Estate planning is undoubtedly complex. It involves navigating complex legal documents, understanding tax implications, and facing difficult questions. It is no wonder that many people find it difficult to understand how an estate plan works.

Think about it this way: everything you own, from your home to your hard-earned assets and investments, makes up your estate. When the inevitable happens, what happens to your estate becomes a pressing issue. While it may be an uncomfortable topic to discuss, mortality is an unavoidable part of our lives. Let’s take a moment to review five of some of the most important estate planning documents.

1. Will
When discussing estate planning documents, a will is one of the most important documents to have. A will is a legal document that states how your assets will be distributed after your death. It also names an executor and guardian for your minor children. A will should be created as soon as you acquire significant assets.

Why is a will important?

Asset Distribution: It provides a clear blueprint for how your assets should be distributed upon your passing.

Executor Appointment: You can designate an executor who will oversee the administration of your estate plan, ensuring it’s executed as you intended.

Guardianship: You can specify who should care for your children and/or pets, guaranteeing their well-being.

Efficient Estate Transfer: A well-structured will streamlines the process of transferring your estate, making it as smooth and efficient as possible.

Not having a will can pose significant risks to your estate plan.

2. Trust
While trusts are not always required, they are useful tools for distributing assets and reducing estate taxes. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.

One significant benefit of a trust over a will is the ability to avoid probate court. Probate court cases can be both costly and time-consuming, making the avoidance of them a big advantage.

The concept of a trust is straightforward: the grantor, who creates the trust, places their assets in the care of a trustee, responsible for managing them. Once the trust’s conditions are met, which may include the grantor’s passing, the beneficiaries, or grantee, gain access to the trust assets according to the trust’s provisions.

The most common and widely used type of trust is a revocable trust, also known as a living trust. Revocable trusts are created during the grantor’s lifetime and can be changed, modified, or revoked entirely by the grantor during their lifetime.

In simpler terms, trusts are powerful tools that can be used to protect assets, lower tax burdens, and control how your assets are distributed.

3. Power of Attorney
Power of attorney (POA) is a legal document that allows you to appoint someone to manage your affairs if you become unable to do so. There are three main types of POA: general, limited, and durable.

  • General power of attorney gives an individual authority to act on your behalf in all legal and financial matters.
  • Limited power of attorney gives an individual specific authority to act on your behalf in a limited number of matters.
  • Durable power of attorney can be added to either a general or limited POA. It remains in effect even if you become incapacitated, which is why it is one of the most widely used types of POA.

4. Healthcare power of attorney
A healthcare power of attorney (HCPA) is a legal document that appoints someone you trust to make healthcare decisions on your behalf if you are unable to do so yourself. It is important to choose someone who shares your views on healthcare and who you can rely on to make decisions that are in your best interests.

Having an HCPA in place can give you peace of mind knowing that your wishes will be carried out even if you are unable to communicate them yourself.

5. Beneficiary Designations
Some of your assets may be passed on to your heirs without being specified in your will. This is why it is important to designate a beneficiary—and a contingent beneficiary—on such an account. Insurance policies should also have a beneficiary and a contingent beneficiary, as they may also be passed on outside of a will. You can find beneficiary designations on many common retirement accounts, such as 401(k)s, 403(b)s, and individual retirement accounts (IRAs), as well as on life insurance policies.

The important thing to remember about beneficiary designations is that they take precedence over your will. For example, let’s say you’re married and name your spouse as the beneficiary of your retirement accounts, but you eventually get divorced. You remarry and change your will to leave your new spouse everything. However, if your ex-spouse’s name is still listed as the beneficiary of your retirement accounts, your ex will receive the benefits, regardless of what your will says.

Therefore, it’s important to review your beneficiary designations regularly to make sure they reflect your current wishes. You can update your beneficiary designations at any time, and it’s a good idea to do so if your life circumstances change.

Bottom Line
A sound financial plan should include an estate plan. Estate planning ensures your assets are distributed according to your wishes and that your loved ones are looked after. There are a number of different estate planning tools available, so it is important to consult with an attorney to determine which tools are best suited for you.

George Maroudas, CFP®

George Maroudas, CFP®

847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor

Disclaimers / Sources:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice.