A comprehensive guide to creating an estate plan.
Heaven can wait … but estate planning can’t. Estate plans deal with the topics that no one likes to think or talk about — accidents, illness, the inability to care for ourselves and, ultimately, death.
But we know you will face these issues eventually — even if the actuarial tables say you have many more years to live, fate may have other plans — and will be creating a tremendous amount of work for your loved ones if you procrastinate and fail to put a plan in place.
If, for example, you become incapacitated due to an accident or illness, your family will face an arduous legal process to have you declared incompetent, so they are able to manage your affairs. And if you pass away without documents in place, they will have to go through a difficult, lengthy probate process. Is that the legacy you’d like to leave?
Death combined with money can bring out the worst in people. By putting your plan in place, you will be saving your loved ones a great deal of difficulty and anguish that you probably aren’t even aware of.
- Die without a will and, in some states, your spouse could receive as little as half of your money.
- Die without a will and an unmarried partner would likely be left with nothing, including the home the two of you currently share.
- If you are unable to handle your affairs due to an accident or illness, no one will be able to handle your finances unless you created and put a power of attorney in place.
- If you have an accident that prevents you from communicating, your medical wishes cannot be honored unless you state them in a living will and have appointed someone to make decisions via a health care power of attorney document.
With all the well-known dangers of dying without a will, it’s amazing that more than 50 percent of adults today do not have one, according to Chas Rampenthal, general counsel of LegalZoom.
Estate Planning Essentials
- Durable Power of Attorney
- Living Will (to put your medical wishes on record)
- Health Care Power of Attorney
- Proper Titling of Assets
- Beneficiary Designations (Have you designated per stirpes or not?)
- Revocable Living Trust
- Provision for Digital Assets
How to Start Creating an Estate Plan
An estate attorney can easily help you set up the essential documents that form an estate plan — a will, a durable power of attorney, a living will and a health care power of attorney. You should also consider creating a revocable living trust, which helps in many ways: It makes the process remarkably simpler for your heirs, avoids probate, reduces costs, avoids publicity and allows for the management of your assets and decision-making during your lifetime if you become incapacitated.
When you work with a lawyer to create an estate plan, you only need to be an expert in one thing — you. It’s your lawyer’s job to figure out which estate planning tools are the right ones to implement your individual set of instructions.
Estate Planning Questions You Need to Ask Yourself
There are some questions everyone needs to answer in preparing an estate plan:
- Who do I want to inherit my assets and my belongings when I pass away?
- Who can I trust to make these distributions according to my wishes?
- How can I assure that my affairs are handled in the best way possible if I become incapacitated?
- How can I lessen the burden on my family when I pass away?
Preparing a Will
When creating an estate plan, the last will and testament is a likely place to start. If you don’t have a will, the probate court will distribute your assets following your death according to the laws of your state — possibly in ways you would not agree with.
For the preparation of a will, you’ll need to answer these key questions:
- Who gets what (naming of heirs along with amounts or percentages for each)?
- Who will take care of my minor children (naming a guardian)?
- Who will distribute my assets (naming an executor or personal representative)?
You should note that a will cannot guide the distribution of jointly owned assets. Wills also do not cover the distribution of assets in accounts in which you name a beneficiary, such as 401(k) accounts, IRAs or life insurance policies. For those accounts, the named beneficiaries receive the assets in the account after you pass away.
That’s why it’s important to review who you’ve named as your beneficiaries regularly — at least every five years. You should also review your beneficiaries after major life events have occurred, such as births, deaths, changes in the marital status of either yourself or your heirs, or changes in your attitude toward your heirs.
Also, remember that minors should never be named as direct beneficiaries of life insurance proceeds, work retirement plans or IRAs.
Durable Power of Attorney, Living Will and Health Care Power of Attorney
A will is only one important step to take in estate planning, however. You will also need documents to direct others to take actions on your behalf when you’re unable to do so. A durable power of attorney is a document that names a trusted family member or friend and describes their rights and responsibilities in those circumstances.
If you are out of the country or are unable to handle your affairs due to an accident, a medical condition or dementia and have not drafted a power of attorney, no one will be able to write a check to pay for your medical bills or normal household expenses.
You’ll also need a pair of documents to cover medical situations where you become incapacitated due to an accident or illness:
- A living will details the level of medical care you wish to receive (or none at all) if you are unable to speak for yourself.
- A health care power of attorney allows the trusted person you appoint to direct the doctors to follow the medical directive and can make additional medical decisions for you.
Revocable Living Trusts and Other Trusts
Beyond these core documents, you may also want to consider creating one of the several flavors of trusts.
A revocable living trust has many benefits:
- A trust can go into effect as soon as you create it and can help if you become incapacitated for any reason. Typically, you would be the trustee of your own trust to start, but would name your spouse or a trusted family member or friend to serve as the backup or successor trustee if you are unable to handle everything. This provides a seamless way to assure that your assets will be handled as you wish throughout your lifetime.
- Following your death, the trust allows your heirs to avoid probate court. This means assets will be distributed in months as opposed to years and will reduce legal fees substantially.
- The provisions of a trust remain private after your death, avoiding unnecessary publicity.
- Following your death, the revocable living trust becomes irrevocable, locking in your wishes. It will be up to your successor trustee to distribute assets according to your specific, written instructions laid out in your trust.
There are quite a few other types of trusts, each useful for a different, specific purpose:
- QTIP (Qualified Terminable Interest Property) Trust: This type of trust is often used in second marriage situations. It provides income for a surviving spouse, while controlling and preserving underlying assets for distribution to children from a previous marriage or other beneficiaries.
- Spendthrift Trust: You may want to create this type of trust if your child cannot effectively handle money, is in a problematic marriage, or suffers from drug or alcohol abuse.
- Life Insurance Trust: This type of trust allows you to avoid estate taxes on the proceeds of a life insurance policy. If done properly, the life insurance proceeds that come through a life insurance trust following death are not counted as part of the estate.
- Special Needs Trust: If you have a child needing ongoing oversight and custodial care due to a disability, this type of trust avoids the interruption of the agency or government benefits due to the child receiving an inheritance
- Charitable Remainder Trust: This type of trust is often used for a large donation to a charity, a university or another nonprofit. It can provide a tax deduction today along with the ability to generate income during your lifetime.
When you do the job right, you’ll make sure you will be taken care of and reduce the burden on your loved ones. Plus, you’ll help ensure that your legacy is passed on to future generations.
This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.