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These Are 6 of the Key Documents You Need to Create When Estate Planning

These Are 6 of the Key Documents You Need to Create When Estate Planning

Estate planning involves mapping out the transfer of assets to heirs in the event of someone’s death or incapacitation. People often do not like thinking about what will happen once they pass, but this is a critical component of financial wellbeing, particularly for families.

Furthermore, estate planning involves more than creating a will or a trust. Too often, individuals think estate planning is something that only the wealthiest individuals do. The truth is that anyone can benefit from making sure their assets are accounted for down the line.

Without proper estate planning, the courts can become involved with personal finances, which can lead to additional expenses and unintended distribution. A solid estate plan will often include things like lifetime annuities to continue generating income, life insurance plans, and other forms of insurance, like long-term care insurance.

The plan should also include some key documents. Here are six:

1. Will and Trusts

The primary component of any estate plan is a will or trust. These documents are essential even for people without a substantial number of assets. A will explains exactly how assets should be divided upon someone’s death. Trusts can limit the taxes levied on an estate and address some legal issues that can arise.

Importantly, creating a will or trust is not enough. The wording of the document must be in line with state laws and remain consistent with decision outside of the will. For example, individuals will often name beneficiaries on insurance policies and retirement account. The will or trust should assign that asset to the same person to avoid a will contest.

2. Beneficiary Designations

As noted above, individuals can name beneficiaries for a number of different assets, such as a 401(k) plan. These assets can pass to heirs without a will, so it is important to keep the beneficiary designations up-to-date. Often, it makes sense to name a contingent beneficiary in addition to a primary one.

Virtually all insurance plans will have a primary and contingent beneficiary. If someone fails to name a beneficiary on these accounts, a court will typically decide what happens to it. The courts will also take over if the primary beneficiary is deceased.

This possibility is often undesirable, since a judge will not likely make the same decision that the owner of the asset would have. It is important to know that named beneficiaries should be mentally competent and over the age of 21. Otherwise, the court may become involved.


3. Healthcare Power of Attorney

The healthcare power of attorney is usually a spouse or a family member. This person will make key healthcare decisions on someone’s behalf if that individual becomes incapacitated. Individuals should to choose someone they trust and have clear conversations with them about their values and desires related to care.

Ideally, that person should have similar views so that he or she recommends a similar course of action. Most people will also name a backup agent in case the primary person is unavailable when needed.

4. Durable Power of Attorney

The healthcare and durable powers of attorney often get confused. The durable power of attorney decides what happens to assets should the owner become incapacitated. This individual does not make healthcare decisions, although it is possible for the same person to fulfill both roles.

A durable power of attorney ensures that courts will not end up making decisions about assets. The durable power of attorney documentation will spell out what that individual can do. Often, the person will make legal decisions, complete financial transactions, and even deal in real estate.

5. Letter of Intent

The letter of intent is a less formal part of estate planning. The letter goes to the executor or a named beneficiary. In the letter, individuals describe what should happen with particular assets. The letter often provides some details about funeral expectations. Other special requests may also be made.

Unfortunately, this letter is not always legally binding. However, it can become a key document if the will ends up being invalidated or assets pass to the court for another reason. Probate judges will generally read the letter to better understand the intentions and desires of the asset owner.

6. Guardianship Designations

The guardian assumes responsibility for any minor children in the event of death or incapacitation of the estate planner. Designating a guardian is only important for individuals who have minor children or who are considering kids in the future. Because the document is not important to every person undertaking estate planning, it frequently gets overlooked.

Ideally, the guardian has similar views as the estate planner and has expressed a willingness to take on raising the kids. Also, it is important that the person have sufficient finances to do so. People should also name a contingent guardian just in case. Without these designations, a court will decide who will raise the children and can even decide to make them wards of the state.