You work hard to provide for your family (after all, they’re the most important part of your life). You also want to make sure your loved ones are well provided for in your absence.
However, while no one I know wants to leave their family with uncertainty or a messy probate situation, I see it happen all the time. Without proper estate planning and documentation, passing on your estate can become a complex burden.
To avoid passing this burden to your loved ones, every estate plan should include 6 key components:
- Wills and trusts
- Durable power of attorney
- Beneficiary designations
- Healthcare power of attorney
- Living Will or Advanced Directive
- Guardianship designations
1. Wills and trusts
A will or a trust may sound complicated or expensive—something only rich people have. That’s incorrect.
A will or trust should be one of the main components of every estate plan, even if you don’t have substantial assets. Wills ensure your property is distributed according to your wishes (if drafted according to state laws). Some trusts help limit estate taxes or legal challenges.
However, simply having a will or trust isn’t enough. The wording of the document is critically important. A will or trust should be written in a manner that is consistent with the way you’ve bequeathed the assets that pass outside of the will. For example, if you’ve already named your sister as a beneficiary on a retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary), you don’t want to bequeath the same asset to a second cousin in the will because it could lead to a will contest.
Not to mention that both individuals could become bitter toward each other (and you) during a legal battle.
2. Durable power of attorney
It’s important to draft a durable power of attorney (POA) so an agent or a person you assign will act on your behalf when you are unable to do so yourself. Without a power of attorney, a court may be left to decide what happens to your assets if you are found to be mentally incompetent—and the court’s decision may not be what you wanted.
This document can give your agent the power to transact real estate, enter into financial transactions, and make other legal decisions as if he or she were you. This type of POA is revocable at a time of your choosing—typically you are deemed to be physically able, or mentally competent, or upon death.
In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases, it might make more sense to have a more financially savvy family member, friend, or trusted advisor act as the agent.
3. Beneficiary designations
As noted earlier, a number of your possessions can pass to your heirs without being dictated in the will (e.g. 401(k) plan assets, life insurance). This is why it is important to maintain a beneficiary—and a contingent beneficiary—on all such accounts.
If you don’t name a beneficiary, or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge who is unaware of your situation, beliefs or intent is unlikely to make the same decision you would have made.
Note: Named beneficiaries should be over the age of 21 and mentally competent. If they aren’t, a court may end up getting involved in the matter.
4. Healthcare power of attorney
A healthcare power of attorney (HCPA) designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. If you are considering executing such a document, you should pick someone you trust, who shares your views, and who would likely recommend a course of action you would agree with. After all, this person could literally have your life in his or her hands.
Finally, you should also identify a backup agent in case your initial pick is unavailable or unable to act at the time needed.
5. Living will or advanced directive
A living will—also known as an advance directive—is a legal document that specifies the type of medical care you do or do not want in the event you are unable to communicate your wishes. In the case of an unconscious person who suffers from a terminal illness or a life-threatening injury, doctors and hospitals consult the living will to determine whether or not the patient wants life-sustaining treatment, such as assisted breathing or tube feeding.
In the absence of a living will, decisions about medical care become the responsibility of your spouse, family members, or other third parties. These individuals may be unaware of your desires, or they may not wish to follow your unwritten, verbal directives.
6. Guardianship designations
While many wills or trusts incorporate this clause, some don’t. If you have minor children or are considering having kids, picking a guardian is incredibly important and sometimes overlooked. Make sure the individual or couple you choose shares your views, is financially sound, and is genuinely willing to raise your children.
As with all designations, you should name a backup or contingent guardian, as well. Absent these designations, a court could rule that your children live with a family member you wouldn’t have selected.
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