Many people believe that estate planning is an activity only for people who are rich – perhaps because of the common associate of the word “estate” with a large, luxurious house. But in fact, estate planning is just a process for making clear what you want to happen to your assets after your death. Everyone with a checking account and any possessions at all should have an estate plan – and that’s virtually everyone.
Estate plans also cover your wishes should you become ill or incapacitated. Without an estate plan, loved one and friends may have no idea what your wishes are if you are ill or incapacitated in terms of healthcare provision or resuscitation orders.
The purpose of an estate plan is to make your wishes in all areas clear, so that your heirs and the legal system can carry them out. Without an estate plan, the lack of clarity may lead to ill feelings on behalf of your heirs or even legal wrangling and years of legal battles. So estate plans are also intended to promote harmony and fairness.
The lack of an estate plan may also cause the state and the courts to step in and make every determination about your affairs, including the distribution of your assets and care of your children. State and legal affairs move very slowly – and there is no guarantee that their decisions will accord with your wishes.
Estate plans are conveyed through documents everyone should know about and have. Here are the 5 most important estate planning documents.
1. A Last Will and Testament or Trust
A Last Will and Testament is the document that sets forth the disposition of all your assets after your demise. It lists all the assets and the individuals or organizations to which you want them to go.
Without a Will, no one has any way of knowing where you want your assets to go. You may always have planned to give your diamond engagement ring to your son, for instance, but without a Will stating that, he may not receive it.
Even if you’ve made that plan known to the individuals involved, your desire is not legally enforceable without a Will saying so. Other people could claim the diamond ring or it may even be sold to pay your debts, if you leave debts.
In fact, if you leave no Will, your surviving family members may not have any way to access your assets at all. Unless you have a joint checking account, your spouse may not even be able to use your account to pay monthly bills.
Not only that, but if you leave no Will, the court takes over. Dying without a Will is known as dying intestate. A court will convene and dispose of your assets, after paying off any debts or other obligations.
The process is extremely lengthy, and can take months or even years. In addition, of course, you have no way of knowing whether the court will give your assets to the individuals or organizations you wanted to receive them.
Without a Will, your heirs, family members, and friends may be drawn into emotional or even physical conflicts about your assets and even mount legal challenges against each other.
Wills must be drawn up and witnessed in accordance with state law. They must not conflict with any other legal information, such as beneficiary designations.
Trusts are often created and administered to dispose of assets instead of Wills. They can minimize taxes and legal challenges. Trusts are administered by a Trustee.
2. Beneficiary designations
Retirement plans such as Individual Retirement Accounts (IRAs) and 401(k)s often ask holders to designate beneficiaries. So do insurance plans.
For all these plans, you need to designate an appropriate beneficiary and review them periodically to ensure that they still accord with your wishes.
You and your attorney should also make sure that beneficiary designations accord with the provisions of your Will or Trust.
3. Power(s) of Attorney
A Power of Attorney gives someone you designate the power to make decisions on your behalf should you become ill or incapacitated. These can be revocable, so that the determinations revert to you once you become well enough to make decisions, or irrevocable, which stay in place.
A medical Power of Attorney gives your designee the right to make determinations about your healthcare.
A financial Power of Attorney gives your designee the right to make financial decisions, such as paying your bills or withdrawing money from your accounts to pay for medical care.
4. Letter(s) of Intent
Letters of intent lay forth your intentions for what happens upon your death. They can also give preferences for medical care.
If, for example, you want a specific form of burial, such as cremation, you can specify this in a Letter of Intent, including where you want your ashes scattered or placed.
It’s important to understand two primary points about Letters of Intent. First, they are not legally binding. The purpose is to make your family and friends aware of your wishes, but the Letter cannot force them to follow those wishes. There is no legal penalty for ignoring the wishes in such a letter.
Second, a Letter of Intent does not replace or overwrite a legally binding document such as a Will. In other words, if you want certain assets to go to certain heirs, or want your business maintained in a specific way, you need legally binding documents to enforce those wishes.
5. Guardianship designation
If you have minor children, it’s very important to set up a guardianship designation for their care should you die.
Don’t assume your spouse will automatically care for them; events such as car accidents and plane crashes may cause both you and your spouse to die at the same time.
Guardianship designations can include plans for your children’s living arrangements, their schooling, and more.
Many people also set up contingent or backup guardianship designations. Again, an accident or other event may cause the death of both you and your guardian choice. A contingent guardianship ensures an orderly plan.
If you want more information about estate planning, contact an attorney.
