You Need an Estate Plan

My wife and I recently met with our estate planner to update a plan we created in 2013. You need an estate plan to protect you and your family in the event of disability or death. Here’s a look at the documents to have in place and some thoughts on how to set them up.

Estate plans help protect you and your family from your incapacity.

Inability to handle your affairs can be planned for so the courts don’t determine who will make decisions for you. Those legal proceedings can be costly, time consuming , fraught with family friction, and potentially embarrassing. It’s better to handle potential incapacity by documenting your preferences from the outset. This comes down to two things: Who will make health care decisions for you and who will handle your finances?

Health Care Proxy

A health-care proxy names an agent to make health-care decisions for you if you cannot. Naming this person in advance eliminates the potentially costly and difficult battles between family members about who is entitled to make these decisions for you at a time of emotional strain. You should also name a successor in case the person you appointed is unable or unwilling to act. You can also include Living Will language governing your preferences where there is no hope for recovery.

Power of Attorney

A power of attorney document names someone to make financial decisions for you. You list what powers you want your agent to have. A good estate planning attorney can explain those potential powers and recommend ones to include based on your situation. You should also name a successor agent in case the person you appointed is unable or unwilling to act.

Powers of attorney can be durable or springing. A durable document is in effect from the moment you sign it. Springing documents come into effect only when you are incapacitated. That seems like the way to go, since you may not want someone to have authority over your finances until you are unable to handle them yourself. However, most estate planning attorneys recommend durable powers for the simple reason that the agent appointed in a springing power can act on your behalf only after proving your incapacity to the court. This somewhat defeats the purpose of advanced planning.

Estate plans protect your family from your death and ensure your wishes for assets and other things are followed.

Too many people procrastinate with getting their plan done. The bad news for them is that they already have an estate plan. States have laws called the laws of intestacy, to determine where people’s assets will go if they die without a will. Intestacy laws differ across the states, but they can lead to strange and undesirable outcomes. For example, if you have living parents but no children, your surviving spouse may not inherit all of your assets. If you have children from multiple marriages, the split probably won’t be what you intended either. So, get your own plan instead of the arbitrary one set up by your state. This will also prevent family skirmishes and court battles about your wishes had you created a plan. To research the laws of intestacy in your state, click here.

Will

A will allows you to appoint a guardian to care for your minor children in the event both parents have passed. Without designating this in advance, you risk the court getting involved and family members arguing about who is best served to raise your kids. You also name a personal representative to temporarily handle your finances and transition your assets where you intended. In our case, our will is considered a pour-over will that “pours” everything into our revocable trusts.

Revocable Trusts

My wife and I each have a Revocable Trust. A trust can be created through your will and does not need to be a separate document. However, when you take this route your family’s assets have to go through probate, which can be a costly and lengthy court process (for more on probate). With a revocable trust that owns your assets during your life, you can avoid this.

Trusts provide for financial management so your spouse and minor children do not inherit large sums of money they may not be equipped to manage. Without a trust, your children will stand to inherit your assets at the age of eighteen or twenty-one (depending on the state) outright. Setting up a trust protects your privacy as well, since the details of it are not public record like your will would be.

Trusts can protect spendthrift heirs from themselves and creditors. When you create a trust, you appoint a trustee who has the legal obligation to administer it prudently according to the wishes laid out in your documents. If the trust’s beneficiary is not the trustee and does not have unfettered access to the funds, the trust can be established so that its assets are not reachable by creditors or an irresponsible beneficiary.

Summary

This is by no means an exhaustive list of the things to consider when creating an estate plan, or what types of planning options you have. For a more detailed look at why you need a plan please check out this resource guide.

Final thought: don’t let the perfect be the enemy of the good. Cross getting an estate plan done off your list!

Here’s a complete checklist you can use to make sure you’re focusing on the right planning and investment items outside of your estate plan.