, for example, a person you assigned as a heath care proxy could direct a doctor not to use a feeding tube on your behalf.
If you assign a health care proxy in your estate plan, make sure they are aware of their responsibility. Discuss your health care treatment preferences with them as soon as possible so they understand the treatment choices you’d want.
Beneficiary Designations
With financial accounts such as IRAs and 401(k)s as well as with life insurance policies, you can designate a beneficiary to receive your assets after your death. This way, funds can pass to your beneficiaries without going through the probate process. The result is a relatively fast and easy transfer of assets after death. Once you choose your designated beneficiaries, periodically review your choices to make sure they remain your preferences. “I usually ask clients to verify beneficiaries once a year and revisit the full estate plan with their attorney every five years or so,” McDermott said.
Make a Plan for Your Assets
By considering the common essentials as you shape your estate plan, you can better reduce the financial and emotional impact of your death or incapacity on your loved ones. Once you establish the right estate plan for you, review and update it periodically. Life events such as births, deaths, marriages, divorces, or changing health issues can affect your goals and priorities. Horack recommended revising your state plan every five years to make sure they continue to align with your goals. “Your finances, health, or family status may change dramatically in this time frame,” Horack said. “Also, states update laws and federal tax rules are amended.… Be sure your documents reflect these changes.”
