There are three common misperceptions in our society regarding the need for an estate plan. A general failure to understand what an estate plan can do for you while you are still living; believing you are not wealthy enough to need an estate plan; and the third, perhaps most prevalent misconception, is that only the elderly need an estate plan. Unfortunately, more often than not, these false impressions, along with a lack of understanding, lead many people into believing they don’t need an estate plan. In fact, according to the American Bar Association, 55% of Americans die without a will or estate plan.
Most people recognize that an estate plan allows for the transfer of property at death. However, what many fail to understand is that an estate plan also focuses on the control and decision making of your affairs while living. A comprehensive estate plan will address who will make medical decisions on your behalf if you are unable to make your own decisions. It will also allow you to name a trusted person to manage your financial affairs. These important medical and financial decisions could be temporary, such as if you were recovering from a car accident, or permanent in nature if you were to develop a life-changing medical condition.
Another common belief among Americans is that they are not wealthy enough to warrant an estate plan. But an estate plan isn’t all about wealth. Do you know who decides where your assets go? Who will take ownership of your house? Who will be granted guardianship of your children? Without a plan in place, you are taking the control out of your hands, leaving your loved ones to handle the burden and subjecting them to the rules of the state, even if those rules may not be aligned with your wishes. This could result in your children being cared for by someone other than who you had imagined or a lifetime of hard earned dollars going into the pocket of an estranged relative. (For related reading, see: 3 Easy Ways to Save Big on Life Insurance.)
The notion that estate planning is only for the elderly is another fallacy in our society. In fact, I recently had a conversation with a woman who recalled feeling insulted when an attorney brought up the topic of estate planning. She felt that she was too young to need an estate plan, and the attorney in question must have overestimated her age. While this may seem farfetched, the numbers don’t lie; 92% of people under age 35 have no will or estate plan. Unfortunately, accidents happen every day, and we cannot pick or choose when they will occur. The premise behind any good estate plan is to put it in place before you need it. Unfortunately when it comes to estate planning, if you wait until you need it, then it is probably too late.
Regardless of your financial status or age, here are three core estate planning documents that every adult should have.
- A healthcare proxy is a legal document that allows you to name someone you trust to make important health and medical decisions on your behalf should you become incapacitated or are unable to speak for yourself. This person, known as your heathcare agent, can be a relative, friend, co-worker, neighbor or anyone else you choose as long as they are eighteen years of age. In addition to traditional medical decisions, your agent also makes decisions on life-sustaining procedures. It is important for you to communicate your wishes with your healthcare agent so they understand your preferences from a medical, moral, and religious standpoint. A Health Insurance Portability and Accountability Act (HIPAA) release should also be included in your estate plan either as a separate document or incorporated into your healthcare proxy. The HIPAA language is what authorizes your agent access to your medical records.
- A durable power of attorney is a legal document that allows for a trusted friend or relative to make financial and business decisions for you in the event you are incapable of managing your own affairs. Your appointed agent can then handle important matters such as paying bills, managing investments, and accessing online accounts. The DPOA is most commonly used due to incapacitation relating to old age or a medical condition such as Alzheimer’s. However, they can also be quite useful in other circumstances such as managing your affairs while you are traveling abroad.
- The last will and testament is a legal document that states your final wishes in terms of who you want to inherit your assets. This includes giving your beneficiaries anything from your home to your investments to your family heirlooms, and can even include your pets! Additionally, and often more importantly, you can name guardians for your children. A named guardian prevents your family from fighting the state (or one another) in probate court and guarantees your children are being cared for by the person(s) of your choosing.
Creating an estate plan now can have a tremendous impact on your own life as well as that of your family. A basic estate plan that is customized for your individual needs can be drafted by a local attorney and shouldn’t break the bank. Don’t leave your health, finances, and children in the fate of someone other than your choosing. Put a plan in place now, before it’s too late! (For related reading, see: Don't Let Sequential Risk Ruin Retirement Plans.)