Estate Planning: Get Your (Financial) House in Order

Key takeaways:

• All adults should develop a plan to make sure their financial and health decisions are carried out if they are incapacitated – or worse.
• April is Financial Literacy Month, a great reason to commit to thinking through these important issues.
  

You may think wills are only for older people, or richer people. But the reality is that everyone should have not only a will, but a range of documents that allow for all your belongings — including you! — to be taken care of as you wish if you aren’t able to make decisions yourself. 

Financial planners typically recommend including the following components in a complete estate plan: a will, a trust, a living will, a financial power of attorney and a medical power of attorney. Here’s a closer look at these elements:

Wills

A will is a legal document with instructions on how to distribute everything you own or are responsible for after you die. That may include your home, your investments, or other assets; it also covers minor children, if you have any.

You may know that if you die without a will, the state in which you live will make those decisions for you. In general, the state court will assume your belongings should go to your closest relatives. 

Wills generally include the name of an executor, which is someone responsible for making sure the instructions in the will are carried out. It also lists your assets and names the people or institutions who will inherit them. If applicable, it should also include instructions for care for young children. 

You can use a lawyer to help you write your will, but it’s not necessary. There are plenty of inexpensive options online that receive high marks from reviewers. A few examples are Nolo’s Quicken WillMaker, Rocket Lawyer and LegalZoom.

Trusts

Wills are perhaps the best-known legal document associated with estate planning, but trusts are another tool you should know about. A living trust is a way to hold your assets in reserve for your heirs while you’re still alive, and then streamline the process for them once you’re deceased. 

Even if you have a will when you die, your will is subject to a legal process called probate. Probate can take a long time – even years – to settle, and can be costly, since your estate will be taxed, and fees assessed during that time. What’s more, probate is a matter of public record, so your affairs won’t stay private. But assets held within a trust are not subject to probate. 

While wills name an executor as the person to settle an estate, the person who takes charge of a trust is a trustee. Trusts can also be set up so that the trustee steps in if you become incapacitated, ill, or otherwise unable to make decisions for yourself. 

Living trusts come in a few varieties. Revocable living trusts can be amended while you’re still alive. The other option, irrevocable trusts, generally apply for tax shelters, when you want to direct money to a particular charity, or for special circumstances, such as for someone who’s unable to look after his or her own money. 

You’ll need a lawyer to establish a trust.

Living Will 

A living will is sometimes also called a medical directive. It specifies many of the possible healthcare situations you may encounter, and how you want your designated proxy to handle them. 

Some examples: Whether you should be resuscitated, at what point you no longer want to remain on life support, whether you’d like your organs donated, and more.

Living wills can be changed at any time, and only come into force when you are unable to make decisions for yourself. 

One well-regarded, inexpensive way to set up a living will is through an organization called Five Wishes.  It offers a plain-English kit to help you document all your directives – medical, legal, financial – in one place.

Medical power of attorney

A medical power of attorney, also known as a healthcare proxy, is a legal directive that lets you name one person who has the ability to make medical decisions on your behalf if you are unable to. 

Because of the sensitive nature of medical decisions, you should select someone whom you trust to carry out your wishes – and make sure that person understands what you want. That individual will have to make life-or-death decisions if you can’t. For example, if you should be resuscitated, continue to receive life support, have your organs donated and so on. 

If you plan to use an attorney to do the rest of the estate planning, he or she can also help with the medical power of attorney/healthcare proxy directives. But there are some helpful free or low-cost options to help if you prefer. 

The American Bar Association has a free power of attorney form. It can be used in all states except Indiana, New Hampshire, Ohio, Texas, and Wisconsin. The Consumer Financial Protection Bureau has a comprehensive list of things to think about when planning for end-of-life care for you or for your aging family members.

Financial power of attorney

Just as you might expect, a financial power of attorney gives someone else the ability to make financial decisions on your behalf if you cannot. 

There are plenty of specific reasons to designate a financial power of attorney in the normal course of your life. For example, if you’re closing on a real estate transaction but can’t be there in person, your financial power of attorney could act in your place. In the context of estate planning, however, the person you designate as your proxy, or your agent will make all financial decisions and transactions for you if you cannot. 

Your power of attorney document can be written so that it comes into force only under certain circumstances. 

Forms relating to all of the above components of a good estate plan can be found on the AARP’s  web site, categorized by type and by state.