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Have you been putting off creating your first estate plan? If so, you are not alone. Many people make this their New Year’s resolution but somehow get stuck. There are some hurdles out there, but how do you clear them?
Having an estate plan is crucial as it ensures a smooth transition of your assets in case of your disability or death. However, despite understanding its significance, people tend to put it off. Sometimes, the issue is just starting, but you may need guidance and encouragement.
This article presents some important questions that can help you get started on estate planning. Even if you cannot answer all the questions at once, starting with some of them can make it easier for you to move forward. Once you have a better idea of what you need, you can either take care of things on your own, reach out to a financial planner, or work with an estate planning attorney.
I’m confident the resulting peace of mind will be worth the effort.
The Largest Hurdle?
As you read this piece, you will realize that there are certain people you need to identify for specific roles like executor or guardian. These individuals will be named in legal documents you will eventually draft, such as your last will and testament or your trust.
Although identifying the right people may not be too difficult, it is advisable to have a conversation with them beforehand. If you’re married, you also want open communication with your spouse. Preparing to have the right conversations is often the largest hurdle to getting your estate plan done.
I suggest starting by getting some simple things down on paper, even if it’s not official or legally binding. This can be a written description of your wishes, which can surprisingly nudge you to take action and get the process started.
Identify Your Beneficiaries
Naming your heirs is one of the most straightforward parts of estate planning. However, there can be nuances to consider.
For example, married couples may choose to leave most or all their assets to the surviving spouse, while others may want to place certain limitations in place. This is particularly common in situations where there are stepchildren or children from previous marriages involved.
When it comes to children, they are often the most common beneficiaries. As you decide who will inherit your assets, you should consider if you want to place any restrictions on them. For instance, you may not want all assets available immediately upon passing, especially if the beneficiary is a young adult or child. In such cases, distributing the assets in stages can be a wise decision.
For instance, you could specify something like this: One-third of the assets should be available to a child upon attaining an undergraduate degree or reaching age 25, whichever comes first. The second one-third could be made available at age 30, and the final one-third at age 35.
In your will or trust, you also have the option to make specific gifts. This allows you to direct certain property or assets to particular individuals or entities. For instance, if you have pets, you can specify which person should take responsibility for them. Additionally, you may want to leave a portion of your estate to a charity of your choice.
Name Your Executor
When you pass away, the person responsible for handling your estate is called an executor. This position is usually temporary, and the executor’s responsibilities include distributing your assets and property to family members according to your wishes or, in some cases, based on the beneficiaries’ desires.
They will also pay off any debts you have and sell any property if necessary. After that, the executor will distribute the estate directly to the beneficiaries or fund trusts and estate structures.
Choosing someone you know and trust to be your executor is usually best. If you’re married, your spouse is often the preferred choice. While it’s possible to name a corporation as your executor, it’s rare.
Additionally, you may prefer to use the term “personal representative” instead of “executor,” as “executor” technically refers to a male, while “executrix” refers to a female.
Regarding Trusts and Trustees
You may need to decide whether to establish a trust as part of your estate planning. In a previous blog post, Does a Trust Belong in Your Estate Plan?, we discussed this topic in-depth.
If you decide to include a trust, you will need to appoint a trustee. This is a person (or corporation) that will manage your trust. Some estate plans involve one or more trusts, which may be funded during your lifetime or after death. While you are alive, you may serve as the trustee and beneficiary of your own trust.
Compared to an executor, the role of a trustee is typically more structured and involved. It includes responsibilities such as managing tax returns and investments. The trustee also meets with your beneficiaries and distributes assets to them according to the trust’s design.
Guardians of Your Galaxy
Do you have any children who are under 18 years old, or do you expect to have any in the future? Please note that the definition of a minor child might differ from state to state. Many families are motivated to get an estate plan in place because of their minor children.
If you have any living minor children, whether they are your biological children, adopted children, or stepchildren, you want to ensure that they are protected in the event of something happening to you.
The first question to consider is who will physically care for your children if something happens to you. This should be someone, or a couple, whom you trust. You might also need to clarify in your documents what happens if the designated guardian couple gets a divorce. Would you still want one of them to be the guardian, or would you prefer to move on to your backup designation?
Furthermore, if you want to name a guardian who lives outside the country, you need to be careful. For practical purposes, you might need at least a temporary guardian who lives nearby or in the same state.
Financial Power of Attorney
Estate planning is crucial because it offers guidance not only in the event of your death but also your incapacity. If you’re severely disabled or unable to make decisions, it’s important to have a plan in place. Let’s briefly discuss how this impacts financial decisions.
By filling out a financial power of attorney document, you are designating someone else to make decisions on your behalf regarding all the assets you own, such as bank accounts, investments, and real estate.
You will also need to specify when you want your agent to act on your behalf. The power of attorney document can be drafted as an outright power that works immediately upon execution, or it can be “springing,” meaning that it only becomes effective when doctors certify that you are incapacitated.
For married couples, the power is typically immediate for the primary agent (usually the spouse) and springing for all backup agents.
Medical Power of Attorney, etc.
Along with the financial side, you have important medical decisions to make. By completing a medical power of attorney, you’re appointing an individual to represent you in case of inability to talk or understand questions and decisions of a medical nature.
You can provide your agent with as many specific healthcare directives as you wish, including end-of-life decisions and instructions regarding anatomical gifts.
There may also be a HIPPA document drafted to allow for the sharing of privacy-protected medical information and documents, which should name and apply to all the involved parties named on the Medical Power.
Another related document is the directive to physicians, also known as a living will. This is a statutory document, which means that you may not be able to provide too many specifics beyond the options provided by the state.
Backups and Disclaimers
As you are naming people like trustees and guardians, it’s important to consider who can serve as backups. You may even want to decide on backups to the backups.
The individuals you name now may not be able to serve in the (hopefully) distant future, so it’s important to ensure that your documents can handle contingencies, especially if you cannot update your estate plan regularly.
It’s important to note that nothing in this piece is intended to be legal advice. Rather, it’s meant to provide a nudge to help you complete the critical documents you may need for your family. It’s impossible to cover all considerations in a short blog post, so please consider hiring an attorney if you have a complex or unusual situation.
For example, you may need more advanced trust structures if you have special needs children, complex business ownership, desire more efficient gifting mechanisms, or wish to mitigate estate taxation.
I hope this piece may serve as a useful reference for getting started with your estate planning. If you have comments or questions on this piece, please drop me a line at: [email protected]
References
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