Let’s be frank – nobody likes to think about the end of their life. It’s unpleasant and can put you in a real downer of a mood. This is probably why estate planning is the financial planning topic I’m least asked about. But just like your retirement and investments, estate planning also needs forethought and management when taking a comprehensive look at your personal finances.
When I mention estate planning to clients, most of them get that generic movie scene in their head of people sitting in a lawyer’s office as the recently deceased’s will is being read aloud. And most people tend to believe that if they are not millionaires they don’t need to think about this subject. However, estate planning is not just for the rich, nor does it just entail deciding to whom your assets will go. Everyone – young or not, rich or not – can benefit from elements of the estate plan.
With that in mind, here are the five crucial documents that estate planning professionals agree are needed for a successful plan.
1. Will and/or Trust
The fundamental estate planning document is a will, which establishes the individual responsible for administering your estate, as well as your wishes for distributing said estate to your beneficiaries. Without this document in place when you die, state intestacy statutes will take effect and create an estate plan on your behalf, which may not be what you had in mind. And if no one under the statute can be found, the decedent's assets may end up going to the state.
A trust does essentially the same thing as a will with one major difference – administrators distributing your estate via a will are overseen by the court process known as probate while the trustees of a trust are not subject to probate.
Generally speaking, distribution to beneficiaries via a trust usually takes less time than having to go through probate. Additionally, though the upfront costs of drawing up a trust may turn away some (it can cost anywhere between $1,000-$3,000 when using an estate planning attorney), depending on the size of your estate, probate costs can be more than 10x that amount (an example an estate planning attorney colleague of mine gave for a simple $500,000 estate ran fees for filing necessary paperwork, the attorney and other costs at anywhere between $14,000-$27,000!).
Given your assets and wishes, an estate planning professional will be able to guide you on which is the more appropriate document for you.
2. Durable General Power of Attorney
A durable general power of attorney authorizes someone to act on your behalf in financial and personal business and tax affairs, in the event that you are incapacitated and not able to make such decisions for yourself. If the power of attorney is "durable," it remains effective through your subsequent incapacity. It ends with your death.
3. Health Care Proxy
Another basic document that should be included in estate plans is a health care proxy. By executing this document, you appoint a person to act as an agent for your medical decisions if a time comes when you are unable to make such decisions.
For example, if you are under anesthesia and the doctor requires an immediate decision as to treatment, an agent under a medical power of attorney may make such a decision. Additionally, it's highly important you and your agent discuss your wishes prior to something actually happening.
4. Living Will
Unlike the powers of attorney documents, a living will does not appoint a person to act on your behalf. Instead, a living will documents your wishes about being kept alive in case of a terminal condition or a persistent vegetative state.
In some states, the operative document is the living will while in others the courts will only enforce the health care proxy. In either case, it is common to have both prepared since the living will provides guidance to the health care agent on the patient's wishes.
5. HIPAA Authorization
Generally, a medical power of attorney will include a provision, known as a HIPPA authorization, under the Health Insurance Portability and Accountability Act, granting an agent access to your medical records. Without this specific authorization it is unlawful for a health care provider to disclose health-related information to a third party.
Without these five basic estate planning documents, things can become difficult and stressful.