Summary/TL;DR
At a bare minimum, every adult needs a will, powers of attorney (both medical and durable), and a living will. In many cases, attorneys will also recommend living trusts to serve as the centerpiece of a comprehensive estate plan. Regular review of these documents along with the beneficiary designations on your investment accounts is also essential.
Introduction
Every adult needs an estate plan, but few know where to begin. Furthermore, even the basics of estate planning is filled with legal jargon that can serve to confuse more than clarify. The purpose of today’s post is to provide a basic checklist for the bare minimum required for a comprehensive estate plan.
Please keep in mind that I am not an attorney and no part of today’s post is legal advice.
Will
Your will is essentially an instruction manual for the probate court. All probate assets (real estate, vehicles, etc.) will be distributed according to the instructions left in your will, assuming that there are no contests against it. Furthermore, your will is made public by the probate courts and sometimes might reveal information about your estate that you would prefer to keep private.
Even with the perfect will and a simple estate, probate in a “good” state can take months and cost thousands of dollars. In these cases and many others, your attorney might recommend a living trust.
Living Trust
A revocable living trust (oftentimes just called a “living trust”), while not needed by everyone, can serve as the centerpiece of your overall estate plan by allowing your estate to avoid probate both upon your death and during your life. Most of your property is transferred to the trust during your lifetime and is distributed as you specify upon your death. And any assets that can’t be placed into the trust (such as IRAs) usually have their primary or contingent beneficiary updated to the trust. Furthermore, you can appoint people to serve on your behalf in the event of your permanent or temporary incapacitation, an essential feature for many business owners.
A common misconception regarding living trusts is that they offer some sort of liability/tax protection. This is not true. Living trusts primarily serve as a probate avoidance vehicle and offer none of the asset protection or tax advantages that an irrevocable trust might offer.
Even if you have a living trust, you still need a will. The will’s purpose is simple – to instruct the probate court to direct any assets to your trust that, for one reason or another, were never placed into it. Wills of this nature are often referred to as “pourover wills”.
Powers of Attorney
A Power of Attorney (POA) is a document that grants someone authority to act on your behalf, usually following your incapacitation. The two types of POA that are essential for everyone are Medical and Financial (Durable) Powers of Attorney.
Medical Power of Attorney
A Medical Power of Attorney allows someone to make medical decisions on your behalf upon your incapacitation. They are usually drafted alongside a HIPAA Release Authorization, granting this person access to your medical records.
All adults need a medical power of attorney, including your unmarried children! As soon as your child becomes an adult, you are no longer their legal guardian. If they got in an accident, your only option would be to obtain a guardianship through the courts, which could take months, cost thousands of dollars, and is not guaranteed to be approved.
Financial/Durable Power of Attorney
A Durable Power of Attorney allows someone to make financial and legal decisions on your behalf. In some states, this is called a “Financial Power of Attorney”. This authority may be effective immediately or upon your incapacitation. Like a medical power of attorney, all adults (including your unmarried children) need these.
Directive to Physicians (Living Will)
This simple document communicates your wishes about certain medical decisions (such as continuing life support) in case you are unable to communicate them on your own.
While it might seem like an odd thing to include in a list of “essential” documents, you need to think about what your loved ones would go through in the event you didn’t make your desires regarding these difficult decisions exceptionally clear. Somebody will have to make these decisions, and this will place a large emotional burden on your spouse, children, siblings, or other family members if you don’t properly document them yourself.
Beneficiary Designations
Many attorneys will tell you that a key goal of an estate plan is to avoid probate, and beneficiary designations are essential for accomplishing this. Your beneficiary designations will take any investment accounts (IRAs, 401(k)s, brokerage, etc) that have them out of your probate estate, meaning that they will go directly to your beneficiaries upon your death. This also means that they will supersede what’s in your will, making regular reviews of them extremely important.
Make sure you review your beneficiaries on all accounts! I can’t tell you the number of times that I’ve looked at beneficiaries with a new client to find that their 401(k) beneficiaries didn’t match their IRA beneficiaries, which didn’t match the beneficiaries on their brokerage accounts. This is an easy thing to fix and keep up with, and the consequences for not doing so can be severe for your heirs.
Review Your Plan Regularly
Like every part of your financial plan, your estate planning documents need to be reviewed regularly and updated as circumstances change. I have a simple document that I review with my clients that has their executors, trustees, and powers of attorney listed. This is much easier than digging up and reading through each document individually and will make your reviews far more efficient.
Regular meetings with your financial planner and attorney will also make sure that the parts of your plan that have to do with the inheritance of your assets are kept up to date. Perhaps one of your children married someone that you aren’t thrilled about, so creating a trust upon your death for them to receive their inheritance in is now more appropriate. Or maybe you’ve purchased some property lately and forgot to do so in the name of your living trust. Things like this come up all the time and are great examples of why regular reviews are essential.
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