When most people think of estate planning, they think “wills”. However, this is a major misconception. There is much more to estate planning than just a will. There are five components of a complete estate plan that will cover all areas of your life and death as well as protect your assets upon passing.
The most commonly known aspect of estate planning, a will, is a legally binding statement that dictates who will receive your property upon your passing. A will can also name a guardian of any minor children you have. It is important to know that a will only covers probate property which is property that is in an individual’s estate. Property that is jointly owned or has a named beneficiary, like life insurance, 401(k), or an IRA, are not covered under a will unless the beneficiary named on these plans is the estate of the individual.
Trusts work much differently from wills in that they are private legal documents in which the details and property in a trust are kept within the knowledge of only those who know about the trust. Trusts can even result in tax advantages for both the donor and the beneficiaries. A trust is established by a person or institution, named the “trustee” who holds the property for the beneficiaries. Trusts can have multiple sets of beneficiaries – for example a set of grandparents can be the trustees with their children named the direct beneficiaries and their grandchildren the next set of beneficiaries who stand to benefit from the trust when their parents pass away. There are many different forms of trusts and reasons to have trusts varying from tax planning to asset protection to ensuring for the care of a dependent or disabled adult child. Many small business owners, those who own more than one parcel of real estate or individuals with investment accounts may benefit from trust planning.
3. Power of Attorney
Power of attorney, or attorney-in-fact, allows you to appoint someone to act in your stead on financial and medical matters if you were to ever become incapacitated. Establishing a Power of Attorney in advance saves valuable time and money to avoid the expensive process of guardianship after you become incapacitated. There is also the risk that someone other than whom you would have chosen could become your guardian if you do not designate this person yourself.
4. Medical Directives
Depending on your state’s laws and the choices that you make, a medical directive can include several types of documents including:
- a health care proxy – someone you designate to make medical decisions for you should you be incapacitated;
- a living will which can list instructions to end life support if you fall into a vegetative state;
- and medical instructions should you become seriously ill and cannot direct your own health care.
4. Beneficiary Designations
While creating your estate plan you should also ensure that any policy you own, including life insurance, a retirement plan, or 401(k), has beneficiaries listed, is up to date and complete. The only way to ensure that the money and assets you leave behind go to whom you want, is to ensure you have named beneficiaries.