The Estate Planning process can seem daunting, but it is necessary for all families. Without a plan, family members can easily get into arguments after your death over the assets you leave behind, from cash to sentimental objects.
Even for those with small estates, a good plan helps avoid probate, which can be costly and public. It also ensures that beneficiary designations on insurance policies and retirement accounts reflect your wishes.
Powers of attorney are an important part of estate planning. They allow you to give a trusted individual the power to act on your behalf in financial, legal, and healthcare matters when you are not able to do so yourself. The person you choose is your agent or attorney-in-fact, and they will have the authority to do almost anything with your money, property, and assets. They can invest your money, buy and sell property, hire and fire employees, and make health care decisions on your behalf. However, you can limit their powers if you want to protect yourself from the possibility of a conflict of interest.
One common type of POA is called a “springing POA.” It only grants your agent power to act on your behalf if a specific condition is met, typically that you have lost capacity. It is a popular option amongst people going through the estate-planning process because it allows you to have a document in place, but it only goes into effect when needed.
The other type of POA is a durable POA, which automatically gives your agent the power to act on your behalf even if you become incapacitated. Most states presume that a power of attorney is a durable POA unless you specifically state otherwise.
When choosing an agent, it is important to select someone who is trustworthy and will be able to handle your finances responsibly. Many people choose a family member or close friend, but this is not always a good idea depending on your circumstances. Family members can be tempted to use their power in self-serving ways and can cause disputes within the family. It is better to select an independent, trustworthy, longtime friend to serve as your agent.
Once your power of attorney is drafted and executed, it should be kept in a safe place with all your other estate planning documents. You should review it regularly to ensure that the document remains current. It is also a good idea to have your agent sign the document again at least every few years.
Health Care Directives
A health care directive is a written document that explains an individual’s medical preferences and indicates who will make healthcare decisions for them when they cannot speak for themselves. Also known as an advance healthcare directive, healthcare declaration or directive to physicians, this is one of the most important estate planning documents you can complete.
While it may seem like a difficult subject to discuss, talking about and preparing your healthcare directive is an essential part of your overall estate plan. It can save your family the emotional burden of making these critical decisions for you and help ensure that your medical treatment preferences are honored.
Depending on your state, an advance healthcare directive can include a living will, durable power of attorney for health care or a do not resuscitate (DNR) order. While you are free to use any type of health care directive form you wish, many people choose to create a combination of documents that best suit their specific needs and circumstances.
In addition to appointing a health care agent, a health care directive will generally list your medical treatment preferences, such as being kept alive on machines or being given nutrition through a tube, and specify which types of life-sustaining treatments you do and do not want. It will also typically note which relatives you would prefer your doctors to contact in the event of an emergency, along with a brief statement of your religious beliefs.
It is important to keep in mind that your healthcare directive will only take effect if you are unable to communicate your own wishes due to illness or injury. It is a good idea to review your documents from time to time, and to keep them with you in case of unexpected events. You can also revoke your health care directive or change the person you have designated as your healthcare agent at any time.
While a lawyer is not required to create advance healthcare directives, you should consult with someone familiar with these issues. Your financial advisor and an estate planning attorney are both good resources. They will be able to provide you with information about the different forms and documents available in your state, as well as referrals to local attorneys who can assist you.
Trusts
Trusts might sound intimidating and conjure visions of contentious family gatherings in oak-paneled attorney’s offices after the death of a patriarch or matriarch. But they’re useful estate planning tools for families of all sizes and income levels. In fact, they can help you avoid probate—a time-consuming and expensive process—and they may reduce your taxes, too.
Essentially, trusts are fiduciary arrangements that specify how financial assets and real property will be distributed. They can be arranged in a variety of ways to accomplish many different goals, including avoiding probate, providing for special needs or simply minimizing estate taxes. They can also provide greater flexibility and control over the distribution of your assets, such as giving them to specific individuals, spreading them out over time or allowing them to be used for certain purposes, like education, without incurring gift or estate taxes.
There are a couple of general types of trusts: revocable and irrevocable. A revocable trust can be amended and revoked during your lifetime, while an irrevocable trust cannot. While there are pros and cons to both, revocable trusts are the more popular option for most people. They can be less costly, easier to set up and can preserve your privacy. They can also help you qualify for Medicaid in your later years and provide protection from creditors and lawsuits.
However, they don’t necessarily offer the same protection from lawsuits as an irrevocable trust does. Moreover, revocable trusts may expose your assets to tax liabilities—and while there are ways to minimize the impact of these liabilities, they can require more careful planning.
Once you decide which assets you want to put in a trust, your trusted advisor can work with you to transfer and retitle them. The cost of this can vary based on the type and value of the assets, as well as state law. In addition, you’ll need to change the beneficiary designations on those assets. While this can be done yourself, it’s usually best to leave this task to an experienced professional to avoid potential mistakes that could cost your loved ones dearly down the road.
Beneficiary Designation
Beneficiary designation is a process used on specific financial accounts and assets, such as life insurance policies and transferable on death (POD) or payable on death (TOD) bank and brokerage accounts, to designate who will inherit those assets upon the owner’s death. It bypasses probate and allows owners to specify who will receive their assets, independently of the terms of a will or other estate planning documents.
Assets with designated beneficiaries can generally be distributed much faster than those governed by a will, which must pass through the probate process. This can help reduce legal fees and time spent settling an estate, which can save heirs money. Additionally, certain designations can provide tax benefits that may benefit the heirs.
While beneficiary designations are not the only estate planning tool, they can be an important part of a comprehensive plan. It is important to review the beneficiary designations for all your accounts, especially after major life events like divorce, remarriage and the birth of children or grandchildren.
It is also important to consider whether your estate planning goals are best served by including a trust or other entity as the beneficiary of certain assets. This can help minimize taxes and protect heirs from creditors.
Although some people choose to name their spouse, children, parents and other loved ones as their beneficiaries, it is important to consult with a knowledgeable attorney to ensure that the proper precautions are taken. This is particularly true when naming minors as beneficiaries, as the laws regarding this can be quite complex and must be followed strictly.
Another common mistake is failing to update beneficiary designations as circumstances change. This can cause delays or result in assets being allocated to unintended recipients. This is why it is important to keep beneficiary designations updated, preferably on a regular basis.
It is also important to understand the criteria for contesting a beneficiary designation. In order to successfully challenge a beneficiary designation, there must be some form of wrongdoing that can be proved, such as fraud or undue influence.