Key Elements of an Estate Plan

Making decisions today that are designed to take effect upon our eventual demise is hardly at the top of anyone’s pleasure list. When it comes to ensuring the financial well-being of your family though, making thoughtful preparations regarding the final disposition of your assets should be a priority. The creation of an estate plan allows you to control how your assets are transferred to your heirs when you die or become mentally or physically incapacitated.

An estate plan will have far-reaching consequences regarding how your financial assets are distributed. A properly designed plan can also make directives about your medical care if you become too ill to make those decisions yourself.

In the absence of an estate plan, a probate court may be making the decisions about your money when you pass away, rather than following your wishes. The lack of a plan may leave your family with an undue hardship, particularly if you have not made it clear to them how you want your affairs to be managed.

Consider the essential components of a proper estate plan:

Last Will and Testament

Regardless of the size of your financial resources, having a will in place is a cornerstone to an estate plan. The will gives the probate court a legal game plan that determines the distribution of your assets when you die. In the absence of a will, the court will adhere to state law and will appoint an executor (administrator) of your estate that will supervise the handling of all your financial affairs.

Through marriage and when you have children, the need for a will grows in importance. While the court will likely make your spouse and then children the beneficiaries of your estate, it is best to have a written document that spells out your wishes. This is certainly the case if there is an uneven distribution within the family or you want to recognize someone or some organization from outside the family.

You can also make provisions in the will that go beyond the financial aspects of your estate. For those with dependent children, this is an important aspect because your will allows you to designate that person(s) who would take custody of children who are still minors. Without a will, the court will be obliged to appoint a guardian for underage children.

Bear in mind that not all financial assets are covered by a will. Specifically, qualified retirement accounts like IRAs and 401(k) accounts for which a beneficiary has been named are not considered part of the probate process. Additionally, life insurance proceeds where the beneficiary is still alive at the time of death of the policy holder will not be paid out as part of a will.

Trusts

Another means to keep your estate in your hands and out of probate court is through a trust. Simply put, a trust is a legal compact where a trustee holds assets on behalf of a grantor (the person who establishes the trust) for the benefit of one or more beneficiaries.

A revocable or living trust is a common way for individuals to manage their assets while they are still alive but with an eye to the future. The trust spells out a specific set of rules for distributing whatever assets the trustee is managing. That trustee can be a family member, reliable friend or trusted advisor. For more complicated trust arrangements, a financial institution may be brought in to act as a trustee.

There are other types of trusts that offer different kinds of advantages that go beyond what a living trust may offer. For a more in-depth discussion of trust accounts please see this earlier blog post from Carnegie Investment Counsel.

Durable Power of Attorney

In general, a power of attorney or POA is a legal document that gives a person that you designate (an agent) the authority to make certain decisions on your behalf. A durable POA allows the agent to continue to act in your best interests if you become mentally or physically unfit. The durable POA is particularly useful concerning estate planning because it allows you to plan for circumstances that typically arise late in life when you may be unable to make decisions on your own.

There are also more limited versions of a POA. For instance, you may designate your agent to fulfill certain financial activities like filing taxes or handling banking transactions. You may also create a medical POA that allows the agent to approve medical treatments or end-of-life care.

An important note about POA and Social Security benefits: The Social Security Administration does not recognize the powers granted in a POA. Under legislation passed in 2018, you may designate up to three people to act as your “representative payee.” The SSA has guidelines about who may act on your behalf.

Conclusion

Hiring an attorney with experience in estate planning allows you to craft the plan that is right for you and your family. That legal advice and the insights of a capable financial advisor will help you draft a document that spells out your wishes and protects your family. You will want to occasionally review the plan to account for changes in your life, such as births, deaths, etc.

Lastly, make the estate plan readily available to those people who are directly impacted by its creation. Notify your family members regarding any specific responsibilities they may have as part of the plan and make sure people have access to the right documents.

References for Estate Planning:

Investopedia.com, "Should Should You Set up a Revocable Living Trust?"

Freewill.com, "What is a durable power of attorney (POA)?"

AARP.org, "Can I manage my mother’s Social Security if I have power of attorney?"