“Estate planning”, according to Investopedia, “is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death”. Estate planning is more than just having a will. It also covers how your wishes will be carried out if you are incapacitated, who will handle your assets, and how to minimize taxes for your heirs. Even if you have modest assets, you should have an estate plan in place to protect your family and provide clear instructions for your end-of-life care before you pass away.
What Is Your Estate?
Everything you own is considered part of your estate. This includes your home, car, real estate, bank accounts, life insurance policies, investments, retirement accounts, furniture, jewelry, personal property, and furniture. If you own any of these items, you have an estate, and you will want to decide who gets what when you die.
Your estate plan includes your will. You can designate which family members, friends, or organizations will inherit anything you own. This includes your personal possessions to your money and investments. You can define what they will receive and when they receive it. You can also specify how they will receive it. For example, cash or a trust paid out over time.
Without estate plans in place, the government will make these decisions for you. Federal and state regulations will determine who will inherit your assets. And your estate may not go to the people you would have chosen. Plus, probate court can also eat up a significant amount of your estate before your heirs inherit.
Some forms of estate planning happen by default. If you open a brokerage account or purchase life insurance, you’ll have to provide the name of a beneficiary. This is the person who will inherit the funds from the account upon your death. You can name one person or multiple individuals. You can also name a contingent beneficiary in case the primary beneficiary is not alive when you pass. This likely covers a small portion of your estate, however.
A last will and testament defines your assets and assigns them to specific beneficiaries. You will need to choose an executor or trustee you trust to administer your will after your death. This person has the legal power to act on your behalf to ensure your will is carried out according to your wishes. Wills still have to go through the probate process and can be contested, but they provide you with a voice after you have passed and are usually respected unless there are extenuating circumstances.
There are a variety of trusts used for estate planning, depending upon your financial situation. If you have substantial assets, a trust is often a better option than a will. A trust is a legal document that gives a third party legal rights to hold assets for a beneficiary. This gives seniors a wide range of estate range of options for estate planning purposes. Most importantly, trusts eliminate the need for going through probate court. You can also put a trustee in charge of handling the funds in the trust on behalf of your heirs if you aren’t sure they will handle money well, or if your heirs are young and you want the funds held until they reach a specific age.
One of the most effective forms of trust is a revocable living trust. This is a trust set up with a trustee, with all assets of your estate in the trust. You are still in control of all your funds and can remove any assets from the trust at any time until you are incapacitated or die. When you are disabled, the trustee takes over the management of the trust until you die. At that point, your estate is settled according to your wishes. This type of trust allows your estate to bypass probate.
Living Wills or Advance Directives
A living will outlines what end-of-life care you want medical care professionals to take on your behalf. Do you want extreme life-saving measures taken? Do you want to be on a respirator if you have limited brain function? These are uncomfortable questions that your children or spouse may have to answer if you cannot speak for yourself. If they don’t know your wishes, a living will or advance directive can make your stance clear.
Powers of Attorney
A power of attorney is a legal document giving an individual the right to act on behalf of another person (the principal). The person with power of attorney can either have very broad or particular powers to make decisions depending on what type of POA they are granted. The most commonly used in estate planning are a Durable Power of Attorney for Health Care and a Durable Financial Power of Attorney.
Durable POA for Health Care
This gives the individual holding the Power of Attorney and medical professionals specific healthcare guidelines for your care. It covers a broad range of topics such as when life-saving measures should stop, what kinds of life support you want, pain relief, blood transfusions, etc. The document also documents a trusted individual to make medical decisions for you if you are incapacitated.
Durable Financial Power of Attorney
There are some accounts that no one can access if you are incapacitated unless you have a Durable Financial Power of Attorney in place. These include your pension, Individual Retirement Account, and other financial accounts in your name. Having a Durable Financial POA ensures someone can access those funds for your care if you are injured or ill.
Reviewing Your Assets for Estate Planning
Truly knowing what your assets are is the first step in estate planning. Consider the value, both monetary and sentimental, of all these items as you begin your estate planning:
- Homes & real estate
- Vehicles (cars, boats, motorcycles)
- Collectibles & antiques
- Savings & checking accounts
- Stocks, bonds, mutual funds
- IRAs, 401(K)s, retirement accounts
- Life insurance policies
- Tools of a Trade
After reviewing their assets, most seniors realize they need to prepare legal documents to make sure each of their loved ones inherits properly.
Talking to Your Family About Estate Planning
Discussing your end of life wishes with your family is also an essential part of estate planning. While powers of attorney and a living will or advance directive are part of most estates, they should not be put in place without discussing the person you’ve chosen to make decisions for you.
Whether you choose family members or close friends to be your representatives, it is crucial that you have clearly expressed your wishes to them. Make sure you review the contents of any legal documents with them before signing the papers. If your loved one has to use a power of attorney on your behalf, you want them to be comfortable acting as your representative.
Estate planning is about protecting yourself and your heirs. If you work with a qualified estate planner, you can protect yourself at the end of your life and ensure your assets and your loved ones are protected after you are gone