Everyone should plan for when they are no longer around or unable to provide for themselves or their loved ones. An estate plan is the best way to do this. An estate plan consists of up to 10 of the following legal documents:
- Last Will and Testament
- Living Trust and Pour-Over Will
- Durable Power of Attorney for Property
- Durable Power of Attorney for Medical
- Living Will
- HIPAA Authorizations
- Beneficiary Designation
- Life Insurance and Retirement Accounts
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The Will and Living Trust serve the same purpose, but you should Pick One
Most people are familiar with a will, formerly known as the “Last Will and Testament”, however, the Living Trust is another legal document that individuals should know about. Both have their pros and cons that we discuss in this section.
The Will’s Popularity makes it an Easy Document to Use
No matter how much money you have, you should have a will because this legal document explains what will happen to your wealth and assets when you die. Many of these assets include:
- A house and furniture,
- Jewelry and clothes,
- Art and antiques,
- Cash and money in your savings and checking account, and
- Insurance policies and any retirement accounts which will likely go directly to your beneficiary (e.g., children and/or friends and family).
Once you identify all of your assets, you should determine which person these assets will go to. In legal terms, they call these people beneficiaries. It is important to name alternative beneficiaries as well because these people will get the asset in case the original beneficiary dies. If you don’t name an alternative beneficiary and the original person dies before you, the laws of the State will likely determine who that item goes to.
In addition, we often have more items than we realize and it is important to have a catch-all provision that determines where the items, that are mistakenly not in the will, should go. In legal terms, this is called a Residuary Clause. For example, the wording in your will may appear similar to the following: “I leave my residuary estate to my spouse, John Doe. If John Doe doesn’t survive me, I leave my residuary estate to my two children, Jane Doe and Tim Doe.”
A will also describes many other things such as:
- An executor, a trustworthy and mature person that serves as the personal representative and administers the will;
- Funeral arrangements describing whether you want to be cremated or buried and by whom; and
- A guardian for your minor children.
Your will must be signed by you and witnesses sign as well. The witnesses should typically be people who are not your heirs and generally younger than you because they will have to testify in case someone tries to contest the will in court. Also, it is important to sign a self-proving affidavit in front of a notary, to ensure that you can prove you have a valid will.
The Little Known Living Trust is used by the Rich and Famous, and you can use it to
The Living Trust is a document that is often used instead of the will. The living trust has many advantages that the will does not have.
The first advantage is that you can avoid the high cost of probate court. When a person dies, the personal representative that was named in the will typically files your will with the probate court. Once that happens, the court will determine whether the will is valid and then oversees the administration of the assets in the will. This can become very costly because of potential court costs, appraisal fees, attorney and accounting fees, and many more.
With a living trust, the court is not automatically involved and this can help you save some money. In addition, the living trust is kept private after your death. This is different than with a will because a will has to go through probate court and thus the will becomes public records. However, with a living trust the public will not be aware of the size of your estate, who your heirs are, and the amount you are leaving to each person.
In addition, individuals with a living trust may forget to transfer all of their items into the living trust. When a person fails to transfer all of the assets to the trust, the laws of the state will likely determine who that item goes to. However, a pour-over will helps because it states that all property at the time the person dies will be distributed to the trust.
It is very important to understand the differences between a will and a living trust. It is also important to know that an aspect of a will, whether it is a traditional will or a pour-over will with a living trust, will be a part of your estate plan. So every adult, no matter the age, should start plans for their assets and items and determine how they will take care of their loved ones.
The Power of Attorney allows your Loved Ones to Take Care of You
As people continue to live longer and society becomes more connected, you may become dependent on your loved ones and others to take care of you. Growing older and accidents are a part of life, and you can make plans for this with two of the following documents in your estate plan:
- The Durable Power of Attorney for Financial and
- The Durable Power of Attorney for Health Care (often called a healthcare proxy)
The Durable Power of Attorney for Financial controls your Finances and Money
The Durable Power of Attorney for Financials is a document that allows you to appoint a person that will have the authority to control many of your assets such as:
- Managing your bank accounts,
- Pay your bills,
- Purchase and sell your real estate,
- Receive your government benefits such as Social Security or Medicaid,
- Operate your business, and many other things.
You can also limit the powers you give to this person, such as they can not change or revoke your will or use your assets for their benefit without your permission.
The Durable Power of Attorney for Healthcare focuses on your Medical Decisions
The Durable Power of Attorney for Health Care is a document that designates a person to make medical decisions on your behalf. This document allows you to stay in control of your health care, while appointing a person to follow your wishes. You should feel comfortable discussing your health and medical wants and needs with the person you appoint.
In addition, within the words Durable Power of Attorney for Health Care, it is important to focus on the word durable. Durable makes this Power of Attorney different from a traditional Power of Attorney because the traditional power of attorney ends when a person becomes incapacitated or loses mental capacity.
You should describe when this Durable Power of Attorney for Health Care will begin. For example, it can begin at times if you have serious brain damage, are in a vegetative state, or if you have a terminal illness. If a person’s medical condition worsens and becomes severe, the situation may be a life or death matter. You don’t want to have your loved ones debating and even more stressed about what will happen to you next. A living will, not to be confused with the more commonly known will, can help you make the decision.
The Living Will and HIPAA Authorization Supports the Durable Power of Attorney for Healthcare
A living will is a legal document that explains your desires when there is an extreme medical situation. In essence, it serves as a way to let your loved ones know when it’s time to let you go. Both the person you appoint for the power of attorney for healthcare and the doctors will carry out the directions of the living will.
In addition, it is a good idea to include a HIPAA authorization in your estate plan. HIPAA stands for Health Insurance Portability and Accountability Act, a law that helps protect the medical privacy of individuals. A HIPAA authorization is helpful for the person who has Durable Power of Attorney for Health Care. This will give that person access to your medical records for him or him to make the most informed decision for you.
It is important to choose a person who you can trust and know will carry out your best interest. This can be a child, a sibling, or a close friend. While these can be very difficult topics to discuss, these are necessary topics that should be discussed sooner rather than later.
Retirement Accounts are a Critical Part of an Estate Plan
During a person’s working years, saving for retirement allows the person to have money when they are not able to work. In addition, life insurance can allow you to take care of your loved ones when you are no longer around. It is a good idea to have both a retirement account and life insurance included in your estate plan strategy.
Retirement accounts can take many forms, including 401(k) plans, 403(b) plans, and Individual Retirement Accounts (IRAs). Two of the main benefits of a retirement account include the following:
- The ability to defer paying taxes on the contributions you make to the retirement account and
- You can grow your money even more through compound interest
When you have a retirement account, you’ll typically fill out a beneficiary form. This form is a legal document that determines who the person is who will receive your account balance upon your death. It is important to note that if you have a will, the will does not control your retirement accounts and it does not go through probate court. Some of the common beneficiaries include your spouse if you are married and if you have more than one beneficiary (e.g. your children), you can define what percentage of your retirement account will go to each beneficiary.
In addition, if you have been putting money in a pension and will start receiving the contributions when you retire, it is important to know whether the pension has survivor’s benefits. Survivor’s benefits will help take care of your spouse after your death.
If your pension plan does not have survivor’s benefits, it is important to consider how the loss of income is going to affect your spouse’s quality of living upon your death. Life insurance can help in this situation.
Life Insurance Protects your Loved Ones After you are Gone
Life insurance is a contract between you and an insurer, where you’ll pay a monthly or annual premium in exchange for the insurance company promising to pay money to a beneficiary of your choice after you pass away. You can buy a life insurance policy for yourself and have a joint policy with your spouse. In addition, the beneficiary doesn’t have to be a person, a living trust or an Irrevocable Life Insurance Trust can be the beneficiary as well.
It is important to understand that having an Estate Plan will benefit both you and your loved ones. It is never too early to start planning and having the right legal documents that will make the process easier.
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