7 Legal Life Planning Must-Haves
Many people are under the impression that having an estate plan is simply drafting a will or a trust. However, there are several documents to include in your estate planning to ensure that your assets are transferred seamlessly to your heirs upon your death. A successful estate plan must also include provisions allowing your family members to access or control your assets should you become incapacitated.
This is a list of items every estate plan should include:
- Durable Power of Attorney
- Beneficiary designations
- Healthcare Power of Attorney
- Guardianship designation
- Letter of intent
Wills and Trusts
A will or trust should be one of the main components of every estate plan, irrespective of whether you have substantial assets. Wills ensure property is distributed according to an individual’s wishes. Some trusts help limit estate taxes or legal challenges. Keep in mind, however, that simply having a will or trust is not 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 have bequeathed the assets that pass outside the will. For example, of you have already named your brother as a beneficiary on an insurance policy, you do not want to bequeath the same asset to a cousin in the will because it could lead to a will contest and cause family turmoil.
Durable Power of Attorney
It is important to draft a durable power of attorney (POA) so an agent or a person you assign will act on your behalf when you are unable to do so yourself in the event you become incapacitated. Without a power of attorney, the court will be left to decide what happens to your assets if you are found to be mentally incompetent. This document gives your agent the power to transact real estate, enter into financial transactions and make other legal decisions as if he or she were you. This type of POA is revocable by you (the principal) at a time of your choosing, typically a time when the principal is deemed to be physically able, or mentally competent, or upon death. In many families, it makes sense for spouses to set up reciprocal powers of attorney, but one can always choose another family member, friend or trusted advisor.
A number of your possessions can pass to your heirs without being dictated in the will. For example, 401(k) plan assets and life insurance benefits. This is why it is important to maintain a beneficiary – and a contingent beneficiary – on such an account. Insurance plans should contain a beneficiary and a contingent beneficiary as well because they too typically pass outside of a will.
If you do not 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.
NOTE: Named beneficiaries should be over the age of 21 and mentally competent. If they are not, the court will get involved in the matter.
Healthcare Power of Attorney
A healthcare power of attorney (HCPA) designates 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 you trust, who shares your views and would likely recommend a course of action you would agree with. This person could literally have your life in his or her hands.
Also, a backup agent should be identified in case your initial pick is unavailable or unable to act at the time needed.
While many wills or trusts incorporate this clause, some do not. If you have minor children or are considering having kids, picking a guardian is incredibly important and sometimes overlooked. Make sure the individual or couple you choose shares your views, is genuinely willing to raise children and is financially sound. As with all designations, you need to name a backup or contingent guardian as well.
Without these designations, a court could rule that your children live with a family member you would not have selected. In extreme cases, the court could mandate that your children become wards of the state.
Letter of Intent
A letter of intent is a document left to your executor or a beneficiary. The purpose is to inform him or her of your intentions. While such document may not 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.
The Bottom Line
There is more to estate planning than deciding how to divvy up your assets when you die. It is more about making certain your family members and other beneficiaries are provided for and have access to your assets upon your temporary or permanent incapacity.