- Guide the disposition of your assets with a will, and a testamentary trust if you have young children.
- Give others the ability to act on your behalf with Powers of Attorney, and guide their decisions with a living will.
- Always consult with an attorney to draft and execute legal documents.
When it comes to death and disability, your will alone might not be enough.
Thinking about death can be… unpleasant. But when it comes to guarantees in life, death is one of the few. However, a properly prepared estate plan can take uncertainty out of your money's future and is a key part of a personal financial plan. Estate-planning needs vary widely between individuals, but most Americans can benefit from having these four documents in place. Read on to find out more.
1. Last will and testament
Your last will and testament, or will, is the estate document most Americans are familiar with, but what is it and why does it matter? Generally, your will directs the disposition of your assets. A will allows for specific bequests, such as a gift of sentimental value. It also directs the "residual" or "the rest of the estate" to certain beneficiaries. So a will might bequeath a business interest to one child while giving a portion of the decedent's 401(k) to another.
One of the reasons a will is so important is because it helps an estate avoid probate. Probate is the process of dividing up a deceased person's assets when there isn't a will. In that case, the government gets involved and distributes assets however it sees fit. While in some cases probate leads to an equitable distribution of assets, it comes at a high price. In even simple cases, probate can cost multiple thousands of dollars, eating away at the value of the estate. Additionally, the benefit of knowing a decedent's intended estate gifting is priceless.
Wills are also vital for those with minor children. Guardianship is established in the will, should both parents be deceased, and typically multiple contingent guardians are named to watch over the child. Another benefit of a will is the ability to establish a testamentary trust, which allows parents to "control from the grave" and keep assets out of the hands of their children until they're a certain age. With a testamentary trust, kids will not have access to substantial assets until they are deemed mature enough to handle them, thereby protecting children from themselves.
2. Financial power of attorney
Powers of attorney, while considered estate-planning documents, actually do not come into effect upon your death. Instead, they typically spring into effect upon incapacitation. At their core, powers of attorney authorize someone to represent an incapacitated person in certain matters, such as financial or healthcare. Let's break down the financial power of attorney first.
Establishing a financial power of attorney authorizes one or many individuals to act on your behalf regarding financial matters. The right to act on your behalf typically includes acting in matters of investing, directing bank account balances, and signing financial documents. A grantee, or attorney-in-fact, is given full authority over your financial matters, so be sure you choose people you trust. Typically, attorneys will list a primary and multiple contingent attorneys-in-fact when drafting this document.
3. Healthcare power of attorney
Another incredibly important document to have at the ready is a healthcare power of attorney, which gives an attorney-in-fact the right to make healthcare-related decisions for you should you become incapacitated. Rights given to an attorney-in-fact through a healthcare power of attorney include speaking to medical professionals about your care, deciding on paths of treatment, and even deciding to cease the care of someone in a vegetative state. As you might imagine, appointing an attorney-in-fact is an enormous decision, and a large responsibility for the attorney-in-fact. It is important to establish a living will to guide their decision making.
4. Living wills
When it comes to making care decisions, attorneys-in-fact may be guided by living wills or advance directives. These documents provide guidance to both doctors and those appointed as attorneys-in-fact. Supplementing an estate plan with a living will can ensure your final wishes are known and carried out, and can prevent a great deal of agony for those making decisions regarding your health care.
Consult a professional
While some states allow individuals to draft and execute estate documents, it is always advisable to hire a professional. An experienced attorney will speak with you about your personal and financial circumstances, and draft a will in accordance with your wishes.
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