When you reach a certain age, you want assurance that your family will be taken care of and that any final wishes will be upheld. An estate plan is one of the best ways to protect you and your loved ones in your later years and plan for the unexpected.
What Is Estate Planning?
So what is estate planning, exactly? It's a process that allows you to establish which family members and other individuals — known as beneficiaries — will inherit what. If you take care of estate planning now, your property will be protected and managed in case you become ill or incapacitated. It can also ensure that minors are protected and possibly minimize any taxes on what you leave to your beneficiaries.
The estate planning process typically consists of creating legal documents such as a will and medical or financial powers of attorney, while also possibly including a living trust. While the powers of attorney protect you while you're still alive, a will or trust helps give your beneficiaries guidance after your passing.
Let's learn more about these various legal processes so you can make more informed decisions about your own estate plans.
Establishing Medical vs. Financial Power of Attorney
A power of attorney is written authorization for someone to act on your behalf in case you're incapable of making certain decisions. A medical power of attorney, also known as an advance directive or health care proxy, focuses on who will make health care choices if you're in a coma or incapacitated state or if your rational thinking is impaired.
A financial power of attorney gives a loved one or another trusted person authority to transact business or other financial decisions (including writing checks, withdrawing money from a bank account, obtaining a loan and even selling assets) on your behalf without needing any further approval. You can either designate different individuals to handle particular affairs or use the same person, which is known as an attorney-in-fact.
Think through your specific needs to decide the powers of attorney you might need down the line. It's a good idea to establish these legal documents earlier in your retirement to give you and your loved ones peace of mind that your health and/or financial affairs will be taken care of.
Creating a Will vs. a Living Trust
A will and a living trust can work in conjunction with each other, but you're not required to have both. A will determines how your assets will be dispersed after passing away. Through it, you can name your beneficiaries, designate guardians for minor children and leave instructions about who receives what at particular times. The rule of thumb is that a will alone doesn't protect your assets from avoiding probate, which is the legal process of validating a will. To avoid probate, you need something more.
Similar to a will, a living trust is meant to protect your assets after your death. It was created with the intention of potentially bypassing months — or even years — of probate court and is a step above a will. It can continue as long as you'd like without any court intervention.
There are fees associated with creating a will or trust — usually, you'll need to pay a lawyer to help you draw up these documents. But these fees are often worth it because the will or trust will protect you and your loved ones from future problems. Having the right legal documents in place can ensure your beneficiaries receive everything you meant them to.
Consider Your Beneficiary Designations
Not all of your assets need to go through a will or living trust. You can use a beneficiary form to pass on certain items, such as your individual retirement accounts (IRAs), 401(k)s or other employer-sponsored plans, life insurance policies and annuities. Make sure to use beneficiary forms to their fullest potential — they're the most cost-effective estate planning tool in lieu of any legal documentation.
Establishing an estate plan now can help you and your beneficiaries save time and unnecessary legal fees in the long term, and knowing that you have a well-thought-out plan of your final wishes will give you and your family peace of mind. If you're getting stuck, consider speaking to a financial advisor or legal expert to help make the decisions that are right for your situation.