Like most Americans, estate planning and end-of-life decisions are things you intend to accomplish. Someday. Not the most uplifting of topics, if you’ve procrastinated, you’re not alone. According to AARP, 60 percent of American adults have yet to complete this important task. This guide will provide some basic information to help you get started on protecting your loved ones and everything you’ve worked for in the process.
What exactly is estate planning?
In short, estate planning is putting in writing how your money, property and any other assets should be handled after you are gone. Without a will, the government will decide who inherits what, as well as potentially subjecting your estate to higher taxes, leaving less to your loved ones.
The key is to not be overwhelmed by the estate planning process. In the end, it simply involves the creation of legal documents that convey your final wishes for personal property, care of minor dependents and potential medical care. You can hire an estate lawyer or take 30 minutes to complete a basic will online (assuming your wishes won’t be contested). While the task may appear daunting, you will enjoy peace of mind knowing that everyone knows your exact wishes, so read on and scratch this critical “to-do” off your list.
What comprises an “estate”?
Legally speaking, your “estate” includes all bank accounts in your name (or jointly held with someone else), plus all vehicles, retirement accounts (including stocks and bonds) and your home(s) (primary, vacation and rental homes in your name). You can also include valuable jewelry, art and even pets.
What happens if you don’t have an estate plan?
If you never make an estate plan, then you have zero say in what happens to your family, everything you own, or even your own medical care. State law will dictate what happens to your children, property and accounts. Treating doctors will decide how to proceed if you are incapacitated at a hospital. Your local community’s customs will decide if you are to be buried or cremated.
What is a will?
For many, a will, the most basic of estate planning documents, is all you will ever need. With a will, you can cover the following:
- What happens to your home
- Who will act as guardian for any dependent children
- Who will act as executor/manager of your estate to pay taxes and distribute property
- Whether you will be buried, cremated, etc.
- Important medical decisions
While a will is good enough for many people, if your assets equal or exceed $2 million in value, or if there are children involved with special needs or from prior marriages, you may require more in-depth planning such as a “trust”.
What is a trust?
Established to give one or more individuals access and management authority over all your assets, one of the most important differences between a trust and a will, is that upon your death, a trust avoids going through probate. Avoiding probate reduces costs and assures fulfillment of your final wishes in a timely fashion without outside interference.
A trust can be established in several different ways. For starters, the terms “revocable” and “irrevocable” will be a part of the trust’s language. Revocable, the most popular, allows the trust to be modified while you are still of sound health and mind. Irrevocable simply means the terms of the trust cannot be altered.
Keep in mind, however, a trust might not be perfect for everyone. For example, individuals who own little valuable property or who are thinking of divorce should avoid the process of setting up a trust.
Aside from a will or a trust, the following items are important to consider:
- Power of attorney: This document allows you to name someone you know and trust to manage your finances if you become debilitated. Without an established power of attorney, in the event you die or become incapacitated, the courts will appoint one for you. The court appointee will most likely be unfamiliar with you and your wishes.
- Transfer designations: Also known as “pay-on-death” (POD), these common options occur anytime you open a savings account or certificate of deposit (CD) at your local bank or credit union. This arrangement allows a specific person, selected by you, to take the funds at the time of your death and can also be established for any stocks and/or bonds you have obtained. PODs avoid probate and provide an immediate source of cash should your beneficiaries require it.
- Joint ownership: Common for a primary residence or bank account you hold with your spouse, with this arrangement, the home or bank account automatically transfers to the survivor. This vital arrangement also avoids probate.
- Healthcare directives: This important arrangement allows your designated representative to instruct a healthcare provider how you would want to be treated should you not be able to communicate yourself. Healthcare directives mainly come into play if you are close to death or in a permanent coma, easing the burden of difficult decisions on loved ones.
- Final arrangements: This document specifies if you want to be buried or cremated, as well as your preference for organ donation. Most likely, you will specify an individual to manage these final arrangements.
Changing a will is not that complicated. Not having one is.
Divorce. Kids. New home. Life changes. The good news is that when it does, changing your will really isn’t that complicated. As long as you’re of sound mind, you can amend, update or even void and redo your last will and testament at any time. As a rule of thumb, review your will every few years to make sure it’s up to date. A few minutes of your time can save your heirs months of worries and thousands of dollars.
Learn more about estate and legacy planning, probate and more from Wills and Wellness.