When it comes to retirement, many people worry about their ability to save enough money to be comfortable once they stop working. However, preparing for retirement also involves estate planning, the process of assigning assets to heirs and figuring out who will make decisions once you have passed on or become incapacitated. Estate planning can be adjusted as your financial situation changes, but it is important to establish a baseline early to avoid court involvement.
One of the key components of estate planning is establishing directives, which ensures that you have legally appointed decision-makers. While trying to decide who will make decisions on your behalf can be stressful, it is important to ensure smooth transitions. The important directives to establish include the following:
1. Living will
Also known as a medical care directive, a living will allows you to express your desires as they relate to medical care. If you become incapacitated, this document guides decisions made for your care and allows you to direct the interventions that you do and do not want to receive. There are many templates for this document, and you will need to think about your values and the quality of life you deem acceptable. Our values often change over the course of our lives, so you may find yourself updating this document fairly often. You may also want to create an advance healthcare directive, which will also appoint someone as your medical power of attorney. This person will make healthcare decisions not already covered in the living will. You can appoint backup individuals to have this power.
2. Durable financial power of attorney
The person that you appoint durable financial power of attorney will assume control of your finances if you are unable to oversee financial affairs for medical reasons. This document designates a person who will act on your behalf not just financially but also legally. The appointed person will have responsibility for paying your taxes and bills. To that end, the person will have full access to your assets. Be sure to discuss your decision with this individual beforehand so that they are aware of the responsibility and have some sense of what you would like done in terms of finances. You should consider appointing more than one person in case the primary individual is not available when needed. In that case, the power would return to the courts.
3. Limited power of attorney
When you appoint someone durable financial power of attorney, that individual assumes full and unlimited control of your assets. If you do not like this idea, you can choose to limit the power. Limited power of attorney is a legal document that imposes limits on the power of the person who is named. You can be very specific about the limitations that you place on the person named. For example, you can grant the individual only the power to sign documents or limit the specific stocks that they can sell. While these documents can be complex, they provide some safeguards in the event you decide you will need them. Think carefully about the people you appoint and the power you assign them as they will literally have your finances in their hands.
4. Trustee
A trust is an essential component of estate planning. While many people think that they need a trust only if they have a lot of assets, this is not true. Even with limited assets, it makes sense to create a trust as it will make their transition to heirs much easier. When you die, the trust coordinates the transfer of assets to designated beneficiaries and bypasses probate. Without a trust, assets will have to go through this probate process, which can cause family feuding and delay the transfer of assets considerably.
There are many different types of trusts. With a living trust, you can make changes during your lifetime as your situation changes. When creating a trust, it is essential to select a trustee who will take over control should you become ill or incapacitated. Again, make sure you trust this person and that the individual understands your particular desires concerning inheritance.
5. Last will and testament
Your last will and testament provides specific direction about how your assets and property will be distributed after your death. In this document, you can detail the care and guardianship of any children you have, as well as your funeral and burial wishes. You can also form trusts through the last will and testament to help manage the estate, which can be a better idea than dividing assets within this document itself. This document gets filed through the probate court as public record once you pass, and a judge helps distribute your assets and property. You can avoid this entire process through the creation of a trust, which is typically a more efficient way of dividing assets. However, it is important to have this document for the other information it contains.