Ready to Start an Estate Plan? 6 Key Documents to Have

Ready to Start an Estate Plan? 6 Key Documents to Have

In this “Ask the Estate Planners” Q&A, we cede the floor to financial pros who can help address what we think is one of the trickiest money topics out there.

When you hear the words “estate plan,” you probably think of the sensationalized courtroom battles that happen between the heirs of celebrities or business tycoons vying for an inheritance worth millions.

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In real life, however, good estate planning is actually what helps eliminate all that drama. And it’s not reserved for the old and wealthy—it’s important for people at every income level who want to help protect their finances and avoid future conflict between family members.

But all too often, creating an estate plan falls by the wayside: A 2014 survey by Rocket Lawyer found that 64% of Americans didn’t have a will—with 57% saying it was simply because they hadn’t gotten around to making one.

Well, now is as good a time as any to start—on not only creating a will but also all the other elements that help make up an estate plan.

So we asked estate-planning attorneys Randy Gardner, CFP®, and Leslie Daff of Estate Plan Inc. in Laguna Beach, Calif., to discuss which documents you should start gathering to help give you and your family peace of mind later.

Why an Estate Plan Is a Good Idea, No Matter Your Age or Income

We typically don’t see people come in to discuss an estate plan until they have their first child, because they want to make arrangements for how he or she will be cared for in the event of a tragedy. Then we typically won’t see them again until they are in their 50s and have adult children who can help them make decisions about their health and property, and then again when they are in their 70s and 80s and have started thinking more seriously about their own mortality.

Ideally, however, we would start working with people the moment they turn 18. That’s because once you become an adult, your parents can’t make medical or financial choices for you, and part of what an estate plan helps establish is who can make decisions on your behalf when you can’t.

Also, you don’t have to be wealthy to have your estate go through probate (the court process sometimes needed to settle your financial affairs after your death). It varies by state laws but, in some states, any estate with more than $20,000 in assets could be subject to probate. Part of what an estate plan does is help ensure your property is distributed the way you want while minimizing the chances your family will have to go through this sometimes costly, lengthy and emotionally tiring ordeal.

6 Key Documents for an Estate Plan

Here are some of the most common documents that help make up an estate plan.

1. Beneficiary Forms
This paperwork says who gets the assets in your 401(k)s, IRAs, life insurance policies and other types of accounts upon your death. If you’re married, your primary beneficiary will likely be your spouse—but it’s important to note that if your beneficiaries die before you do and you haven’t updated your designations at the time of your death, those assets will go through probate. So we typically advise naming your trust as the secondary beneficiary (more on that later).

Another reason it’s so important to keep your beneficiaries updated? Your designations trump any directives stated in a will. So, for example, if you forget that you’ve named your eldest son as the sole beneficiary on a life insurance policy and later state in your will that you want the payout divided among all your children, your son will still receive it all. This type of scenario could cause bad blood among the siblings.

2. TOD and POD Designation Forms
Similar to a beneficiary designation, there are several other forms that could help your assets avoid probate by indicating who should receive what in the event of your death. These are:

  • A payable on death (POD) form, which designates who should receive money in your checking or savings accounts upon your death;
  • A transfer on death (TOD) form, which is similar to a POD form but typically used for brokerage accounts; and
  • A transfer on death deed, which indicates who takes over the deed to your home after you die.

But again, these don’t deal with who gets assets should your beneficiaries die before you do, so it’s important to keep them updated.

3. Durable Power of Attorney Forms
A durable power of attorney names someone to make health care or financial decisions for you in case you become too ill or incapacitated to do so yourself. Everyone over the age of 18 should have one in place because once you’re no longer a minor, your parents lose the authority to tell a hospital how to treat you after an accident, nor can they tap into your bank accounts if they need the funds to cover emergency medical expenses.

4. Living Will
This document, sometimes called an advance health care directive, goes into detail about how you want health professionals to treat you should you become unable to communicate those wishes. For example, you can indicate whether or not you want a hospital to leave you on life support, even if doctors believe you won’t recover. A living will and a health care power of attorney usually go hand in hand.

5. Last Will and Testament
Probably the document most closely associated with an estate plan, this outlines how you want your assets divided upon your death, as well as who should become the guardian of any children who are minors. However, a will still has to go through probate—which means your estate will not only have to go through court proceedings but also be made public record. So we view a last will and testament as an interim solution until you have a living trust set up.

6. A Living Trust
Similar to a will, a living trust details how you want your property and funds distributed upon your death and who will take care of your minor children, and appoints a trustee to carry out very specific wishes for your assets. The biggest differences, however, are that any assets you hold in a trust do not have to go through probate and that a trust goes into effect before death, so you can use it to help manage your assets and property while you’re still alive. (You can serve as your own trustee and then appoint someone else to take over after you die.)

As we mentioned in No. 1 above, trusts can serve as beneficiaries on any accounts you have, so you can opt to have the assets go into the trust upon your death—and from there they would be distributed based upon your wishes.

The Bottom Line

Estate plans are not just for the rich and famous. They’re for anyone who wants a plan in place to help manage their health care decisions, distribute their assets and keep the family peace during tough times. And it’s never too early to start thinking about putting one together.

RELATED: Wills and Trusts 101

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.

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