When you pass away or if you ever become too physically impaired to communicate your wishes, your family may have to make difficult decisions on your behalf. They might have to figure out what to do with your assets, who will care for any young children you may have and how to manage your medical care.
By estate planning when you’re still in good health, you can help ensure that these key decisions are made according to your wishes. The process can also help your loved ones avoid unnecessary disagreements about what you would have wanted.
What is estate planning?
An estate plan is the process of anticipating and managing the financial, medical and guardianship issues that will arise after your death or incapacitation. It typically involves drafting a will that outlines how you’d like your assets to be managed and distributed after your passing. The plan may also address who will care for any children who are still minors and stipulate which medical interventions you wish to receive if you become terminally ill or severely injured.
Often, there’s a perception that estate planning is only for affluent individuals or those who are older. However, preparing legal documents that express your financial and healthcare wishes is important for anyone, regardless of your net worth or age. Formally expressing your intentions can help eliminate unnecessary tension between family members, as well as the need for court involvement in decision-making.
The estate planning process
A comprehensive estate plan addresses several potentially complex legal and financial issues, so you should consult with an estate planning attorney who specializes in this area. You may also want to include your financial and tax professionals in the process.
Once you’ve established your estate plan, it’s important to regularly review and amend it where necessary — especially if you’ve gone through a major life event. Perhaps you experience a divorce that alters your financial considerations. Or maybe you change your mind about which medical interventions you want in the case of an emergency.
What documents make up an estate plan?
Many people think an estate plan deals exclusively with financial assets. But that’s only a part of it. The most basic estate planning documents should include:
Property power of attorney
Also known as financial power of attorney (POA), this person will handle your property and financial matters if you're unable to do so yourself. For example, if you have a health emergency or accident, this person could pay your bills or manage other financial considerations on your behalf.
Healthcare power of attorney
Your healthcare POA is someone you designate to make medical decisions on your behalf if you're unable to do so. If you’re moving away from family for the first time, you may want to designate someone who lives near you and can more easily communicate with the medical team. Depending on the state where you live, this role may have other names, such as a healthcare agent, healthcare attorney-in-fact or patient advocate.
Will
Wills stipulate how you want your assets distributed after you die. A will can also include other information, like who you’d want to care for your children if they’re still minors. Having a will typically makes the process of administering your estate, known as probate, much simpler. If you die without a will, or “intestate,” the local court has to take a much more active role in settling your estate, and may make decisions that don’t align with your intentions.
Advance directive, or living will
An advance directive provides instructions for your end-of-life care when you’re unable to communicate your wishes. The document specifies whether you want medical staff to perform life-sustaining measures such as cardiopulmonary resuscitation (CPR). You can also clarify other desires, like whether you want to be an organ donor.
Trusts
When it comes to your financial assets, a trust can offer potential benefits that aren’t available with a will. Trusts give you greater control over how your assets will be distributed and can even help you reduce estate taxes if your net worth exceeds the federal or state limit. You must designate a trustee to oversee the distribution of assets, which can be an individual, a financial institution, or both.
Other essential documents in estate planning
In addition to the steps mentioned above, consider preparing the following documents to help make the administration of your estate go smoothly.
- Beneficiary designations. Make sure all of your financial accounts and life insurance policies list both primary and contingent beneficiaries. Review your choices every year to make sure they reflect your current wishes.
- Memorandum. A personal property memorandum is a document that lists who you would like to receive smaller items, such as jewelry or artwork. This memo helps express your wishes to the executor, but may or may not be legally binding, depending on the laws of your state.
- Letter of instruction. A letter of instruction provides your executor and family members with easy-to-understand instructions on how to administer your estate. It may include guidance for funeral preparations, financial information and personal messages to loved ones.
What are the benefits of estate planning?
An estate plan helps your loved ones navigate a range of complex issues down the road. Drawing up the appropriate documents now can provide important benefits, such as:
- Protecting your minor children. By designating a guardian, your family can avoid disagreements over who will step in if you’re no longer able to care for them.
- Expressing wishes for your funeral. You can express your desires, like whether you’d like to be cremated or buried and where your remains will be laid to rest. You can also indicate any details of your funeral that you want your family to carry out.
- Specifying how your assets are distributed. It’s important to designate beneficiaries for your assets, ranging from investment and bank accounts to life insurance policies. But your will outlines how the executor should distribute any other assets, including any real estate you own.
- Leaving a legacy. You can make an impact even after you pass away by naming favorite charities, places of worship or other organizations in your will. You can also set up a trust to make ongoing contributions.
- Helping your family manage tax issues. If you’re leaving behind a large estate, your plan should include a source of liquid assets to help pay federal or state taxes.
An estate plan is an important part of the legacy you want to leave behind and will help ease things for your loved ones during a difficult time. Establishing an estate plan now, and updating it regularly, will help bring peace of mind.
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