Estate Planning Basics

One of the most important pieces of a financial plan is ensuring that the plan can be successful even if you cannot act for yourself. While no one likes to think about the worst-case scenario of not being able to act, it is important to do so. The best gift that you can give your loved ones is to have a plan in place should something happen to you. There are two sets of documents: those that help your loved ones while you are living and those that help them when you pass.

Financial Power of Attorney

This should be one of the first documents that you have drafted. A Financial Power of Attorney (POA) allows your designated agent the ability to pay bills, make financial decisions for you, complete tax returns, make investment decisions, etc. A POA can be limited to specific areas you feel you want taken care of should something happen to you. Your POA can be effective immediately upon signing, or only upon your future incapacity as determined by a doctor or judge.

Advanced Healthcare Directive

An Advanced Healthcare Directive incorporates the concepts of a Living Will and Health Care Power of Attorney, and more. Within this document, you specify an agent to make health care decisions for you if you are unable to make them for yourself. You also can lay out what your wishes are should you become severely sick or injured. This can include decisions surrounding end-of-life care, including CPR, use of a ventilator, and certain types of comfort care. You can even include your wishes related to organ donation, funeral and burial arrangements, consideration of a particular faith, and other preferences related to end-of-life care.

This legal document has three parties involved. The first party is the person who is creating the trust, sometimes called the trust maker, grantor, or settlor. The second party is the trustee, which is the person who is responsible for managing any assets that are transferred into the trust. The third party is the beneficiary, who is the person who benefits from the trust assets. Typically, the person forming the trust (grantor) is also the trustee and the beneficiary. Should you become incapacitated, your successor trustee would step in to help manage the assets in the trust for your benefit. This allows the grantor of the trust to set specific “rules” surrounding how the assets in the trust are used. For instance, you can ensure that your trust continues to make charitable contributions even if you are incapacitated. The assets in the trust are controlled by the grantor, so should they be of sound body and mind, they can remove assets from the trust as they see fit, hence making the trust “revocable.”

Irrevocable living Trust

An Irrevocable Living Trust typically has the same three parties as a Revocable Trust. The grantor transfers assets into the trust, which then become owned by the trust (i.e., the grantor no longer has ownership of these assets). An Irrevocable Living Trust may be used for estate tax exemption reasons, to prevent beneficiaries from misusing assets, to gift property to a child, and more. Irrevocable Living Trusts may also benefit grantors who are trying to qualify for assistance that is asset based, such as Social Security or Medicare coverage for long-term care, as the grantor no longer owns any assets transferred to the trust. Irrevocable trusts cannot be modified or terminated without permission from the trust’s beneficiaries or the court.

last Will and Testament

A Last Will and Testament is a legal document that can give directions on the distribution of your assets upon your demise, name guardians for your young children, name an executor of your estate, and may even help reduce any conflict with your surviving family members. When you pass, you want to give your family time to grieve and remember your life, not to worry about who gets what or what is next. A Last Will and Testament can lay out your wishes so that everyone knows your intentions for your assets.

Some variation of these documents should be integrated into your financial plan. Keep in mind that even if you have already prepared any of the above-listed documents, it is worthwhile to review and update these documents every five to ten years, or whenever there is a significant change in your life circumstances.