An estate plan will encompass a variety of legal documents that will help articulate your healthcare preferences, specify how your assets and possessions should be distributed, and even identify guardians for your children, dependents, or even your pets.
Essentially, an estate plan serves as a roadmap to guide the execution of your wishes when you're no longer able to do so.
A catalog of your possessions
In financial and legal contexts, an estate refers to all of your possessions, not just physical property like real estate. It can include a wide range of assets such as your car, investments, life insurance, furniture, personal belongings, and even your checking and savings accounts.
Having an estate plan in place can ensure that your possessions are distributed according to your wishes after your passing, while also minimizing confusion or potential conflicts among your loved ones.
Your plan will eliminate possible legal entanglements
An estate plan plays a critical role in ensuring that your assets are distributed according to your wishes and can help avoid the legal complications that can arise without one.
When an individual passes away without an estate plan in place, their possessions may be tied up in legal proceedings for years, creating a significant and unnecessary burden on heirs and loved ones.
By establishing an estate plan, you can minimize the impact of income, gift, and estate taxes, as well as provide guidance on the distribution of your assets. If you pass away without a will, your possessions will be distributed based on the laws of your state, and the courts will determine who receives custody of your children.
In contrast, a comprehensive estate plan can provide clear instructions regarding the distribution of your assets and the care of your dependents, ensuring that your wishes are carried out.
What you’ll need to create an estate plan
Estate planning is a highly personalized process, and the specific documents included in an estate plan can vary widely depending on an individual's circumstances and preferences. However, there are several commonly included documents that are essential to many estate plans. Those include:
- Last will and testament: This is a legal document that outlines an individual's wishes for the distribution of assets after their passing. In a will, the individual can name one or more beneficiaries who will receive specific assets or a percentage of their estate. The will may also name an executor, who is responsible for managing the distribution of assets and settling any outstanding debts or taxes. A will can also be used to name guardians for minor children or dependents, and to specify any funeral or burial arrangements. To be legally valid, a will must be signed and witnessed in accordance with state law.
- Living will: This allows an individual to specify healthcare preferences in the event they become incapacitated or unable to communicate. The individual can outline wishes for medical treatment, including life-sustaining measures such as artificial respiration or hydration, and pain management. The document is often used to guide medical decisions when the individual is unable to do so themselves. It can be an essential part of an estate plan, allowing individuals to ensure that their medical wishes are respected and followed.
- Trust: A legal arrangement in which a person or entity (the trustor) transfers assets to a trustee to manage on behalf of one or more beneficiaries. The trustee has a fiduciary duty to manage the trust assets for the benefit of the beneficiaries according to the terms of the trust agreement. Trusts can be established during a person's lifetime or through their will, and they can be revocable or irrevocable. Trusts are often used for estate planning purposes, as they can provide a way to distribute assets to beneficiaries while minimizing taxes and avoiding probate. Trusts can also be used for charitable giving, asset protection, and other financial planning purposes.
- Medical Power of Attorney (POA): This grants a designated person (the agent or attorney-in-fact) the authority to make healthcare decisions on behalf of another individual (the principal) if they become unable to do so themselves. In the event of an accident, illness, or incapacity, the medical POA ensures that the principal's medical treatment and care is handled according to their wishes. The agent may have the authority to make decisions such as consenting to medical treatments, choosing doctors and healthcare providers, and making end-of-life decisions.
- Financial Power of Attorney (POA): This grants a designated person (the agent or attorney-in-fact) the authority to make financial decisions and manage assets on behalf of another individual (the principal). The financial POA can be granted for a specific period or an indefinite period, and it can take effect immediately or upon the occurrence of a specific event, such as the principal's incapacitation. The agent's powers may include managing bank accounts, paying bills, buying or selling property, making investments, and filing tax returns.
- Life Insurance: Creates a contract between an individual and an insurance company, in which the individual pays regular premiums in exchange for a lump-sum payment to be made to their designated beneficiaries upon their death. The purpose of life insurance is to provide financial protection to loved ones in the event of the policyholder's death, helping to cover expenses such as funeral costs, outstanding debts, and ongoing living expenses. The amount of coverage and premiums can vary depending on factors such as the policyholder's age, health, and lifestyle, as well as the type of policy and coverage options chosen.
- Beneficiary Forms: Various assets, such as life insurance policies, IRAs, and 401(k) plans, typically provide the option to name a beneficiary and a contingent beneficiary. By doing so, the assets can be paid directly to the designated individual(s) without going through probate. To ensure that your loved ones receive the assets according to your wishes, it is crucial to keep the beneficiary designations up to date. This can be particularly important in the event of major life changes, such as marriage, divorce, birth, or death of a beneficiary, as these events may impact your desired beneficiary designations.
While creating an estate plan can seem overwhelming, it doesn’t have to be. Having a last will and testament is an important part of every estate plan, making it a great first step in getting your plan in place.
