What Estate Planning Documents Do I Need?

A question I frequently receive is “What estate planning documents do I need?” While my recommendation depends on your unique situation, in this post I will outline some basic documents to consider. Before I get to that, let’s first take a look at why estate planning is important, regardless of your stage of life.

Many people think of estate planning as a discussion only Baby Boomers and/or the super wealthy need to have. In simple terms, estate planning is how you identify what you wish to happen to your assets (and debts) upon your death. It also identifies who you wish to be involved in this process when you’re gone. Naturally, younger individuals and families may put off this important discussion, thinking death isn’t likely. While that may be the case, a properly executed estate plan addresses many other areas that are important in the unlikely event something happens to you unexpectedly. Let’s take a look at the basic documents and what each of them may accomplish.

Last Will & Testament
Perhaps the most common estate planning document, a Last Will & Testament (sometimes just called a “Will”) addresses several items. First, it enables you to designate who you wish to receive your assets upon your death. If you’re married, perhaps your spouse is first in line to receive your assets. If you have children, perhaps they would be listed to receive assets in the event something happened to you and your spouse simultaneously. Regardless of your marital status, a Last Will & Testament lets you proactively decide who may receive your assets.

In addition, a Last Will & Testament may enable you to designate a Guardian for your minor children, should something happen to you. Many times, for younger individuals and couples, this is even more important than designating someone to receive your assets. Without designating a Guardian, you may leave it in the hands of the court system to assign someone to care for your minor children should you die prematurely. I think it’s safe to assume most people would rather make this election themselves than depend on the courts!

In addition to the items listed above, a Last Will & Testament may provide direction for payment of your final debts and expenses and enable you to designate someone known as an Executor(trix) to administer your Estate (i.e. distribute assets and pay debts and expenses) upon your death.

Healthcare Power of Attorney
Should you become incapacitated (i.e. unable to make decisions on your own), a Healthcare Power of Attorney may kick in. When you execute a Healthcare Power of Attorney, you designate someone known as an Agent to make healthcare decisions for you, should you be unable to do so. Needless to say, it’s important you trust this person and he or she knows you have designated them as Agent! Your Agent has full power to act on your behalf, including decisions surrounding life support, so take some time to think about it before naming someone.

Financial Power of Attorney
A Financial Power of Attorney (sometimes called a Durable Power of Attorney) functions very similarly to a Healthcare Power of Attorney, only it enables your Agent to make financial decisions on your behalf, should you become incapacitated. Again, careful consideration should be given to who you wish to name as your Agent and he or she should be made aware of your decision. Your Agent may make decisions that include, but aren’t limited to, check writing, investment accounts, real estate, and taxes.

Living Will
Don’t confuse a Living Will with a Last Will & Testament or a Healthcare Power of Attorney. They are separate documents that provide completely different instructions. The Living Will enables YOU to spell out end of life decisions such as life support and whether you wish to receive pain medication and artificial nutrition should you become terminally ill and/or fall into a permanent coma. Rather than relying on the Agent listed in your Healthcare Power of Attorney to make these decisions, you may proactively identify your wishes.

These are the basic estate planning documents I recommend nearly everyone consider, regardless of your stage of life. However, there’s an additional document I strongly encourage each individual or family to discuss with their attorney. Let’s briefly look at the Revocable Trust.

Revocable Trust
At the highest level, the Revocable Trust enables you to have more control over the distribution of your assets upon death. Again, many young individuals or families think this isn’t important, however, it may be the most important document in your estate plan. More on that in a minute.

So what makes a Revocable Trust different than a Last Will & Testament? First, the Revocable Trust enables you to spell out specific provisions governing WHEN your beneficiary(ies) receive assets. For example, you may choose to allow a child to have one-third of your assets at age 25, the next one-third at age 35, and the final one-third at age 45. Until the child reaches age 45, they may have access to the assets held in Trust for specific needs (e.g. education, health, and other support), but the remainder is not available for them to spend without approval by the person(s) or institution you identify as Trustee(s). A Trustee is simply the legal term for the person(s) or institution you desire to oversee the Trust. In other words, they’re the one(s) a Trust beneficiary may turn to request funds from the Trust. Without their approval, the beneficiary may not receive funds as requested.

In addition to providing additional control over the distribution of assets, a Revocable Trust may also provide the beneficiary(ies) with protections from their creditor(s) and/or divorced spouse. Certainly, no one wants to think their child(ren) may one day have financial or marital problems, but it’s a reality that a Revocable Trust may address.

So why do I think a Revocable Trust may be the most important document in a young (define that as you wish!) individual or families estate plan? For many working people, their biggest asset is their earnings potential. They haven’t accumulated a lot of funds in a retirement plan, nor have they accrued much equity in their home. As such, they may maintain more life insurance than they will at any other point during their lives. It’s the potential life insurance proceeds that require careful planning, especially if someone leaves behind minor children.

Therein lies the opportunity for a properly drafted Revocable Trust to address the many issues that may arise as a result of a minor child(ren) inheriting significant funds from life insurance proceeds. I can assure you, if word got out that your child(ren) received life insurance proceeds, they’d immediately have new friends, which may not have their best interests in mind. Proper planning can reduce the likelihood that these proceeds would be squandered and set your beneficiary(ies) up for success later in life!

I encourage everyone to seek advice from an estate planning attorney to determine what documents make sense for your situation. I realize legal advice isn’t cheap, but the peace of mind that comes from knowing you’ve not only put yourself in a good position, but you won’t leave behind a messy situation for your survivor(s) is priceless!

Please note: None of the above should be taken as legal advice, nor should it be assumed the description of any legal document is comprehensive. Rather, I have provided an overview of each document to help you begin to understand what role each may play in your estate plan. You should consult a legal professional to discuss your unique needs and the advantages/disadvantages of each document.