Many people believe that having an estate plan simply means drafting a will or a trust. However, there is much more to include in your estate planning in order to make certain all of your assets are transferred seamlessly to your heirs upon your death. A successful estate plan also includes provisions to make sure your family members can access or control your assets should you become disabled. (For more, see Estate Planning: 16 Things To Do Before You Die.)
TUTORIAL: Your Guide For Estate Planning
Here is a list of items every estate plan should include:
- Durable power of attorney
- Beneficiary designations
- Letter of intent
- Healthcare power of attorney
- Guardianship designations
Does your estate plan measure up? A simple, pre-packaged will kit may not be enough; in this article we'll examine each item on this checklist to make sure you haven't left any decisions to chance.
1. Wills and Trusts
A will or trust should be one of the main aspects of every estate plan, even if you don't have substantial assets. Wills help to ensure that property is passed according to an individual's wishes (if drafted according to state laws). In addition, some trusts help limit estate taxes or legal challenges. However, simply having a will and/or a trust isn't enough. The wording of the document is critically important.
A will or trust should be written in a manner that is consistent with the way you've bequeathed the assets that pass outside of the will. For example, if you've already named your sister as a beneficiary on a retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary), you don't want to bequeath the same asset to a second cousin in the will.
It could lead to a will contest. Not to mention that both individuals could be bitter toward each other (and you) for involving them in a legal battle. (For further insight, see Why You Should Draft A Will.)
2. Durable Power Of Attorney(s)
It's important to draft a durable power of attorney (POA) so that an agent or a person you assign will act on your behalf in the event of your disability.
Absent a power of attorney, a court may be left to decide what happens to your assets (if you are found to be mentally incompetent). The court's decision may not be what you wanted.
This document can give your agent the power to transact real estate, enter into financial transactions and make other legal decisions literally as if he or she was you. This type of POA is revocable by the principal at a time of his or her choosing, typically a time when the principal is deemed to be physically able, deemed mentally competent or upon death.
In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases it might make more sense to have another family member, friend or trusted advisor who is more financially savvy act as the agent. (For further reading, check out The Importance Of Estate And Contingency Planning.)
3. Beneficiary Designations
As was touched upon earlier, a number of your possessions can pass to your heirs without being dictated in the will (a 401(k) plan for example). This is why it is important to maintain a beneficiary (and a contingent beneficiary) on such an account. In fact, all retirement accounts and insurance plans should contain a beneficiary and a contingent beneficiary because they too typically pass outside of a will.
If you don't name a beneficiary or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge that is unaware of your situation, beliefs and intent is unlikely to make the same decision that you would have made.
Note: Make certain that all beneficiaries you name are over the age of 21, and are mentally competent. If you don't, a court may end up getting involved in the matter. (For more, see Designating A Trust As Retirement Beneficiary and Mistakes In Designating A Retirement Beneficiary.)
4. Letter of Intent
A letter of intent is simply a document left by you to your executor or to a beneficiary. The purpose is to define what you want done with a particular asset after your death or incapacitation. In addition, some letters of intent also provide for the details of the funeral or other special requests. (To learn about executors, see Choose The Right Executor and 4 Things To Consider Before Becoming An Estate Executor.)
While such a document may not necessarily be valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will is deemed invalid for some reason.
5. Healthcare Power of Attorney
By drafting a healthcare power of attorney, you can designate another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity.
If you are considering executing such a document, you should pick someone who you trust, who shares your views and who would likely recommend a course of action that you would agree with. After all, this person could literally have your life in his or her hands.
Finally, a backup agent should also be identified, in case your initial pick is unavailable or unable to act at the time needed.
6. Guardianship Designations
While many wills or trusts incorporate this clause, some "form" wills don't. If you have kids or are considering having children, picking a guardian is incredibly important and sometimes overlooked. Make sure the individual or couple you choose shares your views, is financially sound and is genuinely willing to raise children. As with all designations, a backup or contingent individual/family should be named as well.
Absent these designations, a court could become involved and could rule that your children live with a family member that you wouldn't have approved of. In extreme cases, the court could mandate that your children become wards of the state.
There is more to estate planning than deciding how to divvy up your assets when you die. It's also about making certain that your family members and other beneficiaries are provided for, and have access to, your assets upon your temporary or permanent incapacity.
A will is a great start, but many of the pre-packaged will kits don't cover the full depth of estate planning. It's important to plan for all contingencies.
If you find your plan lacking, check out Getting Started On Your Estate Plan.