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Estate Planning Essentials

Middle-aged couple discusses their estate plan in advance to reduce stress later on in life.

Everyone needs an estate plan, even if you don’t own a home, car or business. Estate planning is a way to declare your wishes for your remains after your death and to give clear instructions if you become incapacitated. Estate planning eases stress on your loved ones and lets you make decisions about your legacy.

What’s in Your Estate?

In addition to your body, your “estate” includes anything that has cash value, such as:

  • Home and other property
  • Cars and other vehicles
  • Business profits and assets
  • Bank accounts, investments, cash
  • Insurance policies
  • Retirement accounts and pensions
  • Social Security benefits
  • Military benefits

When someone dies, their assets are used to pay debts, taxes, legal fees, medical bills and funeral costs. Whatever is left over is inheritance for the person’s dependents. Ideally, you want your estate to have enough cash so that your family doesn’t have to sell anything to settle your estate.

If you co-own bank accounts, property or business assets, then the co-owner takes full ownership upon your death, but the documentation must be updated. When you designate beneficiaries on life insurance policies and retirement accounts, those benefits go directly to them when you die.

But, if you don’t leave clear instructions for other possessions and for what you want done with your body, then your remaining estate will be settled according to your state’s laws.

Essential Estate Planning Documents

The following estate planning documents are useful for anyone, even if you are young or don’t have many assets.

Letter of instructions: This informal document doesn’t require a lawyer, but it’s incredibly helpful for your loved ones. It should be kept in a safe place where someone you trust knows to find it. You can write this letter however you want, but include:

  • Important account numbers and how to access them (bank, insurance, investments, retirement, credit cards, bills and utilities, phone, computer, etc.)
  • Contact information for your key personal and professional advisors (employer, lawyer, insurance agent, estate planning attorney)
  • Details of any benefits (military, pension, life insurance)

What would it take for someone to step in and take over your affairs? The letter of instructions is a good place to include usernames and passwords if necessary. You don’t want to list passwords in your will because wills are public record.

A will is a legal document that outlines your wishes for your possessions, including your remains, when you die. It also assigns a guardian for your dependents. If you die without a will, it’s called dying “intestate” and means your property is dispersed according to your state’s probate laws. Most small estates avoid the probate process, but your estate might be larger than you think when you factor in equity on your home and the value of retirement accounts such as your 401(k).

A living will, on the other hand, says if you want to be resuscitated or kept on life support if you are declared brain dead.

A medical advance directive gives permission for another person to make medical decisions on your behalf. If you are single and don’t have immediate family or if you want to prevent an estranged relative from making decisions for you, this document lets you assign this power to someone you trust.

Similarly, a financial power of attorney empowers another person to take over your financial decisions — such as paying your bills — if you become unable. This can be vitally important for young people. An 18-year-old is considered an adult and the parents can have difficulty stepping in unless they’ve been legally authorized.

Springing or Durable

A springing power of attorney only goes into effect when a person is declared unable to make their own decisions, which means there can be delays as the person’s capacity is assessed. By contrast, a durable power of attorney is active all the time. This is helpful for families dealing with cognitive decline because the person can maintain control of their own finances until they’re unable, and then the family member can take over when necessary. If you would trust the person to make decisions for you when you’re incapacitated, you should be able to trust them when you’re not.

Settling a Loved One’s Estate

There is a lot to do when a loved one dies — from the practical tasks of handling the remains and planning the memorial — to the legal and financial steps necessary to close out the person’s life.

In addition to paying off bills and closing accounts, the executor of the estate should contact the major credit bureaus and Social Security (if the person was receiving benefits). Identity thieves target the recently deceased, hoping to take advantage of the gap before the person’s credit report is closed. Download SAM’s Death of a Spouse checklist and Death of a Parent checklist for tips.

In addition to planning your own estate, talk to your parents and regularly update your beneficiaries on retirement accounts and life insurance policies when circumstances change.

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]

Ver este artículo en espanol: Fundamentos de la planificación patrimonial y sucesoria

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