What do Aretha Franklin, Kurt Cobain, and Prince have in common? Besides being famous and talented, they all died without a will. Pretty amazing, given they all had the money and lawyers to draft a proper estate plan, but for one reason or another, they didn't draft one. While the size of your estate is probably more humble than that of these dead stars, you shouldn't neglect your estate plan, either.
Dying without a will creates several problems, mostly for your heirs. Without setting up proper instructions in advance, the court process known as probate takes over to distribute your assets and choose guardians for minor children, which can cause problems. For example, if the probate court places your children with unfit guardians, or dictates your probate assets go to to a son or daughter who struggles with addiction or financial management, problems will likely arise. For these reasons and more, getting a proper estate plan in place is important.
Keep in mind, an estate plan can mean a wide assortment of planning ideas depending on how simple or complex your situation -- for instance, someone married to his or her third spouse with kids from a prior marriage will require more planning than a single person with no kids. No matter your personal circumstances, you should consider drawing up these three crucial estate planning documents.
These three legal documents are a must-have in any estate plan. Image source: Getty Images.
1. Will
Where there's a will, there's a way to distribute your estate based on your intentions, not the probate court's whims.
Simply put, a will is a legal document that sets forth your instructions for how your estate (money in bank accounts, assets in brokerage accounts, cars, jewelry -- generally assets without a named beneficiary, also known as probate assets) will be distributed to the people you choose. A will can dictate how much and the type of probate asset each heir will receive to minimize family squabbles after your death. These are different from non-probate assets such as an IRA, 401(k), life insurance, and a house if titled jointly, all of which go directly to the named beneficiary, outside of your will.
For people with children under a certain age depending on your state (either 18 or 21), you can name guardians in your will to oversee their care. This is one of the most important reasons young families need a will. If you die without a will, the probate court has strict instructions for who becomes the guardian -- usually the parents of the deceased, then the siblings, but it depends on your home state.
Naming guardians in advance in your will will ensure your children are raised by the guardian you want, not who the court appoints. Some couples get hung up on naming guardians, unable to agree on who it should be, but keep in mind that the guardian is only brought in if heaven forbid, both parents pass away. Compromising with your partner or co-parent to determine a plan for your kids that you can both stomach is much better than leaving it up to the courts.
There are other reasons for having a will: To make charitable bequests, to speed up the probate court process, or to minimize estate taxes. For most of us, though, having an asset distribution plan in place and guardians named for your children are reasons enough to make drafting a will a serious priority this year.
For those who already have a will in place, kudos to you! Make sure the distribution instructions and the guardians, trustees and executors are up to date. Executors are the people who handle the after-death administration of gathering up your documents and presenting the will to the probate court. Trustees oversee any money left in a trust for heirs. When you draw up your will, you'll select trusted people to serve as the executor and the trustee.
2. Living will
A will takes effect after death, but a living will can take effect while you are still alive. A living will is a written legal document stating your desires or instructions regarding medical treatment if you become unable to communicate your wishes. You spell out the medical treatments you would and would not want used to keep you alive, as well as dictating how long you'd want to be kept on life support.
Anyone who remembers the tragic case of Terri Schiavo understands the importance of a living will. On Feb. 25, 1990, 26-year-old Terri Schiavo went into cardiac arrest and became comatose. She never recovered from her vegetative state, and after two years without improvement, her husband petitioned to take her off of life support. Her parents opposed this and so began a courtroom battle over Terri's life that played out in the media. Eventually Schiavo's feeding tube was removed, and she died on March 31, 2005. The heartache over deciding her fate demonstrates the worst-case scenario of what happens without a living will in place.
Having a living will takes the emotional burden off family members having to make this difficult decision of whether to continue life support. There is no guessing or bickering, as your wishes are spelled out in black and white. It may not be fun to think about dying or needing life support, but remembering Terri Schiavo's ordeal is reason enough to add a living will to your must-have estate planning documents.
3. Power of attorney
The last in this gloomy but necessary list of documents for estate planning is the power of attorney.
Imagine that you are incapacitated and stuck in the hospital in an unresponsive state. Who will pay your medical bills and the mortgage? Who can sign papers on your behalf? As the name suggests, a power of attorney gives the person or representative you name the power to transact financial and legal matters on your behalf. Generally, this is a spouse, or an adult child if you're unmarried.
Like any insurance, you need to set up a power of attorney before you need it. Otherwise once you're unable to weigh in, your loved ones may have to petition the court to get those powers, which takes time and money. There are "general" and "limited" powers of attorney that give all or only some powers to your representative, but it's best to speak to a lawyer about which may be right for you.
All in all, estate planning may not be fun to think about, but you'll be doing your heirs a huge favor by taking the time now to get these three legal documents in place.
Check out the latest earnings call transcripts for companies we cover.
