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The first months of a new year are often a time to reflect, reset priorities and make plans for the future. Many people use the moment to review their finances, revisit goals and make resolutions designed to create greater peace of mind.
Yet, one critical part of a financial plan is often overlooked: The estate plan. Even a well-crafted estate plan can become ineffective if it no longer reflects your current life, relationships or financial situation.
Having a plan in place during your lifetime is an important step toward long-term security. But what happens if you are no longer able to manage your affairs because of incapacity — or when your plan is put to the test after your death?
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An outdated or incomplete estate plan can lead to confusion, delays and unnecessary costs for your family at exactly the wrong time.
There are important estate planning documents everyone should have so they can be prepared for life’s uncertainties. These include a will, a revocable trust (if appropriate), financial and health care powers of attorney and up-to-date beneficiary designations for retirement plans and life insurance.
An estate plan helps ensure that the people you want to benefit from your wealth receive the right assets in the right way.
While the directions you provide in these documents can usually be changed, failing to have a plan — or failing to keep it current — can leave important decisions to state law and create added stress for your loved ones.
Planning for incapacity
It is difficult to imagine a future where you are unable to manage your affairs because of a serious injury or incapacity. But there are basic documents you can put in place now to help plan for the future.
Financial power of attorney. A power of attorney is a legal document in which an individual (the principal) designates another individual, such as a spouse, child or close family member (the agent) to act on his or her behalf.
A power of attorney is usually “durable,” meaning that the powers granted to the agent continue to be effective even if the principal loses capacity. The power of attorney allows your agent to take care of financial matters for you in a variety of situations.
For example, your agent can manage banking and investment transactions, sign legal documents or apply for benefits on your behalf.
However, the power of attorney is no longer valid after your death. At that point, the terms of your will or revocable trust control the disposition of your assets.
While a power of attorney is important for those facing illness or old age, parents should also encourage their young adult children to put a power of attorney in place, since parents can no longer make decisions for their children once they reach the age of majority.
Health care power of attorney/living will. In a health care power of attorney, you name an agent to make health care decisions for you when you are no longer able to do so.
Your agent can also obtain access to medical information and records and authorize admission to a long-term care or rehabilitation facility.
You should also have a living will (also referred to as an advance directive), which can be part of your health care power of attorney or a separate document. In a living will, you express your preference for end-of-life measures such as pain management, nutrition and hydration and name a surrogate to carry out your wishes.
Planning for wealth transfer
It is equally important to plan for the transfer of your wealth and ensure you have the right team in place to carry out your wishes. Here are the documents that you may need:
You can also name guardians for your minor children in your will, making it an especially important document for young families.
A will must be admitted to probate, and the cost and complexity of probate proceedings vary by state.
Revocable trust. In many states, a revocable or “living” trust is the central document of an estate plan. A revocable trust can avoid the need for a probate proceeding after your death. It can also facilitate the handling of your property during your lifetime in the event of incapacity.
With a revocable trust, you transfer title to your assets into the name of the trust. You can serve as sole trustee during your lifetime or name a co-trustee.
During your lifetime, you are the beneficiary of the trust and can typically access the trust property in the same manner as an account in your own name. You can revoke or amend the terms of the trust at any time.
If you have a revocable trust, your will is usually a “pour-over” will, directing that any assets you may not have titled in the name of the trust during your lifetime should be added to the trust at your death.
If you lose capacity, the successor trustee you name in the trust instrument can take immediate control of the trust property to meet your needs.
Upon your death, the trust property is distributed to the people and organizations you name in the trust instrument.
Trusts. If you have a large estate or a more complicated family picture, you may want to leave assets in a trust. Trusts can be used for lifetime gifting or the transfer of assets at your death and are often used to take advantage of the federal estate tax exemption, for marital and charitable deductions and for income tax planning.
Beneficiary designations. For many individuals, retirement accounts and life insurance policies make up a substantial portion of their wealth. Remember that these assets are not controlled by the terms of your will or revocable trust.
Instead, their distribution is governed by the beneficiary designation forms you have filled out with the plan administrator or life insurance company.
Your insurance company or retirement account administrator should be able to provide you with a copy of your current beneficiary designations as well as the forms necessary to make any changes.
Naming the right team to carry out your wishes
One of the most important things to consider when putting an estate plan in place is naming a team you can trust to carry out your wishes. The executor of your will, trustee of any trusts and agents under powers of attorney all play key roles.
For an executor, this job can last for many years. For a trustee of continuing trusts, it could be decades. It is important that the individuals you name have the organizational and financial skills to carry out these duties. Of course, they also can hire professionals to assist as needed.
At the end of the day, you need to know that your affairs will be handled in the way you planned. Talk to the individuals you are considering to ensure they understand and accept their potential roles and responsibilities.
Depending on the complexity of your plan and family situation, you might also consider naming a corporate trustee to provide expertise, experience and objectivity.
Review and update
There may also be other reasons to update them, such as a change in your financial status, changes in federal or state tax laws or changes in your relationships with named beneficiaries, executors, trustees or agents.
Regularly reviewing and updating your documents helps ensure that your assets will be distributed to the right people in the right way.
