When you create an estate plan, you create a set of documents that manage your financial and health situation should you become incapacitated or pass away. A complete estate plan can contain several documents that bequest assets to heirs, settle estate debts and taxes, plan for guardianship of minor children and pets, and handle health decisions. It may include a living will, one or more trusts, a last will and testament, healthcare directives, and powers of attorney for financial and healthcare decisions.
The Importance of Estate Planning
It doesn’t matter if you are 20 or 60 or if you only own a car or own several, or a house and many other assets. An estate plan tells your loved ones what to do should you become incapacitated or die. While you don’t expect anything to happen when you are younger, it can happen. Accidents and sudden illnesses are not planned. However, you can make life easier for your loved ones – and yourself, should you become temporarily incapacitated.
In a nutshell, an estate plan ensures your loved ones follow your wishes and protect your assets when you can’t do it, regardless of the reason. Some of the tasks you can accomplish with estate planning include:
- Ensuring your assets are protected should you become incapacitated.
- Ensuring your beneficiaries receive the assets you want them to have.
- Limiting estate taxes.
- Establishing guardianships.
- Naming a personal representative (executor) for your estate (someone who ensures your instructions are followed).
- Setting up funeral and burial arrangements.
- Creating or updating beneficiaries for various financial plans.
- Giving a trusted individual power to handle your finances or make healthcare decisions when you can’t do it yourself.
Estate Planning Documents and How They Work
The estate planning documents will vary depending on your circumstances. What you want to do and the value of your assets will determine which documents you need in a complete estate plan.
Last Will and Testament
When you die intestate – without a will – your state’s laws determine who receives your assets. While the rules vary by state, in most cases, your spouse is first, then your children, then your parents, then your siblings. If you have no immediate relatives, your assets go to the next level, such as aunts, uncles, cousins, and grandparents. If you have no living relatives, then it is possible for the state to receive your assets as a last option.
State laws on who is to receive your assets often do not reflect your wishes. For example, if you have no children but you don’t want one sibling to receive any of your assets, you are out of luck unless you have a will.
Some states do not allow you to disinherit spouses or children. Other states have spousal rights laws that say your spouse must inherit a certain percentage of your assets, even if you prefer to leave your assets to your children or a charity.
Some assets can avoid probate, such as property titled in your name and another’s name and accounts with beneficiaries, such as bank accounts and retirement accounts. Probate laws are complex, even if you don’t have a lot of assets. An estate planning attorney can review your situation and help you create an estate plan to meet your wishes.
Additionally, in some states, you can create a “pour-over” will that points to one or more trusts. In certain circumstances, this can help you avoid a lengthy probate.
Trusts
A trust is a document that holds your assets in place for a beneficiary. When you create a trust, you are the trustor, the person managing the trust is the trustee, and those who benefit from your trust are the beneficiaries.
Revocable Trusts
In most cases, a revocable trust protects your assets while you are alive. You are often the trustor and trustee. You can change the trust by adding and removing assets at will. All you have to do is title the asset in the name of the trust to put it in the trust or title it in another person’s name (including yours) to remove it from the trust.
Revocable trusts, in conjunction with other estate documents, allow a loved one to manage your finances should you become incapacitated.
Irrevocable Trusts
An irrevocable trust is usually a trust you set up to handle your assets after you die. You cannot change an irrevocable trust. Many types of irrevocable trusts exist, depending on how you want your assets handled. They can make the probate process very short or eliminate it. Irrevocable trusts also allow you to manage your assets, such as a large amount of cash, after you are gone. They can also help avoid some taxes.
Durable Power of Attorney
Should you have an accident or become catastrophically ill and not have the ability to take care of your finances, a durable power of attorney allows a trusted loved one to do it for you. You can give one or more people permission to act on your behalf for financial actions, including paying bills, buying and selling real estate, investing, and even filing bankruptcy.
Healthcare Power of Attorney
When you need to appoint someone to care for you should you become incapacitated, you can create a healthcare power of attorney. Your estate planning attorney will let you know which document is accepted in your state and can prepare these documents for you. You can name more than one person to make healthcare decisions on your behalf. For example, you may want to name one person to determine whether you should be taken off life support and another person to make decisions, such as which surgeries you should have.
Living Will
A living will provide instructions for withholding or withdrawing life-prolonging procedures in the event you have a terminal condition, have an end-stage condition, or are in a persistent vegetative state.
Advanced Directives
Includes the healthcare power of attorney and a living will.
Contact an Estate Planning Attorney
An estate plan can be as simple as having a will that names a personal representative and distributes a bank account and a vehicle, or it can be as complex as having a will, one or more trusts, several powers of attorney and other documents. What you need to protect your assets and have someone make decisions for you depends on your overall financial picture and your preferences.
You can always update your estate plan. In fact, you should always review and update your estate plan at least once every year or after a major life change, such as getting married or divorced, having a baby, or buying a house.
Contact an estate planning attorney to help you create an estate plan to protect your assets should you become incapacitated or pass away.