Creating an estate plan is something many individuals don’t think about until they have a family or significant assets. However, it is actually a wise step for anyone to take for several reasons. Such plans include legal documents that may be necessary in the event of an unexpected health issue. A good plan can help maximize the legacy a person leaves to their heirs, regardless of the size of their estate. To fully grasp the five parts of a good estate plan, it is important to first understand what an estate plan is.
There’s No Need to Have a Vast Estate to Have a Solid Plan
Many people hear the word “estate” and picture a mansion on a hill, with manicured gardens and luxury cars in the garage. While this is technically part of a wealthy individual’s estate, an extravagant lifestyle is not a requirement for estate planning. “Estate” simply refers to anything an individual owns, including cash, cars, real estate, and any other assets.
Most people want the things they own to go to one or more of their surviving loved ones in the unfortunate event that they pass away, and an estate plan is the best way to ensure one’s wishes are carried out. The legal documents that make up an estate plan protect an individual’s assets and property and specify who will handle those assets in their absence. The plan is a way to facilitate the family’s ability to ensure their loved one’s wishes and needs are met when they are unable to do so themselves.
What Does an Estate Plan Do?
There are three primary objectives of any good estate plan, including the following.
- Protecting assets for heirs. An estate plan acts as a safety net to preserve the value of an individual’s assets. It can also minimize the time beneficiaries must wait for the assets to be distributed and help to ensure that the individual’s legacy is carried out according to their wishes.
- Allowing a person to decide who gets their possessions. When an individual creates a will, they can detail their assets, as well as those to whom they wish them to go. They can also name an “executor” who will disperse the estate.
- Allowing an individual to choose the person who will make decisions for them. Estate plans may include a health care proxy form and a durable power of attorney. The health care proxy form is a legal document that gives another party permission to make health care decisions for an individual if they are unable to do so themselves. The durable power of attorney is a form that names a trusted individual such as a close friend or family member to manage a person’s financial and legal affairs if they are incapacitated.
If an individual sets up either of these legal documents as part of their estate plan, it is essential to include that information on accounts such as insurance policies, 401 Ks, and IRAs.
The Five Essential Components of Any Estate Plan
Once an individual has a solid understanding of what estate plans are and how they work, it is important to know what they should include in their plan. The following five components are part of an ideal estate plan.
- A valid will. Most people think of a will when planning for the distribution of their assets after they pass away. This document details who the individual wants to handle their assets after they have passed and helps ensure that they are distributed according to their specific wishes. Some wills also state who the individual would like to act as a guardian for their minor children if both parents are deceased or incapacitated.
- A trust. A trust is a legal arrangement that holds an individual’s assets on behalf of their beneficiaries. There are various types of trusts. An estate planning attorney can help the individual choose the appropriate type to dictate exactly how and when they wish their beneficiaries to receive their assets. Additional benefits of irrevocable trusts and revocable trusts include limited exposure to estate taxes and avoiding probate, respectively. Some individuals choose to create a “testamentary” trust, or one that is part of their will. Such trusts, however, are not exempt from probate.
- A financial power of attorney (POA). This power of attorney document allows an individual to select a person who will oversee their finances if they become incapacitated. Single individuals, especially, should include this component in their estate plan, as they do not have a spouse to serve in this role. For singles who don’t name a POA, the court decides who will handle these matters, and it may not be the person they would have selected themselves.
- A health care directive. A health care directive performs a similar function as a power of attorney. Instead of pertaining to financial matters, it covers an individual’s medical decisions. This component includes two primary documents, a health care proxy and a living will. The purpose of the health care proxy is to name a person who will make medical decisions on an individual’s behalf if they should become incapacitated. The living will is a written statement giving instructions on health care if the individual is unable to do so. At times, family members disagree on health care decisions when a loved one becomes incapacitated, and a health care directive can help ensure a person’s wishes are honored.
- Beneficiary designations. These designations are found on life insurance policies and retirement accounts and act as a way to dictate who will receive those benefits when an individual passes away. These designations should be reviewed at least once a year, as they supersede anything written in a will.
Talk to a Knowledgeable Estate Planning Attorney and Make a Plan
Estate plans should be reviewed regularly, as life changes may alter an individual’s circumstances. Paul Campo has over three decades of experience assisting clients with honesty and integrity. Visit our website today to see how he can help you.