Estate planning has always been considered an integral part of one’s financial plan. However, there’s been a misconception that it is just for those who are “older,” and/or have substantial assets. While it is certainly extremely important for these individuals, it is also necessary for those who are younger whether or not they have a high net worth – especially those with children.
There are two main aspects of estate planning: documents (Will, Power of Attorney, Living Will/Health Care Proxy) and estate taxes (federal and state). For the purpose of this article, we will be focusing on the documents.
A Will
Most people know why they need a Will. A Will expresses your wishes; who will receive your assets, how they will receive them (outright or in trust) and when they will receive them (immediately or over time) upon your death. You name an executor, the individual who will be in charge of carrying out your wishes, and you may name a trustee, who will be in charge of any trusts that are set up in your Will. However, one of the most important individuals you need to name in the Will is a guardian for your minor children. This is the individual (or individuals) who will take care of them should something happen to you and your spouse or significant other.
Many younger individuals use the “excuse” that they do not have enough “assets” to worry about a Will. Unfortunately, if you don’t have a Will you die “intestate” and the state you live in (each state is a little different) decides who, how and when your beneficiaries receive your money. Even worse, the state will make the decision on who cares for your minor children and will appoint a guardian. Do you really want the state making those important decisions for you?
If you happen to have life insurance (through work or a private policy) and have minor children you need to be careful. Remember life insurance policies have named beneficiaries (they do not necessarily follow your Will); therefore if you name a minor child (or even a young adult), you may want to consider a trust for the money and give the child a portion of the money at certain ages (e.g. at 25, 30 or 35). Imagine if your child inherited $1 million+ dollars at age 21! How well you think he or she might handle this would certainly impact your decision on whether or not to set up a trust.
Power of Attorney
The next document is a Power of Attorney (POA). This document allows your spouse or significant other to act as your “attorney in fact” (basically sign as if they were you) on your behalf in financial matters. There are two types of Powers of Attorney: General Durable POA and Springing POA. The General Durable POA becomes in force once the document is signed, but the Springing POA typically requires a doctor to “sign off” that an individual cannot act on his or her own behalf for the document to “spring” into effect. Most married couples have a General Durable POA, as a Springing POA can sometimes be a logistical problem. So why is a POA important? Most individuals believe that because they are married they have access to their spouse’s bank accounts, retirement accounts, insurance policies, etc. but in reality may only have access to these accounts upon death. What about incapacity? Without a POA the spouse may not be able to access any accounts during this difficult time, which is typically when they need it the most!
Living Will / Health Care Proxy
The last document is a Living Will/Health Care Proxy. These can be two separate documents or combined into one. The document describes your wishes about health care matters should you become incapacitated or unable to express your wishes. This document discusses issues like the ability to “pull the plug” or be kept alive by a machine. Not having this document can cause difficult family decisions, tear families apart (if they don’t agree) and even cost a substantial amount of money (medical bills are not cheap!). The second portion of the Living Will is the Health Care Proxy. In this document, you name the individual who will be able to make health care decisions on your behalf should you be unable to.
There are other parts of estate planning, but these three documents: Will, Power of Attorney and Living Will/Health Care Proxy form the basis of a strong estate plan. Once you start a family these documents are imperative and should not be forgotten. No one wants to think that “bad” things can happen to them, but the reality is you need to be prepared.
