Estate planning is a topic many people want to put off.
This is understandable, as it can feel like a morbid and slightly complex topic. However, estate planning is important if you care about what happens to your assets after you pass, or if you end up unexpectedly incapacitated.
Here are the things you should know if you’ve thought about estate planning, but haven’t gotten started yet.
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What are the 5 Components of Estate Planning?
There is nowhere better to start than the five components of estate planning.
These are the five areas you must understand in order to have a complete estate plan.
1. Will
This is perhaps the most well-understood of the 5 components of real estate planning. But then there is some confusion between a living will and a last will.
The first component of estate planning is a last will.
It is the document that lays out where you want your assets to go after your passing. It includes details such as who should receive which of your assets. Then, you would normally cover who you will entrust with the care of your children, and perhaps any pets you have.
Formally, these documents are referred to as your last will and testament.
As the person who authors the last will and testament, you are the “testator”. The individuals or organizations that receive any assets laid out in the documents are the “beneficiaries”.
2. Trust
A trust is a less understood, but legally significant estate planning document.
It provides the finer legal details of what you’ve laid out in your will. A trust is also known as a “living trust” and there are no differences between the two, apart from their titles.
Your trust lays out how your beneficiaries should handle the assets you’ve designated for them. There are several specific types of trusts.
What you need to know now is that a trust has a few sets of beneficiaries.
The first set of beneficiaries handles the assets, and once they pass, the next set of beneficiaries receives them. A common example would be the first beneficiary being a bank, and the second set being your children.
There may be several benefits to having a trust. The most significant and common reason is to avoid probate. Probate is time-consuming and hiring a probate lawyer can get very expensive.
A revocable living trust that terminates when you die ensures that assets listed in the trust are passed to beneficiaries immediately.
3. Power of Attorney
Power of attorney status allows the person you designate to act in your stead for financial matters if you are incapacitated.
If you are incapacitated for any reason, that person will be able to make financial decisions for you.
If you are incapacitated without a designated power of attorney, you have no one who can legally financially represent you. The only exceptions are those where a court appoints a conservator or guardian.
However, that route takes some time and the court proceedings are normally expensive. Of course, the court could also appoint someone who you would not want to have control over your financial assets.
Lastly, the court-appointed representative will have to go through lengthy processes that someone with power of attorney could do for you almost immediately.
For the time, money, and control it offers, power of attorney is a serious component of estate planning.
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4. Healthcare Directives
The terms “healthcare directives”, “medical directives” and the like may include several different document types.
In their totality, they offer your instructions for how to direct your healthcare should you be unable to do so yourself.
Healthcare directives can be encompassed in documents such as:
- Those designating a healthcare proxy
- Durable power of attorney for healthcare
- Your living will
- Instructions for medical decisions
You will most likely want to consult an estate planning lawyer. Healthcare directives vary by jurisdiction, so directives that would be valid in one state could be illegal (and thus unenforceable) in another.
Healthcare directives include such serious matters as:
- Whether to withdraw life support when you are terminally ill or in a permanently vegetative state
- Directions for the management of your healthcare should you be in a less severe state, but still unable to actively provide directions yourself
5. Other Beneficiary Designations
This last category is the least necessary of the estate planning components, but is one worth understanding and considering.
While you are making your estate plan, you might as well re-check your retirement plan beneficiary designations. If you haven’t made such designations yet, then you should strongly consider doing so while making your estate plan.
If your retirement plans don’t include beneficiaries, local and/or federal laws may dictate where the proceeds go should you pass. In other cases, the plan will include the assumption to automatically disperse the funds to your spouse and children.
Regardless, it’s worth re-checking your designations (or lack thereof) as a part of the estate planning process.
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What are the main steps of estate planning?
For simplicity’s sake, let’s lay out a step-by-step plan encompassing all the important components of estate planning.
1. Take inventory of your assets.
It’s important to have a thorough understanding of them to make an ideal estate plan for you.
2. Consider the unforeseen.
Estate plans should cover death, and both temporary and permanent incapacitation.
3. Consider loved ones.
Family members’ and dependents’ futures will be affected by your decisions. Thinking this through carefully is important to ensure the best decisions possible.
4. Document all your wishes.
Using the above, it’s time to put your wishes into written words. This is where an estate lawyer can help you make sure your wishes are communicated in the most legally practical way.
5. Appoint an executor.
You must designate someone to act on your behalf to execute your estate plan. Family members, friends, or hired professionals can all serve as executors.
When should estate planning begin?
You can’t start your estate planning too early.
Granted, you may want to make changes several times should you start your planning “too early”. However, it’s a good idea to always prepare for the unforeseen. You can always revisit your estate planning documents and make amendments.
It can be reasonably argued that the more assets and more dependents you have, the more important estate planning is.
But if you have anything at all and care at all about where it will go when you pass, now is the best time to get started.
What is an executor?
Executors (of estates) are those individuals appointed to administer the terms of your last will and testament.
Their primary responsibility is to carry out the instructions provided.
You should consider designating an executor if you haven’t already. If you don’t name one, a court will appoint one for you when you pass.
What’s the difference between an estate lawyer and a probate lawyer?
Estate lawyers and probate lawyers both work in the same area of the law.
However, probate lawyers specifically handle the probate process after an individual passes away.
Estate lawyers, by contrast, help living clients set up their estate planning documents before death.
Conclusions
Estate planning isn’t a thrilling series of activities.
However, it’s an area worth sorting out as soon as you can. If you have assets and care about where they are to go after you pass, you should consider estate planning a necessity.
It could also make it a lot easier for your family when it’s your time to go.
