Estate planning is the process of making sure your loved ones follow your wishes once you reach the end of your life. Most people don't like to think about death, but estate planning is necessary to ensure your assets go to the right people. A good estate plan also outlines what your loved ones should do in the event you become incapacitated by a serious illness or injury.
Complex estates may have trusts and other legal protections, but wills, advance directives and powers of attorney are the most common components of an estate plan. A will, also known as a last will and testament, outlines how you want your assets distributed. In legal terms, an asset is any tangible or intangible item of value. For example, you may have fine jewelry, antique furniture, designer clothing or cash in a bank account.
Creating a will gives you more control over what happens when you pass away, and it also prevents conflict among your surviving family members. If your will says you want your niece to have your antique armoire and your sister to have your diamond ring, there's no need for anyone to argue about who should get each item.
Advance directives outline your wishes regarding medical care. If you can't make medical decisions on your own, an advance directive allows a designated individual to make them for you. For example, if you're critically injured in an auto accident, your proxy would have the authority to make decisions regarding blood transfusions, mechanical ventilation and tube feedings.
Powers of attorney give a designated person authorization to act on your behalf. If you have a financial power of attorney, for example, your proxy is allowed to sell your assets, pay your bills and otherwise manage your funds.
To maximize the benefits of estate planning, follow these tips.
Many people put off estate planning because they don't like to think about leaving their loved ones. Unfortunately, there's no way to predict when an accident or illness will strike. If you put off estate planning, you may never get a chance to make your wishes known.
Some companies offer templates designed to help people create their own wills. Although a template may work if you have a limited number of assets, it's better to hire an experienced attorney to guide you. This is especially true if you have a high-value estate or think one of your heirs might contest your will at some point. Attorneys know the ins and outs of estate planning, so a licensed professional can help you avoid problems down the road.
Your estate plans should be based on your wishes, not anyone else's. Before you meet with an attorney, think about what you'd like. For example, if you have a serious heart attack, do you want to be placed on life support? If not, your estate plan needs to document your wishes. If there are any charities close to your heart, you may also want to include them in your estate plan.
You also need to think about your family's needs, especially if you have loved ones who rely on your income. For example, if you and your adult child live together, you may need to leave them some money to cover your half of the expenses when you're no longer around.
If your adult child has special needs, your attorney may need to create a special needs trust to ensure they're provided for long after you pass away. An attorney may also recommend getting life insurance or long-term care insurance.
Once you have the documents drawn up, keep them in a safe place. If an emergency occurs, you don't want your proxy to have to search high and low for your advance health care directive. Consider getting a fireproof safe or renting a safe deposit box at your local bank or credit union.
The contents of your estate plan shouldn't be a surprise to your loved ones. As soon as you have the paperwork in order, have a family meeting to share your wishes. Preparing loved ones ahead of time can help prevent conflict when it's time to distribute your assets or follow your wishes regarding health care.
At some point, you may need to change your estate plan to account for new circumstances. For example, if one of your heirs passes away before you do, you'll need to remove them from your will. You may also change your mind about who should serve as your health care proxy.
