A Guide to Estate Planning

People put off estate planning for a variety of reasons. Some find the task overwhelming or don’t know where to begin. Others feel it can wait until they’re older, or are uncomfortable contemplating the end of life.

Estate plans formally express healthcare, guardianship, and property transfer wishes.

Estate Planning Documents

Common legal forms used in estate planning include:

Advanced medical directives

Advanced medical directives differ from state to state. There are three general types: a living will, health care power of attorney, and mental health advance directive.

A living will outlines which life-saving and life-sustaining measures you do and do not want to receive under specific conditions that may arise during end-of-life care. It might specify preferences regarding medical ventilation, hydration, or organ donation. A living will is intended to convey important information in the event someone is unconscious or unable to communicate at the time crucial treatment decisions must be made.

A health care power of attorney is used to name a primary, and perhaps an alternate, agent to make decisions about medical care in the event that you are unable.

A mental health advance directive, or psychiatric advance directive, lets those who have a mental illness detail their treatment preferences should they experience a psychological crisis.

Power of Attorney

A power of attorney is used to grant an individual of your choosing the ability to manage your affairs. A durable power of attorney grants an agent’s authority immediately, where a springing power of attorney establishes an agent who will have authority only if and when you become incapacitated.

Last Will & Testament

A last will & testament designates beneficiaries, or heirs, who will receive assets from the deceased’s estate. A representative, or executor, is designated to implement the recorded wishes and instructions. A will may also name guardians, donate to charities, or explicitly exclude (disinherit) someone.

A codicil can be drawn up to add, eliminate, or revise parts of a will.

Trusts

A trust shifts the management of assets from their current owner (the grantor or settler) to an individual or institution (the trustee) and the equitable interest to the heirs (the beneficiaries).

Having a trust can provide asset protection, allow for greater personalization of portfolio allocation, reduce estate taxes, circumvent the probate process, divide the interest of single assets, prevent disagreements, provide support for minor children, or direct the distribution of wealth after one’s death.

Revocable trusts can be modified or cancelled until the grantor becomes incapacitated or dies.

Irrevocable trusts, on the other hand, cannot be modified or cancelled once they’ve been established. One advantage of this type of trust is that, because it permanently moves property and other assets, it provides shelter from liabilities or collections.

An inter vivos trust is created while a grantor is living, whereas a testamentary trust is formed by an executor based on instructions left in a will.

A simple trust provides annual distributions to those individuals who’ve been named as beneficiaries, whereas a complex trust may distribute funds monthly or quarterly, contribute to charities, or provide funding for a scholarship.

Insurance

Life Insurance can be used to cover lost income that was used to provide for a dependent, build or preserve generational wealth, fund a loved one’s education, or cover estate expenses.

Burial insurance is used to cover end-of life expenses. Although coverage of up to $50,000 can be obtained, $25,000 or less is more common. In addition to funeral, cremation, or burial costs, beneficiaries can use part of the payout to cover medical expenses and other debts.

Term life insurance policies are temporary. They last for a specific length of time, typically between 10 and 30 years. They’re often used to provide coverage until specific circumstances change. Someone might, for instance, purchase a policy that was in effect for the duration of a mortgage loan. A 20 year policy may be used to ensure minor children would be provided for, in the event they loose a parent before they reach adulthood.

Whole life insurance has two components, a cash value and a death benefit. Policy holders are able to withdraw from, or borrow against, the cash value. A policy also has a surrender value, which is equal to the cash value minus any surrender fees, which may be as high as 35%.

Universal life insurance is similar to whole life insurance, with a few key exceptions. Most notably, universal life insurance allows some payment and benefit flexibility whereas whole life insurance has fixed premium payments and a fixed death benefit. Policy holders can request either of these areas be modified to adapt to their changing life circumstances.

Where to Begin…

Whether your primary goal is to provide for loved ones or to state your preferences regarding life-prolonging medical interventions, the process will likely begin by finding one or more professionals to assist you. You may want to enlist a financial planner, accountant, insurance agent, trust officer, and/or attorney. These specialists can help you analyze your current situation, guide you through the process, make suggestions, offer alternatives, set up accounts, and draw up the necessary paperwork. Over time, they’ll be there to help you make any desirable changes or modifications.

Since no one knows what the future holds, having an estate plan in place is essential. Getting started can be challenging, since planning for the end of our life requires facing our own mortality, and making some difficult choices. However, in addition to benefitting loved ones, putting a detailed plan into effect, tailored to your circumstances, needs, and desires, provides a sense of security and peace of mind.

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