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Estate Planning Basics
If you believe that estate planning is one of those things “other people” need to do, then you may not have a firm grasp on what “estate planning” is. Perhaps you think only “rich” people need an estate plan. Sound familiar? In reality, every adult needs an estate plan.
When a person dies without a valid last will or living trust, that person is said to have died intestate. As a result, any of the decedent’s assets subject to probate will be distributed according to state “intestate succession” law. For example, even though the decedent would have intended otherwise, an antique pocket watch inherited from a cherished grandfather or a valuable guitar collection may be ordered sold, so the cash proceeds may be distributed equally to the statutory heirs.
Think for a moment about the assets you treasure the most. Now consider how you would want them distributed after you pass. Unless you memorialize your wishes for those treasured assets in a last will or living trust, those assets will not be distributed according to your specific wishes.
Estate Plans Are for the Living
What people seldom realize is that an estate plan is for the benefit of the individual making the plan while he is alive, as well as to provide for and protect his loved ones after he is gone. Here are some common documents that should be part of every estate plan:
General Durable Power of Attorney
Through this document you designate someone to act on your financial behalf, if you cannot or no longer want to act for yourself. Imagine for a moment that you decide to travel around the United States in an RV, go on a mission trip, or serve a tour in the Peace Corps. You will not always have access to a telephone or the internet. You could ask someone to deposit your checks, pay your bills and file your tax returns while you are away. However, unless you appoint them as your “attorney in fact” (also known as an “agent”) under a General Durable Power of Attorney, they will not have the legal authority to take care of things for you.
This document is essential if you were severely injured or ill and could not make or communicate your wishes. Without a General Durable Power of Attorney that legally appoints someone as your attorney in fact, your family will have to go to court to have a formal conservatorship created with a court-supervised conservator appointed. The expense of doing so and potential conflicts about who should serve as your attorney in fact can damage relationships among your loved ones.
Advance Health Care Directive
As with a General Durable Power of Attorney for financial decisions, you can appoint someone you know and trust through an Advance Health Care Directive (also known as a “Health Care Proxy”) to make your medical decisions, if you cannot. Through this document you may indicate medical treatments you would or would not want under a variety of scenarios. Your health care “agent” will have no decision-making authority, as long as you can act for yourself. You should also consider signing a HIPAA medical records release so your doctors can talk to your agent, and the hospital can share your records. You do not want your agent making any decisions without full access to your doctors and your essential medical information.
A Will or a Living Trust?
One of the most significant decisions in estate planning, is whether you will have a last will or a living trust. Both documents have advantages and disadvantages.
A last will usually is easier and costs less than a living trust to create. Last wills only control assets that are subject to probate (i.e., have no surviving joint owner or designated beneficiary). The probate court process required to administer a last will can tie up your estate longer than a living trust. In addition, a last will must be filed with the probate court and becomes a matter of public record.
Generally speaking, a living trust is never filed with the probate court and does not become a matter of public record. Fortunately, the inheritance protection for your loved ones is virtually the same with either approach. Regardless of whether you have a last will or a living trust, the inheritance can be protected for a loved one with special needs and even from a loved one who is financially immature or addicted.
In summary, whether you choose a last will or a living trust, both roads eventually lead to Rome. The former is easier to create, costs less now and more later when administered. The latter is more involved to create, costs more now and less later when administered.
Life Insurance as Part of Your Estate Plan
For a nominal monthly premium, you could provide additional financial security for your family through a life insurance policy. You can designate people or a trust as your beneficiary or beneficiaries. Life insurance payouts can create an “instant estate” for your loved ones, if you died before having time to create that estate for them. If you have created a sizeable estate, then life insurance can provide needed liquidity to pay death taxes and even equalize the overall inheritance among your loved ones. For example, if you leave your business to your daughter who has helped you build the business, then life insurance proceeds can help provide a “fair” inheritance to your son who has his own employment.
Pulling all of the elements together, the general durable power of attorney, advance health care directive, last will, living trust and life insurance are all “estate planning basics” that can spare your family legal and financial hardship, when they are grieving after losing you. Your loved ones will know you were thinking of them and their future. Make sure you are “good to go,” by creating an estate plan appropriate for your unique personal, family and financial circumstances. Then, once your estate plan is created, be sure to review it from time to time when “life happens” and changes need to be made.
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